Nacchio Profits: the Tenth Circuit in United States v. Nacchio Properly Departs from the Eighth Circuit in United States v. Mooney and Adopts the Federal Sentencing Guidelines

• Publication year: 2022

43 Creighton L. Rev. 1107. NACCHIO PROFITS: THE TENTH CIRCUIT IN UNITED STATES V. NACCHIO PROPERLY DEPARTS FROM THE EIGHTH CIRCUIT IN UNITED STATES V. MOONEY AND ADOPTS THE FEDERAL SENTENCING GUIDELINES

NACCHIO PROFITS: THE TENTH CIRCUIT IN UNITED STATES V. NACCHIO PROPERLY DEPARTS FROM THE EIGHTH CIRCUIT IN UNITED STATES V. MOONEY AND ADOPTS THE CIVIL REMEDY OF DISGORGEMENT TO MEASURE AN INSIDE TRADER'S GAIN UNDER THE FEDERAL SENTENCING GUIDELINES

I. INTRODUCTION

In 1984, Congress enacted the Sentencing Reform Act of 1984(fn1)("Reform Act") with the basic objective of forming a fair and effective sentencing system.(fn2) The Reform Act empowered the United States Sentencing Commission ("Sentencing Commission") to develop detailed rules prescribing suitable sentences for those convicted of federal crimes.(fn3) The Sentencing Commission promulgated the Federal Sentencing Guidelines(fn4) ("Guidelines") pursuant to the Reform Act.(fn5)The Guidelines establish categories of offender characteristics and offense behavior and set out appropriate sentencing ranges for an offender based on the coordination of these two categories.(fn6) Section 2B1.4 of the Guidelines pertains to the sentencing of offenders convicted of insider trading.(fn7) If an inside trader's "gain resulting from the offense" is greater than $5,000, the inside trader's offense level can be increased up to thirty levels.(fn8) In United States v. Mooney,(fn9) the United States Court of Appeals for the Eighth Circuit became the first federal appellate court to consider how to calculate an inside trader's gain under the Guidelines.(fn10) The Eighth Circuit in Mooney concluded that the plain language of the Guidelines and sentencing policy considerations required an inside trader's gain be measured by the total profit resulting from the trades.(fn11) The Eighth Circuit also specifically rejected using disgorgement, a remedy used in civil securities fraud cases, to measure a defendant inside trader's gain.(fn12) The dissent by Judge Bright criticized the total profit method of calculating gain under the Guidelines, stating that the Eighth Circuit majority's interpretation was dependent upon the stock market's gyrations.(fn13) Instead, Judge Bright recommended that the Guidelines gain calculation be more closely tailored to the deception involved with an inside trader's trades, and should reflect changes in the market unrelated to the inside trader's conduct.(fn14) Judge Bright opined that the disgorgement remedy used in civil cases should be used to arrive at an appropriate calculation of gain under the Guidelines.(fn15)

Recently, in United States v. Nacchio,(fn16) the United States Court of Appeals for the Tenth Circuit picked up where Judge Bright left off by concluding that an inside trader's gain under the Guidelines should be calculated to reflect only the gain resulting from the defendant inside trader's deception, rather than using a simple total profit calcula-tion.(fn17) Further, the Tenth Circuit in Nacchio specifically concluded that the civil disgorgement remedy is an appropriate tool to measure an inside trader's gain under the Guidelines.(fn18) In Nacchio, the Tenth Circuit remanded for resentencing the sentence of Joseph Nacchio ("Nacchio"), the former Chief Executive Officer of Qwest Communications International Inc. ("Qwest").(fn19) Relying on the Guidelines' commentary and the en banc majority in Mooney, the United States District Court for the District of Minnesota calculated Nacchio's gain under the Guidelines using Nacchio's total net profit.(fn20) Nacchio appealed his sentence to the Tenth Circuit, claiming that the district court incorrectly calculated his "gain resulting from the offense."(fn21) On appeal, the Tenth Circuit determined that the district court's gain analysis did not comport with the plain language of the Guidelines and its commentary, and held that Nacchio's gain should be calculated more narrowly to produce a figure that approximately reflected the proceeds related to Nacchio's trades on material, nonpublic informa-tion.(fn22) Further, the Tenth Circuit noted that it is appropriate to look to civil jurisprudence for proper criminal sentencing approaches, and that the civil disgorgement remedy is a proper guide for courts sentencing criminal inside traders.(fn23)

