Great frauds in history: Joe Nacchio’s insider trading

Joseph Nacchio was born in Brooklyn in 1949. After graduating from New York University in 1970, he went to interview for a job at Procter and Gamble, but ended up joining AT&T as an engineer after accidentally walking into the wrong interview room. By the 1980s he had risen to the position of chief engineer for AT&T’s long-distance network, and was sent to the Massachusetts Institute of Technology for management training, eventually taking over control of the division. Passed over for the top job at AT&T, he became CEO of rival telecommunications firm Qwest in 1997.

What was the scam?

Nacchio set unrealistic revenue and earnings forecasts in order to boost Qwest’s share price, and engaged in various accounting tricks so that it could appear to meet them. These included engaging in sham transactions with other telecommunications companies, where Qwest would sell capacity and then buy it back to give the impression that its sales were growing. Overall, these tricks helped Quest inflate earnings by a total of around $3bn between 1998 and 2002. During the same period, Nacchio made more than $100m by selling his shares in Qwest, even after he had been warned that the firm would miss his targets.

What happened next?

By the middle of 2001 Qwest’s share price was falling thanks to the bursting of the dotcom bubble, and to an increasing number of questions being raised about its accounting. By 2002 its share price was in freefall, and Nacchio was forced to resign in June 2002. Almost immediately afterwards Qwest was forced to restate its sales and earnings during the period that Nacchio was in charge. In 2007 Nacchio was convicted of 19 counts of insider trading and, after a long legal battle, ended up serving four years in prison.

Lessons for investors

Qwest’s share price fell from a peak of $55 in July 2000 to $40 when Nacchio sold most of his shares in early 2001, to a low of $1.11 shortly after he left – reducing its value by $89bn. Asset sales helped the company avoid bankruptcy, but the shares were still only worth around $6 when it merged with Century Link in 2010, leaving shareholders with huge losses on their investment. Qwest is a case study of what can happen when a company becomes too focused on meeting its quarterly revenues and earnings targets.