DENVER — Qwest Communications International Inc. fostered an aggressive culture that pushed managers to exceed expectations in exchange for lucrative performance bonuses, a former company president testified Tuesday in Joe Nacchio's insider trading trial.
On the witness stand for a third day, Afshin Mohebbi told jurors that setting internal targets higher than publicly stated guidance for a company — sometimes called a "stretch budget" — is "a good idea."
Under cross examination, Mohebbi acknowledged that he earned $600,000 a year at the end of 2000 with the chance to earn essentially double that if he met such targets.
Nacchio, a former Qwest chief executive accused of $101 million in illegal stock sales, has contended the transactions were legal because he believed the company would meet internal goals despite concerns from business managers that the 2001 targets were unrealistic and unattainable.
Mohebbi has said that he, too, repeatedly warned Nacchio about the targets for the company heading into its first year after merging with former Baby Bell U S West Inc.
On Monday, Mohebbi described a series of memos he drafted to Nacchio in late 2000 and 2001 in which he said one-time sales transactions would have to be used and that recurring revenue would need to "literally take off by April-May time frame" to meet the goals.
Senior executives were told on April 9, 2001, that they would miss a $21.8 billion internal budget forecast. The publicly stated financial target was $21.3 billion.
Under questioning by defense attorney Herbert Stern, Mohebbi acknowledged that the revenue was within the publicly stated goal and targets included in an investment banking study conducted as Qwest was working to finalize its merger with U S West Inc.
Qwest generated $18.95 billion in fiscal year 2000, which was $450 million higher than the banking study had predicted, Mohebbi said.
Mohebbi said he received 1.1 million stock options shortly after the investment banking study was issued, second only to Nacchio, who received 9 million options.
Prosecutor Cliff Stricklin earlier asked Mohebbi if he had exercised stock options in the spring of 2001 — the same period in which Nacchio sold stock — but U.S. District Judge Edward Nottingham refused to allow him to answer after Stern objected.
Mohebbi said he had about $8 million worth of vested options in January 2001.
The potential risks to meeting the 2001 financial targets were not released publicly until August of that year, despite the concerns of Mohebbi and other managers.
Defense attorneys contend Nacchio firmly believed that the company would meet the goals, in part because he alone knew that Qwest was in the running for potentially lucrative secret government contracts.
A key point in the government's case was Qwest's practice of relying on revenue from one-time sales of capacity on its fiber optic network. At the time, there was stiff competition among telecommunications companies as they fought for consumers wanting wireless and Internet service.
Federal regulators have said Qwest falsely reported fiber-optic capacity sales as recurring instead of one-time revenue between April 1999 and March 2002.
The practice allowed Qwest to improperly report about $3 billion in revenue, which helped pave the way for its acquisition of U S West, regulators have alleged. Qwest later restated about $2.2 billion in revenue.
Jurors have not heard about separate allegations by the Securities and Exchange Commission that are the subject of a pending civil suit against Nacchio and others.