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Sources: Qwest Case Broadening

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News Analysis
Light Reading
11/10/2003
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The investigations into Qwest Communications International Inc.'s (NYSE: Q) past are beginning to reach far and wide. The government is now broadening the investigation to include several equipment companies associated with Qwest, sources close to the situation say. They're searching for clues to whether Qwest executives misreported facts relating to the relationships between the carrier and its suppliers. Several investigations involving Qwest have been developing over the year. In February, the Securities and Exchange Commission (SEC) filed a civil suit for fraud against eight executives and employees of Qwest. The agency claims the defendants played with the numbers so investors would believe the company was doing better than it actually was. That investigation continues (see Prosecutors' Party at Qwest). In early October the SEC said it was taking a more careful look at the relationship between Redback Networks Inc. (Nasdaq: RBAK) and Qwest (see SEC Digging Deeper at Redback). Now it appears that the Department of Justice, which is proceeding with its own criminal investigation of Qwest, may also take an interest in this relationship, as well as other relationships Qwest had with equipment suppliers. The DOJ investigations have so far resulted in an indictment charging four former Qwest officials of helping the carrier falsely recognize more than $33 million in revenues in 2001 (see Former Qwest Execs Indicted for Fraud). The two cases have some similarities and, in fact, the SEC is holding its case until the DOJ finishes up. An element of both cases is the alleged practice of the defendants helping deliver unnecessary telecom gear and services to customers so Qwest could book enough revenues and make its quarterly financial projections. On top of that, several individuals are suing Qwest for securities violations and other things, generating a slew of investigative inquiries flowing from lawyers' offices to Qwest and its assorted telecom gear providers. Only Redback has publicly acknowledged that the SEC is looking at its relationship with Qwest (see SEC Digging Deeper at Redback). Redback's senior VP of field operations, Joel Arnold, was one of the eight people charged in the SEC's civil suit, and he continues to play a role in the day-to-day business of the company, which last week filed for bankruptcy protection (see Redback Exec Part of Criminal Probe and Redback's Arnold Included in SEC Suit). The task of proving a willful violation of accounting laws is tough, legal experts say. But one way to get there is to examine presumed conflicts of interest -- such as the practice of carrier executives accepting stock from potential customers -- to see whether any sordid details were misreported or left out altogether.

It's hard to say what kinds of details the Justice Department is looking into. It declined to comment for this story. There are several instances where Qwest forged reciprocal relationships that may be of interest. These examples, culled from SEC filings and Light Reading reports, give some idea of the company's practices when working with up-and-coming startups or newly public companies.

  • In early 2000, Qwest bought several different classes of Covad Communications Inc. (OTC: COVD) shares, representing an aggregate investment of $15 million. "Concurrently with these strategic equity investments, we entered into commercial agreements with... Qwest," Covad's SEC filings state. "These agreements provide for the purchase, marketing and resale of our services at volume discounts..."
  • Qwest has told Light Reading that it helped CoSine Communications Inc. (Nasdaq: COSN) design, test, and analyze its equipment during the company's early days. In return, CoSine let some senior Qwest executives -- including former executive VP of corporate development, Marc Weisberg; executive VP and general counsel Drake Tempest; and executive VP and chief strategy officer Lewis Wilks -- buy "friends and family" shares before the startup went public. CoSine went public in 1999 and, in February 2000, it announced that Qwest had placed a multimillion-dollar purchase order for its gear (see Is Qwest Shunning Startups?).
  • Qwest got warrants for agreeing to buy Tellium Inc.'s (Nasdaq: TELM - message board) gear. Qwest executives accepted some $10 million worth of stock options from the startup in exchange for being allowed into its network (see Tellium Lawsuits Allege Rigged IPO). Weisberg was one executive who enjoyed Qwest's cozy relationship with CoSine and other startups, landing a board seat at Tellium for a time (see Love Lost for Tellium).
  • Sometimes, Qwest's relationship with kindred startups didn't fare so well. In 2000, it agreed to purchase some $150 million of equipment from Corvis Corp. (Nasdaq: CORV) within two years. Some months later, it lopped $110 million from the purchase order (see Corvis's Qwest Deal Reduced by $138M).
  • In 2000 and 2001, Qwest bought more than $80 million worth of gear from Redback Networks. During that time, Qwest's Cyber Solutions group announced a five-year, $18 million contract with Redback to help the vendor with enterprise resource planning, customer relationship management, and manufacturing operations.
  • Kleiner Perkins Caufield & Byers partner and Qwest board member Vinod Khosla invested in or served on the boards of several firms that had dealings with Qwest, including Redback, CoSine, Corvis, and Juniper Networks Inc. (Nasdaq: JNPR). Khosla, through a spokesperson, says he hasn't been contacted by the Justice Department regarding any of the Qwest investigations. He declined further comment.
The acceptance of stock options from suppliers was a widespread practice during the peak of the Internet bubble -- and the practice itself isn't necessarily illegal. Where it may be bad news for Qwest, legal experts say, is if prosecutors find some evidence that executives involved were willfully misleading in their representation of the deals.

