By Carrie Johnson
Washington Post Staff Writer
Tuesday, March 18, 2008

A federal appeals court overturned the 19 insider-trading convictions of former Qwest Communications chief executive Joseph P. Nacchio after concluding that the trial judge improperly excluded expert testimony that would have helped Nacchio advance his defense.

The U.S. Court of Appeals for the 10th Circuit said yesterday that the mistake justified a new trial because a business law professor could have offered important context in Nacchio's bid to persuade jurors that he had an innocent explanation for more than $52 million in stock sales while Qwest was struggling to meet profit targets.

The central issue in the case is whether Nacchio dumped stock in early 2001 because he knew the company was faltering or because he simply sought to diversify his financial holdings.

The three-judge panel's ruling erases the jury verdict from last year, as well as a six-year prison sentence for Nacchio, who had remained free pending the results of his appeal. "Armchair economics is not the way to decide complex securities cases," the appeals court wrote.

Herbert J. Stern, the lead defense lawyer for Nacchio, said he was "delighted" with the decision. "We look forward to Joe Nacchio's eventual and total vindication," he said.

Federal prosecutors said they would consult with criminal authorities at the Justice Department. The government could seek to retry Nacchio or ask the entire 10th Circuit appeals court to review yesterday's decision.

"This is a setback, not a defeat," Denver U.S. Attorney Troy A. Eid said. "The good news is the circuit court said our trial team presented sufficient evidence to convict Mr. Nacchio of insider trading."

Legal experts said the Nacchio decision is grounded in the particulars of his case, blunting somewhat its impact on other corporate prosecutions.

But the ruling could promote the use of business experts as witnesses in major white-collar cases. Defense teams for former executives often are stymied in a search for witnesses because current employees of a company are frightened or otherwise unwilling to stand up in court to support a deposed corporate official.

"Any opening to get that kind of testimony in front of a jury is a substantial benefit for the defense," said David Esseks, a former federal prosecutor who now defends executives and businesses.

The appeals court ordered that the Nacchio case be sent to another federal judge, a rebuke to U.S. District Judge Edward W. Nottingham, who has been the subject of critical news reports in Denver for allegedly patronizing adult dating Web sites and a gentlemen's club. He did not return calls or e-mails sent to his chambers yesterday.

The Nacchio prosecution attracted widespread attention because it highlighted national-security issues stemming from a government surveillance program. Nacchio's defense lawyers argued that the charges were payback for a refusal to go along with National Security Agency efforts to access phone calls and other data from Qwest customers.

The issue of whether telecommunications companies that cooperated with federal authorities deserve retroactive legal protection continues to rage on Capitol Hill. Last week, the House passed a bill that would not offer the companies immunity, putting the chamber into conflict with the Senate and the Bush administration.

The ruling is the latest in a series of high-profile government victories to splinter after an appeal. The Supreme Court upended the obstruction-of-justice case against accounting firm Arthur Andersen, and a federal appeals court cast doubt on the obstruction case against banker Frank P. Quattrone.

Daniel M. Petrocelli, a lawyer for former Enron chief executive Jeffrey K. Skilling, said he is reviewing the Nacchio ruling. In newly unsealed court documents, Skilling seeks a new trial by claiming that prosecutors failed to turn over statements from a critical witness, former finance chief Andrew S. Fastow. Government officials have said the defense's arguments about the Fastow comments are overblown.