Qwest Quenches Fraud Probe

Qwest Communications International Inc. (NYSE: Q) inches closer to freeing itself from civil charges of accounting fraud as it negotiates one of the largest settlements ever with the Securities and Exchange Commission (SEC).

Analysts watching the situation say wrapping up the SEC investigation allows Qwest to focus on launching such services as VOIP to offset losses from its traditional local telephone service.

The Midwest incumbent phone company has agreed to pay $250 million to settle an SEC investigation into its accounting practices, according to Candice Johnson, a spokeswoman for the Communications Workers of America. Johnson says Qwest told the union on Friday it had reached an agreement with the SEC. The union, which represents about 27,000 Qwest workers, says the settlement allows the company to move forward.

Qwest spokesman Steve Hammack would not comment on the SEC agreement beyond saying, “We continue in our efforts to cooperate with the SEC and the DOJ [Department of Justice] in their investigations.”

SEC spokesman John Heine declined to comment.

“This allows Notebaert to put the Nacchio years behind the company,” says Scott Cleland, CEO of Precursor Group, an investment research firm based in Washington.

About two and a half years ago, the SEC began to investigate charges that Qwest inflated revenues by $2.5 billion in 2000 and 2001, while under the leadership of former CEO Joseph Nacchio (see Sources: Qwest Case Broadening).

When Qwest’s new CEO, Richard Notebaert, arrived in June 2002, the company was on the brink of bankruptcy.

“Notebaert has done an amazing job at taking the company literally hours away from bankruptcy to stabilizing it. Qwest is by no means out of the woods, but the near-term crisis has been adverted,” Cleland says.

The accounting-fraud settlement with the SEC doesn’t end or in anyway affect the ongoing criminal investigation by the DOJ, says Jeff Dorschner, spokesman for the U.S. attorney’s office in Denver. “I am not aware of any agreement with the SEC, but if there was one, it would have no affect on the ongoing Department of Justice investigation,” Dorschner says.

On top of the criminal investigation, the company must battle a slew of shareholder lawsuits and dig its way out of $17.2 billion in debt.

According to its 10-K, dated Aug. 3, Qwest says it increased its reserves from $300 million to $500 million to pay possible penalties from pending investigations. Analysts expect these reserves to be sufficient to cover the cost of settling shareholder lawsuits.

Some analysts say shareholders would get more from the $250 million settlement with the SEC than from the shareholder lawsuits. They expect the government would set up a fund for shareholder restitution, similar to the fund created as part of the $750 million SEC settlement with WorldCom Inc., which included paying $500 million to investors.

Analysts say a settlement with the SEC means the company has cleared its biggest hurdle on the road to recovery, leaving it to concentrate on improving its services (see Qwest Heads for Convergence).

Qwest's coming improvements include rolling out VOIP services to its residential customers to help offset losses from its regional telephone service. Last December, the company began to provide VOIP service to customers in St. Paul, Minn. Spokeswoman Claire Mylott says Qwest plans to offer VOIP service in all its residential markets by the end of the year.

“The settlement will be a huge relief to management, since they will no longer be distracted with the SEC’s investigation,” says Donna Jaegers, a research analyst at Janco Partners Inc. “They can now focus on improving their business.”

— Joanna Sabatini, Reporter, Light Reading

fbgboy 12/5/2012 | 1:17:04 AM
re: Qwest Quenches Fraud Probe you have to love a country that lets you pay fines like this and keep operating.
How much money do they have if they can pay out this chump change.
whyiswhy 12/5/2012 | 1:17:01 AM
re: Qwest Quenches Fraud Probe Telecom Giants Unite to Lobby
For Opening of Markets in Asia

September 14, 2004; Page A2

HONG KONG -- Several global telecommunications companies, upset about regulatory hurdles they say are impeding competition in fast-growing Asian telecom markets, are forming a new industry group to push for more liberalization of the region's telecom sector, according to people involved in the plan.

The companies include AT&T Corp. and MCI Inc. of the U.S., BT Group PLC and Cable & Wireless PLC of Britain, T-Systems, a unit of Germany's Deutsche Telekom AG, and several others. The same companies successfully lobbied regulators in Singapore last year for a significant reduction in the so-called last-mile fees charged by state-linked Singapore Telecommunications Ltd., the country's former phone monopoly.

Those fees -- applied to domestic and foreign companies that lease the local circuits needed to connect businesses with global networks of voice and data traffic -- are higher in Asia than in the U.S. and most countries in Europe, the group says. Reducing such fees will be a key goal of the group's efforts, because many of its members are focused on selling services like data networks to businesses. The companies also say more competitive markets will bring benefits for consumers and help Asian economies.