— Phil Harvey, Senior Editor, Light Reading

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fw23
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fw23,
User Rank: Light Beer
12/4/2012 | 11:16:10 PM
re: Sources: Qwest Case Broadening

You should add Avici to the list. The situation
is similar to some of the others cited.
lightreceding
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lightreceding,
User Rank: Light Beer
12/4/2012 | 11:16:03 PM
re: Sources: Qwest Case Broadening
Much of the equipment sold to Qwest by Redback sat in warehouses and was unused by Qwest. Redback not only announced application services, which were taken in trade, and then later cancelled, but they also took OC3 feeds from Qwest to small sales offices that didn't need them and they kept the feeds even when the offices were vacated. Joel Arnold was at Qwest in a senior management sales role at the time this was going on. Joel is being kept on at Redback by Kevin DeNuncio even though he is being sued by the SEC and investigated by the DOJ and bringing harmful attention on Redback and hurting customer relations. Kevin was in charge of Service Provider sales at Cisco during the time that Joel was at Qwest and his group sold large amounts of equipment to Qwest. Kevin was ousted from Cisco when it was found that his group had pumped the sales numbers by booking nonexistent orders. Cisco took a huge write off and had to debook these fradulent orders. There is probably a lot more to the Arnold and DeNuncio connection.
WiserNow
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WiserNow,
User Rank: Light Beer
12/4/2012 | 11:16:01 PM
re: Sources: Qwest Case Broadening
They filed a lawsuit last year sometime, but it seems to have been forgotten. Anyone know the outcome?
AAL5
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AAL5,
User Rank: Light Beer
12/4/2012 | 11:16:00 PM
re: Sources: Qwest Case Broadening
I've said it before but its worth saying again...

Bobbymax you are the biggest idiot I have ever encountered in any online forum.

You know nothing about anything but still you think people care about your bigotted, illogical ranting.

I use to think there was a chance for you to make a positive contribution to this forum.

I was sadly mistaken.


Hugs and kisses

AAL5
BobbyMax
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BobbyMax,
User Rank: Light Beer
12/4/2012 | 11:16:00 PM
re: Sources: Qwest Case Broadening
What Quest has done has simply not happened. It is case of corruption and deceit in which the copany auditors failed to conduct a proper audit.

What I find most troublesome is that the US Government does not mind heavy handed crimes perpetrated by rich and influential people. But the Department Justice goes crazy involving minor crimes and transgressions. The foreign jornalists and the UN do not report the behavior of the government toward poor and unprivilleged people.

"Dr." Nachio was the most greedy, cunning and unprncipled person. During his last days at Qwest, Nachio walked away with about $150 million. The Board members did not have the honesty to withhold the money from Nachio until he was cleared of all the charges. The Qwest Board did not place the interests of the shareholders ahead of other considerations. The current board should be asked to resign so that a new board can be elected by the sharehoders.

I had mentioned about two years ago or so that Qwest has become a test lab for many junky companies. It is now clear as to why this was done. This was done in exchange for shares of the companies that were going public.

Normally RBOCs do not buy from start-ups. But Qwest was prepared to offer its support to third rare vendors like Redback. Qwest did this in exchange for getting shares at reduced prices.

Qwest also had expanded abroad without any consideration of the shareholders interests. They just wanted to travel to Europe and load the company with all kind if expenses..

Even when Nachio left,the Quest Board appointed President and CEO of Ameritech as its new CEO. The new CEO did not have a good record of performance even then he was selected.

The whole industry is full of cases where qualifications are seldom used in selecting a candidate. This corrupt practice is likely to shape the future of this country. Many nations would hesitate to buy US products based on the level of corruption thatcurrently exists.
DarkWriting
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DarkWriting,
User Rank: Light Beer
12/4/2012 | 11:15:57 PM
re: Sources: Qwest Case Broadening
AAL5,

Just what was it in BM's latest post to this thread that you consider illogical ranting? I will admit that he/she jumps to conclusions once in a while but it does appear that he/she does have some knowledge of the indusry. If you (and GEA) are going to make personal attacks, at least you could point out some specifics for the posting in question.

DW
lightmaven
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lightmaven,
User Rank: Light Beer
12/4/2012 | 11:15:57 PM
re: Sources: Qwest Case Broadening
Surprised that Movaz's name hasn't come up in the list of suspect relationships. Given their connection to the Anschutz family and that Qwest felt compelled to purchase a product that had yet to exist.
gea
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gea,
User Rank: Light Beer
12/4/2012 | 11:15:55 PM
re: Sources: Qwest Case Broadening
BobbyMax:

All your base are belong to us.
gea
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gea,
User Rank: Light Beer
12/4/2012 | 11:15:54 PM
re: Sources: Qwest Case Broadening
"At least, BM gave some reasoning and opinoin of his own, but you simply gave personal attack."

How is "All your base are belong to us" a personal attack?
IP4Telecom
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IP4Telecom,
User Rank: Light Beer
12/4/2012 | 11:15:54 PM
re: Sources: Qwest Case Broadening
Gea,

I do not know what is going on between you and BM. But at least I observed that everytime BM posted a message, you replyed with the same annoying garbage. At least, BM gave some reasoning and opinoin of his own, but you simply gave personal attack.

I am surprised that all the readers have to tolerate your garbage post for so long and no one speak up.

Clean up this forum and be constructive. You are annoying.
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