This Note will first review the facts and holding of Nacchio and the Tenth Circuit's rationale employed to find that the district court erred in calculating Nacchio's gain under the Guidelines.(fn24) This Note will then provide a brief discussion of the offense of insider trading and the purpose and operation of the Guidelines.(fn25) Next, this Note will provide a summary of Mooney and other federal case law that addressed the calculation of gain or loss in securities fraud cases.(fn26) This Note will establish the following: (1) the plain language of the Guidelines and its commentary support the notion that the "gain resulting from the offense" must be the gain directly resulting from the deception from the trade on material, nonpublic information; (2) the dis-gorgement remedy used in civil insider trading cases is an appropriate measure of ill-gotten gains for purposes of sentencing under the Guidelines; and (3) the policy objectives of the Guidelines are best served by measuring ill-gotten gains using disgorgement.(fn27) This Note will conclude that the Tenth Circuit in Nacchio correctly deviated from the Eight Circuit's opinion in Mooney when it determined that an inside trader's "gain resulting from the offense" should not be measured by net profit, but by using disgorgement to measure ill-gotten gains.(fn28)

II. FACTS AND HOLDING

In July 2000, Qwest Communications International Inc. ("Qwest") merged with another large telecommunications company, U.S. West.(fn29)After the merger, Joseph Nacchio ("Nacchio"), then-acting Chief Executive Officer of Qwest, told employees the five-year business plan was to expand, die, or sell.(fn30) In September 2000, Nacchio set out the upcoming year's revenue, earnings, and growth targets.(fn31) Nacchio publicly announced a prediction of $21.3 billion to $21.7 billion in revenue in 2001, and set Qwest's internal targets $500 million higher than the public prediction to encourage its employees to surpass public targets.(fn32) Several Qwest employees, including financial analysts, expressed concern to Nacchio that the public and internal targets were too high and believed Qwest could only make $20.4 billion, $900 million less than its public target.(fn33)

One of the reasons Qwest financial analysts believed Qwest's targets were too high was the company's reliance on long-term leases, or indefeasible rights of use ("IRU"), to generate revenue.(fn34) Qwest collected money for the long-term leases up front, which created one-time revenue instead of a stream of income.(fn35) To attain its 2001 public target, Qwest needed to make an aggressive shift to recurring revenue streams rather than IRUs.(fn36) By December 2000, Qwest executives had informed Nacchio that Qwest needed to make the shift to recurring revenue streams by April 2001, otherwise its 2001 public target would have to be forced down.(fn37) Because of IRU sales, Qwest met its internal targets in the first two quarters of 2001, but the executive vice-president of wholesale markets informed Nacchio that the IRU market was dissipating and that the recurring revenue was not going to be increased enough to reduce third and fourth quarter gaps in the budget.(fn38) On April 24, 2001, Nacchio announced Qwest's first quarter earnings to the press, and indicated to investors that Qwest would meet its public targets.(fn39)

Meanwhile, Nacchio sold more than a million shares of his stock in Qwest.(fn40) Qwest policy allowed officers to sell stock during trading windows each quarter directly after the company announced its quarterly earnings, and Nacchio exercised $7.4 million in options in the first-quarter trading window.(fn41) During the second trading window beginning April 26, 2001 and ending May 15, 2001, Nacchio sold more than 1.25 million shares of Qwest at prices varying from $37 to $42 per share.(fn42) After the second-quarter trading window closed in May, Qwest's general counsel approved Nacchio entering into an automatic sales plan whereby Nacchio would sell ten thousand shares per day if the stock price remained at least $38 per share.(fn43) Between May 15, 2001 and May 29, 2001, Nacchio sold another seventy-five thousand shares.(fn44)

Qwest issued a press release on July 24, 2001, announcing its second-quarter financial results and informed its investors that it was lowering its expected revenue.(fn45) Nacchio gave a slide-show presentation on August 7, 2001, which illustrated Qwest's annual percentage of revenue from IRU sales.(fn46) On August 14, 2001, Qwest filed with the United States Securities and Exchange Commission ("SEC"), disclosing the magnitude of its 2000 and 2001 IRU sales.(fn47) Finally, on September 10, 2001, Nacchio issued a press release in which he lowered the 2001 and 2002 public revenue targets.(fn48)

On December 20, 2005, the United States Government indicted Nacchio on forty-two counts of insider trading.(fn49) On April 19, 2007, a jury in the United States District Court of Colorado convicted Nacchio on nineteen of these counts for trades of Qwest stock options he made between April 26, 2001 and May 29, 2001.(fn50)...