I offer in this post some personal observations on the trial and conviction of Joe Nacchio, the former CEO of Qwest Communications, as well as some thoughts about the impact of SOX.  The Race to the Bottom has blogged the entire trial, with students or faculty attending all of the sessions. 

On Thursday, April 19, the jury found Nacchio guilty of 19 counts of insider trading (out of 42), all involving trades occurring in April and May of 2001, after the close of the first quarter.  During this time, Nacchio learned that Qwest’s “recurring revenues” (phone, internet, and data transfer) would be insufficient for the company to meet its publicly stated earnings guidance.  Despite these warnings, Nacchio reaffirmed earnings-per-share guidance and, during the same approximate time period, sold somewhere around 1.3 million shares.

A critical issue in the case concerned the failure of Qwest to disclose that its growth was dependent on non-recurring sources of revenue, a category labeled throughout the trial as “one-timers,” or Indefeasible Rights of Use (“IRUs”).  Had this information been disclosed, it is highly unlikely that the insider trading case against Nacchio would ever have  been brought.  The disclosure obligation, of course, rests with Qwest.  Why wasn’t this information disclosed?

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