Prosecutors' Party at Qwest

Surprise! It would seem that Qwest Communications International Inc.’s (NYSE: Q) accounting adventures weren’t all Arthur Anderson’s fault after all.

That, at least, appears to be the U.S. Department of Justice and the Securities and Exchange Commission (SEC)’s view after completing the first phase of their investigations into the Denver-based carrier. A federal grand jury today indicted four of the company’s former executives for concocting a scheme to falsely report $33 million in revenues in 2001 (see Former Qwest Execs Indicted for Fraud). Also today, the SEC filed civil fraud charges against seven former and one current Qwest employee for artificially inflating the company’s revenues by about $144 million in 2000 and 2001 (see SEC Sues Qwest Execs for Fraud).

Qwest, which has placed most of the blame for its creative accounting blunders on its former auditor Arthur Anderson, has already said it will restate $2.2 billion misstated revenues (see Qwest's Amazing Shrinking Revenues and Qwest Overstated Another $357M). SEC spokesman Donald Hoerl today said that it is unclear if the amounts revealed in today’s indictments and lawsuits were reflected in that number. The investigations into the carrier’s accounting practices are still ongoing, he says.

Industry observers say they expect investigators to find a lot more dirt at Qwest as they continue to dig deeper. “The rot is more widespread than a few individuals,” says Davenport & Co. LLC analyst Drake Johnstone. “Certainly at headquarters… that behavior seemed to be pervasive… It’s good that they’ve weeded out a lot of the corporate officers.”

“The [investigative] strategy is to find lower-level people who will squeal, and move up the food-chain,” agrees Craig Johnson, an independent analyst based in Portland, Ore. “I really hope that they’ll be able to get Nacchio [Qwest’s CEO until last June (see Notebaert Takes Out Nacchio)]. I really hope they take his toys away.”

The 12-count federal indictment alleges that four former Qwest executives in the company’s Global Business Unit tried to fill an expected revenue gap in the second quarter of 2001 with misleading reporting of a purchase order from the Arizona School Facilities Board. According to the indictment, the executives violated strict SEC requirements when they immediately recognized revenue from the order, while holding the merchandise for later delivery. The executives knew they were breaking SEC regulations, and filed false documents to hide their actions, the indictment states.

Attorney General John Ashcroft announced the indictment today, claiming that it is proof that the Bush government is serious about its fight against corporate crime. “We will protect the integrity of our markets by punishing those who falsify financial information out of sheer greed,” he stated in a Justice Department press release today.

Accounting for the Arizona purchase order is also the subject of the SEC civil suit against eight former and current Qwest employees. “Without the fictitious revenue from the ASFB transaction, Qwest would have fallen short of its projected 12 to 13 percent revenue growth for the quarter,” today’s SEC announcement states.

In addition, the Commission charges that former and current Qwest employees artificially reported one transaction with Internet service provider Genuity Inc. (Nasdaq: GENU) as two separate contracts. This allowed Qwest to improperly recognize $110.6 million in revenues in 2000, the suit claims.

"Qwest continues in its efforts to cooperate with the government in connection with the investigations,” Qwest said in a statement following the DOJ and SEC announcements today. “Fundamental to the Spirit of Service is complete integrity in all we do. As a company and as individual employees, we hold ourselves to the highest ethical standards as we conduct our business."

The defendants in the 12-count federal indictment are:
  • Grant Graham, former CFO of Qwest’s Global Business Unit
  • Thomas Hall, former senior VP in the Government and Educational Solutions Group, which is part of Qwest’s Global Business Unit
  • John Walker, former VP in the Government and Educational Solutions Group
  • Bryan Treadway, former Assistant Controller at Qwest
Arrest orders have been issued for all four defendants, and they have been given 48 hours to surrender [ed. note: then they go in with the dogs and the tear gas?].

All four of the former Qwest executives are also mentioned in the SEC’s civil suit.

In addition, that suit names the following two defendants in connection with the Arizona School Facilities Board case:
  • John Arnold, former SVP of Qwest’s Global Business Unit
  • Douglas K. Hutchins, former director of Global Business at Qwest
As for the Genuity transaction, the SEC suit names the following defendants:
  • Richard L. Weston, the former SVP of product development in Qwest’s Internet Solutions Unit
  • William L. Eveleth, the current CFO of Qwest’s Corporate Planning and Operational Finance Unit
  • John Arnold, former SVP of Qwest’s Global Business Unit
  • Grant Graham, former CFO of Qwest’s Global Business Unit
"This is just further distractions for them,” Johnstone says, pointing out that the company recently issued disappointing results, and that last week’s FCC decision was also a blow (see Qwest: Decent Quarter, Drab Outlook and Powell Loses FCC Vote). “This just makes it harder for them to turn their business around.”

