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Financial

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
http://www.lightreading.com
fiber_r_us 12/4/2012 | 10:57:37 PM
re: Qwest Called on Global Crossing So, if Carrier "A" needs fiber on route #1 that Carrier "B" has, and Carrier "B" needs a fiber on route #2 that Carrier "A" has, shouldn't these sales be posted as revenue? It only seems fishy if the carriers were swapping fiber on the SAME route and trying to record it as revenue.

Isn't it essential for carriers to be able to buy/sell capacity from each other in areas where they need capacity? Therefore, the mere buying/selling of capacity from each other should not be a problem; only the buying/selling that would create no real company value for either party would be of a questionable nature.

Who decides whether a transaction creates value?
PantomineHorse 12/4/2012 | 10:57:35 PM
re: Qwest Called on Global Crossing "...Who decides whether a transaction creates value?..."

Is there end-use for the acquired capacity? Who is the intended customer?

First & forecast, GX was known as a "carrier's carrier". I used to work the e/u side. Rarely, even for large F500 firms, could you get GX to respond to an RFP. (Oh year. GX has a few REAL customers)

Capacity leasing swaps are a very tricky issue -- probably legal.

Imagine if you are a CEO. What better plan than to swap with excess capacity (any route, plenty to go around) with another carrier, both booking revenue? The retention of excess capacity -- is that legitimate value? What degree is allowable? Do you really think anyone has thought about these questions? Who? A.A?

Combine this with (bandwidth) commodities futures trading, accounting prowess, and you've got the perfect scam. I wish I had thought of this first.

My theory. GX learned the tricks-of-the-trade through J P Morgan, adroit at playing the physical commodities futures game.

Do you actually think GX swaps were limited to one carrier?
flanker 12/4/2012 | 10:57:30 PM
re: Qwest Called on Global Crossing Pantominehorse:

JPMorgan is not a lead underwriter for debt or equity to GlobalCrossing. In fact, JP was active in arranging financing for real and potential competitors of GX.

GX's advisors are among: SALOMON SMITH BARNEY, MERRILL LYNCH, CIBC OPPENHEIMER, MORGAN STANLEY DEAN WITTER, DEUTSCHE BANK SECURITIES, GOLDMAN, SACHS & CO. CIBC was a round one investor in GX and made a nice bundle of money.

PantomineHorse 12/4/2012 | 10:57:25 PM
re: Qwest Called on Global Crossing "JPMorgan is not a lead underwriter for debt or equity to GlobalCrossing. In fact, JP was active in arranging financing for real and potential competitors of GX..."

Flanker:

My impression is that JPM is involved with many telecomms, but with respect to GX...

http://www.economist.com/agend...

"Among the many banks stung by recent bankruptcies in America, one name stands out: J.P. Morgan Chase was a big lender to three of the biggest corporate failuresGÇöEnron, Kmart and Global CrossingGÇöand has had to write off hundreds of millions of dollars. It also lost heavily in Argentina and on its private-equity holdings..."

"...However, that very strength in lendingGÇöthe bank claims a massive 37% of the American syndicated-lending marketGÇöis now beginning to look like a weakness as corporate casualties add up. J.P. Morgan was a leader to Kmart, a retailer, and Global Crossing, a telecommunications company. Both have recently filed for bankruptcy, like Enron. The bank has also lent to NTL, a European cable-TV company staggering under $17.5 billion of debt..."

Would you happen to know JPM's involvement w/Qwest?
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