Joe Nacchio, former CEO of Qwest and now Federal Prisoner No. 33973-013, is going to prison. He was convicted almost two years ago but his conviction was overturned by a three judge panel of the Circuit Court of Appeals. The full panel of the Circuit Court recently reinstated the conviction and removed the stay of execution of sentence. He was convicted of nineteen counts of insider trading during the collapse of Qwest stock after it acquired telephone giant U S WEST in a stock for stock merger. Nacchio was sentenced to six years in prison, a $19 million fine and forfeiture of $52 million in illegal gains.
As in many cases involving corporate cheats, Nacchio was convicted of the crimes the government could prove but not for the injury he caused.
Qwest began as a start up fiber optic company using the railroad right of ways for creating a backbone coast to coast high capacity communications backbone. Like many technology related companies during the dot.com bubble, its stock was valued based on year-over-year growth in top line revenue — never mind its actual profitability. Qwest’s top line revenue growth was spectacular; so much so that the market value of its stock allowed it to acquire U S WEST, one of the regional Bell Operating Companies created in the aftermath of the break-up of AT&T. While it was described publicly as a merger, it was in fact a hostile takeover and the senior management of U S WEST soon left — most with handsome termination packages.
But there was something just not right about the spectacular growth of Qwest.
Qwest had built a fiber optic network with excess capacity between the major cities in the US. It was primarily an East-West network and while it had excess capacity on those routes, it lacked capacity to other major cities lying north and South of the main network. Other fiber optic companies also had excess capacity in their networks with similar “holes” to major cities. Qwest began a systematic trading of capacity with those companies. For instance, if Qwest had excess capacity between Denver and Los Angeles but lacked sufficient capacity between Denver and Dallas it would contract with the XYZ Company who had excess capacity between Denver and Dallas but needed capacity between Denver and Los Angeles. These trades seldom involved actual cash transfers even though the capacity acquired and disposed had a contractual value.
Under normal conditions, these transactions would be accounted for as the purchase and sale of capital assets. While any cash value would be recognized on the Balance Sheets, such sales would not be reflected as revenue for the Income Statement. However, Qwest treated each such sale as recurring revenue, while the acquired capacity received in trade was treated as a capital asset. The net result was that Qwest overstated its top line revenue growth by billions. That overstated top line revenue growth was what caused its stock to grow in market value.
Qwest has since been forced to restate its revenues for the SEC for several years, including the years immediately preceding and following the merger. No one can be certain what the market value of Qwest’s stock would have been if it had accurately reported its revenues, but it’s fair to say that it certainly would not have been enough to engage in merger discussions with US West, let alone complete them. The net result was that U S WEST’s shareholders traded their very valuable stock for paper that was worth practically nothing. And in the process many of US West’s employees saw 20, 30, even 40 years of savings disappear along with their dreams of a comfortable retirement.
To give you a fair idea of the enormity of the loss for employees and shareholders, the market value of the combined U S WEST/Qwest one week after the merger was $100 Billion. Within short order and almost immediately after the departure of Nacchio and the commencement of the audits by the SEC, the market value dropped to $6 Billion. It has never recovered. Ninety-four percent of the value of employees’ and shareholders’ value simply disappeared.
Prior to the merger U S WEST stock was, like the other Bell Operating Companies’, a widow’s and orphan’s stock — one that had steady but unremarkable growth, paid a dependable dividend, and was safe enough to be included in the portfolios of those who relied on their investments to supplement Social Security. It was also so dependable that it constituted a substantial portion of many employees’ savings plans to supplement their retirement benefits.
All were left with nothing. For many employees it meant that they would have to continue to work without thought of ever retiring. For others it meant that their retirement years were going to be stingy and worrisome — would there be enough to maintain an average quality of life?
All of this lies at Joe Nacchio’s doorstep. It wasn’t an honest mistake; it was an intentional act of duplicity. And while Nacchio was rewarded handsomely — over $400 million — his victims lost $94 Billion.
Yes, Joe Nacchio should go to prison. Maybe six years is enough time but I think twenty-five years would have been better. But even twenty-five years would not erase the swagger of this cocky crook — not as long as he has money and money enough to travel in the circles of power.
Real justice requires Nacchio to be relieved of all of his wealth. His millions, including the millions he has stashed away in trusts for his wife, children and other relatives, should be seized. His homes and every other asset should be taken. And when he is released from prison he should be penniless, unemployed and forced to try to make a living as a convicted felon over sixty years of age. Only then will he appreciate the pain and misery he caused thousands of US WEST employees and shareholders.