Qwest Pays $250M to Settle SEC Probe

Qwest pays a nominal fee, doesn't admit guilt, and promises to hire a 'chief compliance officer'

October 22, 2004

3 Min Read
Qwest Pays $250M to Settle SEC Probe

Qwest Communications International Inc. (NYSE: Q) said Thursday that it had agreed to pay $250 million to settle a two-and-a-half year Securities and Exchange Commission (SEC) fraud investigation. News of the settlement first leaked out last month, but neither side would talk about the terms at that time (see Qwest Quenches Fraud Probe).

But they're talking now. As part of the settlement, in which Qwest neither admitted nor denied liability, the company agreed to pay the fine in two installments, $125 million within 20 business days of the entry of the judgment and $125 million by Dec. 31, 2005. The money will be used to repay investors.

The company also agreed to install a chief compliance officer (CCO), who will report to a committee of outside directors to ensure that the company conducts its business in compliance with federal security laws.

The SEC complaint alleges that Qwest improperly recognized more than $3.8 billion in revenue and excluded $231 million in expenses to meet optimistic revenue and earnings projections. These actions allegedly happened between 1999 and 2002, while under the leadership of former CEO Joseph Nacchio (see Sources: Qwest Case Broadening).

The SEC says Qwest:

  • Booked one-time revenue from the sale or trade of fiber-optic capacity as recurring revenue from operations;

  • Booked anticipated revenue long before it materialized;

  • Failed to disclose that it had committed to buy millions of dollars of equipment that it never intended to deploy in its network (see SEC Digging Deeper at Redback);

  • Entered into strategic relationships with equipment and service vendors in part for the personal benefit of certain members of its senior management team -- a problem Light Reading described in detail way back in 2001 (see Is Qwest Shunning Startups?); and

  • Inflated revenues by delaying or moving up publication dates for directories published by its former phone book unit Qwest Dex Inc.

“Qwest senior management created a corrupt corporate culture in which meeting Wall Street expectations was paramount,” Randall J. Fons, Regional Director in the SEC’s Central Regional Office in Denver, said in a statement released Thursday. “Senior management projected unrealistic revenue growth and would not tolerate missing the numbers. As a consequence, accounting rules, policies, and controls that interfered with meeting financial targets were ignored. The Commission will continue its investigation in an effort to hold personally accountable those individuals responsible for the fraud.”

The SEC hopes that this judgment will serve as a warning to other companies.

“Today’s action once again sends the message that the Commission will hold accountable not only the individuals who commit securities fraud, but the companies that serve as vehicles for their misconduct,” said Stephen M. Cutler, Director of the SEC’s enforcement division.

“While our investigation of individuals is active and ongoing, the $250 million penalty levied against Qwest should signal to executives at other companies that they need to worry about more than their own personal compliance with the law; they also need to ensure that their companies have established a culture of compliance and integrity.”

“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," says Qwest's chairman and CEO Richard Notebaert, in a statement on Qwest's Website.

But Qwest isn't out of the weeds yet. The carrier still must battle through a slew of shareholder lawsuits and dig its way out of $17.2 billion in debt. Also, many members of its past senior management team are still under investigation by the Department of Justice for civil and criminal charges related to the scheme to inflate revenues (see Former Qwest Execs Indicted for Fraud, Prosecutors' Party at Qwest, and Redback Exec Part of Criminal Probe).

— Chris Somerville, special to Light Reading

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