Three recent, regulatory victories for the telecom companies involved in the new Asia Pacific Carriers Coalition:


GăˇInfocomm Development Authority, Singapore's telecom regulator, orders former monopoly Singapore Telecommunications to cut its fees for "local leased circuits" by 30% to 50%.

GăˇTelecom regulator gives rivals greater access to Singapore Telecommunications' submarine-cable landing stations, where undersea data cables come ashore. SingTel says access to the stations is already "highly competitive" and the regulator's intervention was "unnecessary and inconsistent with promoting facilities-based competition."


GăˇAustralian Competition & Consumer Commission rules that fees for routing calls to mobile phones are too high, and should be progressively reduced over three years. Vodafone Australia is appealing the decision.

Source: Asia Pacific Carriers Coalition

Formation of the lobby group, to be called the Asia Pacific Carriers Coalition, is expected to be announced today. The group is modeling itself on the European Competitive Telecommunications Association, a similar industry grouping that lobbies European regulators for open markets. The new coalition is expected to target developed markets such as Singapore and Japan as well as less-developed ones, including China, India and Vietnam, members say.

Members of the coalition contend that big Asian telecom operators "typically remain dominant in their markets," even in countries where new operators, including foreign companies, have been allowed to challenge them, says Joe Welch, an MCI regional director for regulatory affairs who will be the APCC's president.

Many of the dominant Asian telecom companies continue to wield market power through excessive fees, the APCC believes, including those charged for last-mile data connections and completing calls to mobile phones. In much of Asia, unlike in the U.S., an individual subscriber's phone company must pay a fee every time he or she places a call to a mobile phone, even if the call is local.

"Whilst we have liberalized markets, we're still a long way off from effective competition," says Matt Healy, the national regulatory manager for Macquarie Corporate Telecommunications Holdings Ltd., a telecom company now competing against Australia's former telecom monopoly, Telstra Corp. Macquarie will also be a member of the APCC, along with Pacific Internet Ltd. and StarHub Pte. Ltd., both of Singapore.

While big telecom concerns such as MCI and AT&T operate their own international networks, in most countries a local provider owns most of the last-mile connections to individual buildings. In Singapore, for example, SingTel -- as Singapore Telecommunications is known -- owns those connections.

SingTel has called the Singapore government's decision in December ordering it to cut its last-mile fees by 30% to 50% inconsistent "with the stated regulatory approach of placing primary reliance on market forces." SingTel notes that it recently signed a three-year contract with Singapore mobile-phone company MobileOne Ltd. to provide local leased circuits. The deal "clearly shows that win-win, market-driven outcomes can be arrived at without the need for regulatory intervention," a SingTel spokeswoman says.

The APCC is also expected to express concern about restrictions on foreign investment in less-developed telecom markets, such as China. There, foreign investors can't invest in telecom companies offering basic services, such as fixed or wireless networks -- though that will change soon because of China's membership in the World Trade Organization.

In India, meanwhile, the group says high license costs keep many foreign companies from entering the market. Foreign telecom companies trying to do business in the U.S. don't often face the same type of restrictions, it says.

Write to Rebecca Buckman at [email protected]

startup_shutup 12/5/2012 | 1:16:57 AM
re: Qwest Quenches Fraud Probe you also have to love the country which allows
stock option accounting fraud to continue...
Do you think FASB would prevail??????

>>you have to love a country that lets you pay fines like this and keep operating.
How much money do they have if they can pay out this chump change
whyiswhy 12/5/2012 | 1:16:55 AM
re: Qwest Quenches Fraud Probe Startup: please shut up.

Stock option accounting fraud? OK, I will give you that is the fuel for the fraud, but there is no fraud in the options or their accounting. It's a few criminal CxO's and their corporate accounting that is fraudulent.

Stocks are not loans, they are speculation on the future market value of the company. Expensing options reduces profit, and makes it harder if not impossible for the company to grow.

A fair deal is: stock options give management and employees incentive to make the investors money grow. The investors should pay for that service. Otherwise, the company can and should just get a bank loan and keep the equity.


fbgboy 12/5/2012 | 1:16:55 AM
re: Qwest Quenches Fraud Probe Well holding stock is a crapshoot, here in Canada if Notel came out with the truth in one fell swoop the whole board woudl be going to jail.
read an article on the weekend that said companies restating there earnings are now in the Thousands. GAAP can always be manipulated and restated. The real difference now is the accounting firms will not sign off the audits, because they do not want to go inside. Maybe Worldcom/ Enron etc and few more sentances will start a whole new bsuiness trend. Somewhere over the rainbow.
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