In the Courts

Tenth Circuit Orders Retrial Of Insider Trading Charges Against Former Qwest CEO

Joseph Nacchio, former CEO of Qwest Communications International, Inc., will receive a new trial on insider trading charges. Nacchio persuaded the Tenth Circuit that defense expert Professor Daniel Fischel, who was to 'provide economic analysis of Mr. Nacchio's trading patterns, and to testify about the economic importance of the allegedly material inside information,' should have been allowed to testify at Nacchio's trial and that the trial court's error was not harmless. The trial court excluded Fischel's testimony because Fischel's expert report failed to adequately disclose his underlying methodology. Fischel's expert testimony was also excluded on grounds that it would not assist the jury, was more prejudicial than probative, and relied on impermissible facts rather than opinions.

In ordering the new trial, the Tenth Circuit held that Fed. R. Crim. P. 16 does not require a party offering expert testimony in a federal criminal case to extensively discuss the expert's methodology in an expert report. The panel held that the rules of civil procedure require broader disclosure than the criminal rules of procedure and the trial court erred when it imposed a heightened disclosure burden on Nacchio in his criminal case. The court explained that Fed. R. Crim. P. 16 does not require extensive disclosure of an expert's mythology and does not even require disclosure of an expert report to the court or to opposing counsel in advance of the witness's testimony. The court also rejected the government's claim that Fischel's expert testimony was inadmissible under Daubert and Kumho without affording Nacchio an opportunity to present evidence of Fischel's methodology at a hearing.

After his first trial, Nacchio was sentenced to six years' imprisonment, fined $19 million, and ordered to forfeit $52 million.

In the Courts and Business Crimes Hotline were written by Jason Hernandez, Associate Editor of this newsletter, and an associate with Kirkland & Ellis LLP, Washington, DC.

Return-of-Capital Defense In Criminal Tax Evasion

The U.S. Supreme Court unanimously vacated the Ninth Circuit's opinion in United States v. Boulware , 470 F. 3d 931 (2006) and held that a distributee accused of criminal tax evasion may claim return-of-capital treatment without producing evidence that either he or the corporation intended a capital return when the distribution occurred. The Ninth Circuit, relying on United States v. Miller , 545 F. 2d 1204 (1976), had held that in a criminal tax evasion case, a diversion of funds may be deemed a non-taxable return of capital only after the tax payer and/or corporation demonstrates that a return was intended. Writing for the Court, Justice Souter explained that the text of ” 301 and 316(a) of the Internal Revenue Code did not support the lower court's intent requirement. The relevant inquiry under the Internal Revenue Code, the Court held, was whether the corporation had earnings and profits, and the amount of the taxpayer's basis for his stock. Those factors, not the intent of the party making the distribution, determine whether the distribution was a non-taxable return of capital or a taxable capital gain. The Court's opinion ends a split among the U.S. Courts of Appeals. See Boulware v. United States, No. 06-1509, slip op. (U.S. Mar. 3, 2008).

Tenth Circuit Orders Retrial Of Insider Trading Charges Against Former Qwest CEO

Joseph Nacchio, former CEO of Qwest Communications International, Inc., will receive a new trial on insider trading charges. Nacchio persuaded the Tenth Circuit that defense expert Professor Daniel Fischel, who was to 'provide economic analysis of Mr. Nacchio's trading patterns, and to testify about the economic importance of the allegedly material inside information,' should have been allowed to testify at Nacchio's trial and that the trial court's error was not harmless. The trial court excluded Fischel's testimony because Fischel's expert report failed to adequately disclose his underlying methodology. Fischel's expert testimony was also excluded on grounds that it would not assist the jury, was more prejudicial than probative, and relied on impermissible facts rather than opinions.

In ordering the new trial, the Tenth Circuit held that Fed. R. Crim. P. 16 does not require a party offering expert testimony in a federal criminal case to extensively discuss the expert's methodology in an expert report. The panel held that the rules of civil procedure require broader disclosure than the criminal rules of procedure and the trial court erred when it imposed a heightened disclosure burden on Nacchio in his criminal case. The court explained that Fed. R. Crim. P. 16 does not require extensive disclosure of an expert's mythology and does not even require disclosure of an expert report to the court or to opposing counsel in advance of the witness's testimony. The court also rejected the government's claim that Fischel's expert testimony was inadmissible under Daubert and Kumho without affording Nacchio an opportunity to present evidence of Fischel's methodology at a hearing.

After his first trial, Nacchio was sentenced to six years' imprisonment, fined $19 million, and ordered to forfeit $52 million.

In the Courts and Business Crimes Hotline were written by Jason Hernandez, Associate Editor of this newsletter, and an associate with Kirkland & Ellis LLP, Washington, DC.