Joseph Nacchio, the former CEO of Qwest Communications International, Inc. (“Qwest”), was convicted of nineteen counts of insider trading in federal district court. . . . this court . . . affirmed Mr. Nacchio’s conviction. . . . The district court sentenced Mr. Nacchio to seventy-two months’ imprisonment on each count, to run concurrently, and two years of supervised release on each count, also to run concurrently. The district court additionally assessed a $19 million fine and ordered him to forfeit approximately $52 million.
From the 10th Circuit Opinion released today.
The court found the trial court overstated the gain Nacchio made from his insider trading deals, which in turn impacts the length of his sentence, and improperly failed to deduct his direct costs in connection with the deals in calculating the asset forfeiture amount that he must surrender.
The parties do not dispute that: Mr. Nacchio’s gross proceeds from the relevant stock sales were $52,007,545.47; the cost of exercising the options was $7,315,000.00; the brokerage commissions and fees paid were $60,081.09; and the taxes paid were $16,078,147.81.
Prior to sentencing, the parties presented arguments to the district court regarding the appropriate amount that should be considered “gain” for purposes of increasing Mr. Nacchio’s offense level under § 2F1.2(b)(1). The government argued to the district court that Mr. Nacchio’s “gain resulting from the offense” pursuant to § 2F1.2(b)(1) was at least $44.6 million, i.e., the net profit Mr. Nacchio received from his stock sales during the April-May 2001 time period. That figure would equate to a 17-level increase to Mr. Nacchio’s base offense level and a Guidelines range sentence of 70-87 months. . . .
Mr. Nacchio [Ed. arguing that not all of the gains had a causal link to his trades with expert testimony] argued for calculation of gain at $1.8 million, which would translate to a 12-level increase under § 2F1.1(b)(1)(M) and a Guidelines range of 41-51 months.
The district court rejected both of these arguments and instead calculated Mr. Nacchio’s gain to be approximately $28 million.
The trial court had focused on Nacchio's net profits from the trade. But, the 10th Circuit held that Nacchio was focusing on the right objective in his gain calculation, without necessarily endorsing his expert witness's way of getting there. The court held that "if the impact of unrelated twists and turns of the market is ignored in the sentencing calculus then an insider trading defendant is likely to suffer a sentence that is detached from his or her individual criminal conduct and circumstances."
On the issue of forfeiture:
Mr. Nacchio appeals the district court’s order that he forfeit approximately $52 million. He argues that the district court erred in requiring him to forfeit his gross proceeds rather than his net profit. According to Mr. Nacchio, under the terms of the forfeiture statute he should be required to forfeit no more than approximately $44.6 million, which comprises his gross proceeds from the unlawful trades less brokerage commissions and fees and the cost of exercising the options.
His fine was not struck down, although he is not barred from raising an excessive fine issue before the trial court, and arguing that it is excessive in another appeal. The 10th Circuit implied in a footnote that this would be a weak argument.
Nacchio will be resentenced by the trial court as a result. It must consider the federal sentencing guideline sentences, properly calculated, at that time, although it is not required to follow the Guidelines precisely so long at the trial court has what amounts to a reasonable justification for the deviation.
Bottom line: Nacchio gets to keep about $7.4 million that was going to be subject to forfeiture and will probably get a couple of years trimmed from his current prison sentence of six years. A good day's work for his lawyers.
Nacchio is unlikely to be released in the meantime, as his convictions stand and he has not served a sentence longer than the one he is arguing for on appeal.
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