Let the smoke and mirrors begin. Here in Denver, the trial of Joseph Nacchio is about to begin (on Monday March 19, 2007). In case, you haven’t been following along, Nacchio (the former CEO of Qwest) is being tried for insider trading. The story is that he sold off his shares of Qwest knowing full-well that the company’s financial picture was not the rosy picture that was being painted for their stock-holders. By the time he got done selling his stock, the price of Qwest stock had went from 41 dollars a share to less than 2. Nacchio made 100 million while others lost everything. Nacchio now claims that he was aware of a national-defense contract that made him optimistic about the company’s future (a contract that Qwest failed to get).
In a CNN Money article, Curtis Kennedy (a Denver lawyer) calls Nacchio, “The poster boy for corporate gluttony and greed.” Personally, I couldn’t of said it better myself. Nacchio is the archetypical insider-trader who sells out their stock before everything tanks. Even if what he claims is true, he is guilty of insider-trading. I doubt that he is telling the truth. He may have been aware of a pending government contract; but if he thought it was going to go though and happen, why did he sell his stock?
It is this that makes insider-trading so evil. In theory, everyone who buys stocks is risking their money. But the reality is that certain people, like Nacchio, have the edge of knowing more about the real financial state of the companies than do the average investor. And it is happening again and again, with the average investor getting burned while the insiders are escaping with their wallets intact.
Now everyone who buys a stock after getting a tip from a “friend” is guilty of insider-trading. My aunt Hilda is guilty, though I doubt that her hairdresser is a reliable source for tips-I wouldn’t bet on any horse he suggests, but she does. But she is not committing a real crime; she does have enough of any stock that she can cause a stock to crash if she sells off her shares. Nacchio, on the other hand, did have enough shares to make a big situation worse. His liquidating his shares caused the price of the stock to fall, costing other people a lot of money.
He is going to claim otherwise, hoping that the smoke and mirrors of a pending government contract (that never actually happened, if it existed at all) will be enough to get him off the hook. If he succeeds, I expect others insider-traders to follow his lead. Hopefully, the jury is smart enough to see the truth of his sleight-of-hand and finds him guilty.