Qwest Called on Global Crossing

Fiber swap deals between Qwest and Global Crossing may be at issue in SEC subpœna

February 11, 2002

2 Min Read
Qwest Called on Global Crossing

Qwest Communications International Inc. (NYSE: Q) has been subpœnaed in connection with an investigation of Global Crossing Ltd. (NYSE: GX) by the U.S. Securities and Exchange Commission, the company announced this morning.

Qwest said in a statement that it plans to cooperate fully with the SEC.

The summons marks the latest in the unfolding scrutiny of Global Crossing, which includes an FBI inquiry and numerous lawsuits (see Global Crossing Under Fire). It also appears to be the first official look into Qwest's dealings with the ailing carrier.

The SEC's probe reportedly involves allegations that Qwest was a partner in Global Crossing's questionable accounting practices. Roy Olofson, a former VP of finance at Global Crossing who turned whistle-blower last summer, cited swaps of capacity by Qwest and Global Crossing as an example of cooking the books. Olofson was subsequently fired by Global Crossing.

The subpœna could be crucial to the case. Among the allegations dogging Global Crossing is that it inappropriately accounted for transactions in which it swapped fiber with other carriers.

Qwest and Global Crossing exchanged leases on each other's networks, recording the transactions as incoming cash revenue and outgoing capex, thereby optimizing the positive and minimizing the negative impact on their balance sheets.

This isn't the first time Qwest has been questioned about how it handles its accounting. In the past, the carrier faced queries by Wall Street analysts in relation to how it treats capacity sales and transactions with other companies. In October 2001, for instance, CEO Joseph Nacchio held a special press conference in part to deal with queries on Qwest's exchange of equipment and services with Calpoint LLC (see Qwest's Nacchio Pipes Up, Again).

It's also come up that Qwest and Global Crossing have used auditing services from Arthur Andersen LLP, which is being scrutinized in relation to the recent Enron scandal. A report in the New York Times this past Saturday says Andersen was notified of Olofson's accusations, which included examples of accounting with the Qwest transactions. Andersen reportedly says it was not notified until last month, although Olofson's first letter surfaced in August.

In fairness, Qwest isn't the only carrier that's likely to enter the spotlight courtesy of Global Crossing's mess. Level 3 Communications Inc. (Nasdaq: LVLT) and Williams Communications Group (NYSE: WCG) are also being questioned about how they report capacity transactions.

It's important to note that the FBI investigation into Global Crossing is not known to relate to the carrier's dealings with Qwest. So far, no information has been forthcoming on what that probe concerns.

Qwest had not returned calls by press time.

— Mary Jander, Senior Editor, Light Reading

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