But while analysts worry, the market didn’t seem to be too shaken by today’s news. Qwest’s stock price actually improved a half a percent in trading today, closing up $0.02 at $3.40 a share.

— Eugénie Larson, Reporter, Light Reading

ohub 12/5/2012 | 12:34:17 AM
re: Prosecutors' Party at Qwest What would happen to them if IT bubble were unbroken?...

Opticla Hub

BobbyMax 12/5/2012 | 12:34:17 AM
re: Prosecutors' Party at Qwest Qwest participated in one of the biggest scandals. SEC finding four employees in the company to indioct is simply unacceptable. I think Nachio is the main culprit. Every thing must have occured with his consent. I am not very pleased by the investigative skills of SEC.

The main question is: How did Nachio acquired US West without having any real money? Ordinarily no one would dare acquire an RBOC because of very complex infrastriucture. Nachio has also have caused Qwest to borrow over $24 Billion dollars. Where has this money gone? During his final days Nachio ran away with over $140 million dollars.

SEC has failed to investigate one of the board members who was doing brisk business with Qwest.

Also,It would be intersting to investigate as to how much money was given to the US West's management when Nachio acquired it.

All assets of Qwest belong to the shareholders. No one has a right even to waste a single penny.
The current CEO of Qwest who comes from Amertech did not leave the company in the best of shape. Yet he was chosen to head QWest.

The stock has come down from $65.00 to $3.54. Thousands of current and former employees, and other shareholders have been affected adversely. In sopite of seriouness of charges the current CEO of Qwest, board members, SEC and Department of Justice have failed to discharge their responsibilities.
billy_fold 12/5/2012 | 12:34:16 AM
re: Prosecutors' Party at Qwest This is all well and good and I sure that the G men are doing their job with the proper amount of zeal. But we somehow have to get all this type of activity behind us at some point if we are going to have any kind of recovery in the telcom industry.

Fortunecookie 12/5/2012 | 12:34:15 AM
re: Prosecutors' Party at Qwest I am appalled by your opinion. Justice first!!!

Get it behind us? SEC hasn't done it enough!

Are you one of those corrupted?
This is all well and good and I sure that the G men are doing their job with the proper amount of zeal. But we somehow have to get all this type of activity behind us at some point if we are going to have any kind of recovery in the telcom industry.

pipesoflight 12/5/2012 | 12:34:12 AM
re: Prosecutors' Party at Qwest Can someone enlighten me on what this means for current and future contracts? While the fan blade stinks to high heaven will Qwest's purchasing plans be put on hold until this is over?
lightmaster 12/5/2012 | 12:34:06 AM
re: Prosecutors' Party at Qwest This affects the possible restatement of past earnings, but the budget for this year is driven by the economy, which stinks on its own.

I agree that this hasn't gone far enough. There were many instances of stock market manipulation at Qwest and many other companies that have gone upunished. Employees recieved stock options, then made purchasing decisions that were the basis of multi-billion IPOs that made those employees millionaires. This was defrauding the other stockholders by artificially inflating the IPO values.
ChildoftheLight 12/5/2012 | 12:34:04 AM
re: Prosecutors' Party at Qwest I have no doubt that Qwest and Worldcom are just the tip of the iceberg .....

Last year Forbes magazine had a issue entitled 'The Next Telecom Crash' in which it details how most of the RBOCs and ILECs are highly leveraged and have weak revenue vs. infrastructure cost pictures for wireless and wired service providers alike. I think we can all agree that the service plans that we have've seen in the past (free phones, unlimited minutes, Vmail, Caller-ID, etc.) have been priced well below the cost of the same wired services (in order to gain market share). Coupled this with the fact that 1 million wired phone lines were permantly turned off in '01-'02 in favor of cable and mobile services and you have an environment which doesn't offer a good profit outlook.

I'm sure that if the SEC were to set out on a crusade to uncover every questionable bookkeeping practice, it would overwhelm the public/shareholders and certainly send the economy deeper into recession.

We should move on ... but cautiously and with a tone that character matters and those who defraud others will be punished.
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