The Appeal of Joe Nacchio (En Banc)

We have not been as diligent as usual in noting postings in this case. The parties filed supplemental reply briefs on Sept. 19 and the briefs are posted on the DU Corporate Governance web site. The defense describes the case as follows:

• The government musters no authority even suggesting that Nacchio had any obligation to submit a written proffer by the time the court launched into its ruling. Its principal argument is that Nacchio, who had called his witness to the stand and was prepared to establish reliability in the ordinary manner, forfeited his defense by not getting the words “I want a hearing” out before the judge silenced him. The government cites nothing for this novel proposition. And its repeated assertion that Nacchio “could have” disclosed more information about Fischel’s testimony before calling him to the stand is irrelevant. The district court never ordered Nacchio to do more than he did and there is nothing prejudicial to the opponent in laying the foundation when the expert witness is called. Alternatively, the government claims that a preeminent expert on the operation of financial markets was not going to say a single thing that would have assisted the jury. But it does not cite even one case excluding this “venerable” form of expert evidence.

As for the importance of the evidence, the defense points to the government's closing arguments.

• The government told the jury that investors completely discounted IRUs and, when they were disclosed, “immediately stripped” “growth that was related to the IRUs” out of estimates. Fischel would have explained to the jury that his study of competitors’ revenue multiples—a standard method in finance—demonstrated that investors did not discount IRU revenues or their contribution to growth.
• The government told the jury that “when [Qwest] disclosed in the 10k in “how the IRUs are playing a role, the stock price does drop.” That was totally misleading because expert testimony about how the market incorporates information, which Fischel would have provided when explaining the effect of Qwest’s disclosures on its stock price, would have shown that there was no significant decline in the price when the disclosures were made. He would also have explained why the decline in Qwest’s stock was attributable to a severe reduction in demand for telecom services across the sector, and that the risks of a deteriorating economy were already known to the market.
• The government told the jury that because Nacchio did not “take those numbers down like their competitors did” in late 2000 it was “conclusive evidence beyond a reasonable doubt that his conduct was intentional and willful.” Fischel’s own study showed that many of Qwest’s competitors did not accurately predict the severity of the economic downturn and also reduced guidance after Nacchio’s last trade.
• The government told the jury that an executive who “really believe[s] in the company” would “exercise the[] [options]” and “hold them.” Fischel would have explained that his study of executive trading practices demonstrated that executives customarily exercise and sell.
  

As the defense concludes: "A new trial is essential."

The government, of course, argues the reverse.  The government takes the position that the case is not unprecedented, painting the case as a routine one.  And, predictably, the government argues that the burden of requesting a hearing rested with the defense.  As its reply brief notes:

• There was nothing “unprecedented” about this prosecution or about the exclusion of Daniel Fischel’s proposed “expert” opinions. Only on appeal and in hindsight has Fischel’s testimony become “[t]he heart of Nacchio’s defense.” Ibid. The district court properly excluded that testimony.  Nacchio sold his Qwest stock in April and May 2001 after “learn[ing] that * * * things had gone wrong.”  He knew that Qwest had met its targets in early 2001 only because of IRUs, but that the IRU market was drying up.  He knew that Qwest had already failed to make a planned “shift” away from IRUs to recurring revenue, leaving a $900 million shortfall in Qwest’s public revenue target. Add. 3-5, 46. In contrast, he himself had said in January that a $50 million shortfall would cause the company’s stock to drop by 15 or 20 percent. 
  
• Most of the “critical” (Br. 54) testimony Nacchio now says Fischel would have offered to refute the foregoing evidence was not mentioned in his initial expert disclosure.  Some of the testimony was not mentioned at all prior to exclusion. The testimony the defense did disclose was unsupported by any methodology or underlying materials. Nacchio cannot colorably claim he did not know of his burden under Rule 702 to establish Fischel’s reliability. The court’s ruling on Nacchio’s first expert disclosure, its subsequent admonitions, the government’s motion to exclude, and the law all gave Nacchio notice of his need to meet that burden. In his opposition, Nacchio himself cited his expert disclosure (which he called an “expert report”) and invited a ruling on reliability. Neither in the opposition nor at any other point before exclusion did Nacchio ask for a hearing, as the court’s rules required him to do if he wanted one. Given his failure to ask for one, or to suggest what he would show at one, the court was not required to hold one sua sponte.  

The government also took issue with the argument that Fischel was particularly important since it was the only substantive witness to be called by the defense.

• Given the defense’s conduct, the court was not required to assume Fischel was “the only substantive defense witness on the key issues.” Nor did exclusion deprive Nacchio of a fair trial. The defense listed some 20 witnesses before trial. It called almost none of them. It was permitted to present evidence relating to classified matters. It chose not to. Instead, the defense told the jury that stock-price changes were not a science, and it rested on its lengthy cross-examinations of the government’s witnesses. Those strategic choices did not require the district court to admit Fischel absent any showing of admissibility.

Both briefs are well done and this time devoid of churlish remarks.  We'll have a better idea after oral argument which was the more convincing.