TELECOM Digest OnLine - Sorted: Qwest to Pay $250 Million in Fraud Probe

Qwest to Pay $250 Million in Fraud Probe

Marcus Didius Falco (
Sat, 23 Oct 2004 02:22:50 -0400

By Carrie Johnson
Washington Post Staff Writer

Qwest Communications International Inc. yesterday agreed to pay $250
million to settle Securities and Exchange Commission charges that the
company fraudulently booked $3.8 billion in revenue over nearly three
years, repeatedly turning to accounting tricks that employees compared
to a heroin "addiction."

Qwest employees carried out an extensive fraud, under orders from senior
managers who made "outrageously optimistic" assertions that the Denver
company would post double-digit profit gains at a time when demand sharply
lagged, regulators alleged. The SEC is continuing to investigate the role
of individuals in the scheme.

In one common tactic, employees reported revenue from one-time sales
of fiber-optic capacity as recurring revenue, referring to such
transactions as "one hit wonders." They also swapped assets with other
companies but treated Qwest's side of the swaps as if they were sales,
producing immediate revenue, the SEC said. Qwest also allegedly
understated $231 million in expenses from June 1999 to March 2002.

Employees employed the strategies so often that some began to refer to
them as Qwest's "heroin," the SEC said.

The nation's fourth-largest long-distance telephone service provider
did not admit or deny wrongdoing as part of the settlement.

"Qwest senior management created a corrupt corporate culture in which
meeting Wall Street expectations was paramount," said Randall J. Fons,
director of the SEC's Denver regional office. "Senior management
projected unrealistic revenue growth and would not tolerate missing
the numbers."

Qwest's current chief executive, Richard C. Notebaert, said in a
prepared statement: "We are pleased to conclude this matter, which
will now allow us to focus even more of our effort to provide
exceptional value and service to customers."

Qwest, whose stock price plunged from a high of $55 to less than $2 a
share after the fraud surfaced in August 2002, said it would cover the
settlement in two separate payments. It will send the agency $125
million soon, and the rest by December 2005. The money eventually will
be given to Qwest shareholders, regulators said. Qwest stock closed
yesterday at $3.44 a share, up 12 cents.

The company also agreed to hire a compliance official to ensure that
managers never again stretch or ignore accounting rules to meet
earnings targets and trigger executive bonuses, as was also alleged by
the SEC.

Regulators said that Qwest misled investors about its business
partnerships and improper relationships with suppliers, who were
sometimes pressured by unidentified Qwest officials to award them
shares in the supplier before initial public offerings during the
Internet boom.

Qwest also failed to disclose to shareholders a $7.6 million aircraft
sale between the company and the Anschutz Co., owned by Philip
F. Anschutz, Qwest's founder and co-chairman of its board of
directors. The May 2001 deal brought tax benefits and savings to
Qwest, regulators said. "Disinterested" Qwest board members approved
the transaction, according to the SEC order. The order did not
question the propriety of the transaction itself, only that it was not
disclosed as it should have been in the company's annual report or its
proxy statement.

SEC enforcement chief Stephen M. Cutler said yesterday in a prepared
statement that the investigation of individuals at Qwest who
participated in the fraud is "active and ongoing." Federal prosecutors
in Denver said they are continuing to investigate the company and
former executives.

Former Qwest chief executive Joseph P. Nacchio, who is referred to by
title in yesterday's SEC complaint, recently received notice that the
agency planned to file related civil charges against him. Nacchio
joined the company in January 1997 and departed under pressure in June

"Mr. Nacchio never did anything improper or illegal -- nor instructed
anyone else to do anything improper or illegal -- during his tenure as
the CEO of Qwest," William Anderson, a spokesman for Nacchio, said in
a prepared statement yesterday.

Anderson added that many of the activities mentioned in the SEC order
were reviewed and approved by lawyers, accountants and Qwest's board.

The SEC and Justice Department prosecutors already have sued several former
Qwest managers. Two have pleaded guilty to criminal offenses; two others
were acquitted after a seven-week trial this year.

Copyright 2004 The Washington Post Company

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