Did Qwest Qwash Morgan's Analysts?
In one battle with Morgan Stanley Dean Witter & Co., Qwest executives cut off Morgan's banking business after being angered by the company's analysts, according to testimony by Qwest executive vice president and former CFO Robin Szeliga. Her notes from a meeting in the summer of 2001 said "quietly close Morgan Stanley out of company." This meeting included president and COO Afshin Mohebbi and former CEO Joseph Nacchio. The notes were among the piles of documents presented at yesterday’s hearing held by The Committee on Energy and Commerce to delve into Qwest and bankrupt competitor Global Crossing Holdings Ltd.’s accounting for Indefeasible Rights of Use (IRUs) sales, or capacity swaps (see Global Crossing: What, Us Worry? ).
The battle with Morgan Stanley apparently flared up shortly after a June 20, 2001, report by analysts Jefferey Camp and Simon Flannery criticized Qwest’s accounting practices and said the company’s earnings were bloated after the US West merger. “I know that Joe Nacchio was very angry with Morgan Stanley,” Szeliga said in her testimony before the Committee yesterday. “[Morgan Stanley] was no longer employed, after the notes came out, to do... banking transactions for the company.”
Nacchio’s dissatisfaction with the report was not a secret. He actually publicly blasted Morgan Stanley on a call on June 20, stating that “innuendos on our integrity are not going to be tolerated, regardless of who makes them, including what I used to believe was a reputable branded firm, Morgan Stanley.”
But the carrier’s refusal to accept any form of criticism of its business practices was characteristic of the company culture and its willingness to do anything to make its numbers, according to Committee chairman Billy Tauzin. “Anybody that gets in the way gets rolled,” he said. “Including an investment house that criticized the company… That’s the culture I’m asking about."
Morgan Stanley would not comment on the revelations.
Tauzin said both Qwest and Global Crossing indulged in deals with the sole objective of propping up their revenues. “Global Crossing and Qwest executives pursued sham transactions to put revenue on the books, to mislead investors, and to prevent further drops in their stock prices,” he said in his introduction to the hearing.
During the hearing, which lasted for more than six hours, the Committee weeded its way through piles of documents and emails that it claimed showed both Qwest and Global Crossing’s intent to deceive the street, as well as their unscrupulous and ruthless attempts to make their numbers at any cost.
One damaging piece of testimony came from Global Crossing’s former vice president of finance Roy Olofsen (see GlobalX: The Burst Bubble), who told the panel that the company’s former executive VP, Tom Casey, misled analysts about swap deals made in the first two quarters of 2001, saying that he had been surprised to hear the executive “unequivocally state… that there were no swaps in the quarter.”
Both Szeliga and Global Crossing’s former president of carrier sales, Patrick Joggerst, said that employees at both companies came under growing pressure to meet the earnings estimates as the market started to tank. In the early days, they said, it was easy to make the numbers, but as the market faltered, the expectation for positive earnings reports remained the top priority. “There was certainly a heightened sense of pressure for everyone in the company,” Szeliga said.
“At Global Crossing it became unacceptable to not meet the numbers,” Joggerst said.
Tauzin chastised the two companies for making it very clear to employees that there would be dire consequences if they didn’t meet the Street’s expectations, but, he said, there were “no known consequences for cutting corners.”
Nacchio and Global Crossing’s founder and chairman Gary Winnick are expected to testify at the Committee’s second hearing, scheduled for next week.
— Eugénie Larson, Reporter, Light Reading