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SEC Charges Former Qwest Execs

The Securities and Exchange Commission (SEC) Tuesday charged Qwest Communications International Inc. (NYSE: Q) former co-chairman and CEO Joseph Nacchio and eight other former Qwest employees and officers with engaging in “a multi-faceted fraudulent scheme” designed to overstate the Denver-based carrier’s revenues between 1999 and 2002. Along with Nacchio, the other officer-level defendants named in the civil suit are former CFOs Robert Woodruff and Robin Szeliga, and former COO Afshin Mohebbi.

The SEC claims these executives systematically overstated Qwest's earnings in financial statements, and managed to recognize over $3 billion in revenues while excluding $71.3 million in expenses. To do this, the SEC claims, the executives frequently reported non-recurring revenue as recurring revenue in financial statements. Over time the practice "grew to the point that it was likened internally to an 'addiction'... to 'heroin,' " reads the SEC complaint.

All this helped "mask the company’s declining financial state," fill the gap between actual revenues and projected revenues, and inflate stock prices, according to the SEC.

The Qwest executives' revenue misrepresentations were particularly important at the time, because they allowed the carrier to maintain a stock price sufficiently high to complete its pending merger with US West.

Yesterday’s action does not come as a suprise to those familiar with the situation; it is the latest in a series of actions filed by the SEC against Qwest dating back to February 2003. (See Qwest Pays $250M to Settle SEC Probe, Nacchio to Pay $400K in IPO Suit, Prosecutors' Party at Qwest, Tellium Lawsuits Allege Rigged IPO, Did Qwest Qwash Morgan's Analysts?, Qwest's Amazing Shrinking Revenues, Qwest Trashes Junk Rating, and Qwest Prepared to Answer Feds.)

Qwest, not surprisingly, is distancing itself from its former leaders. “Any allegation that concerns the conduct of Qwest relative to [this suit] concerns events that took place many years ago," says Qwest spokesperson Bob Toevs. “The company is focusing on the future.”

The charges were filed in a district court in Colorado just hours after a guilty verdict was handed down in the fraud case of former WorldCom CEO Bernard Ebbers (see Ebbers: GUILTY!). “This has been a multiyear investigation,” says Mary Brady, the SEC’s assistant regional director of enforcement, based in Denver. “We’re filing now because we’ve proven that we’ve developed sufficient evidence to bring the charges."

If Nacchio and the others are found guilty of those charges, the court could impose civil penalties against all of the defendants, as well as injunctions and "disgorgement of ill-gotten gains," plus prejudgment interest, on the officers named. Brady says the SEC will also ask the court to bar Nacchio, Woodruff, Szeliga, and Mohebbi from serving as officers in any company in the future. Because the SEC’s action is a civil proceeding, none of the defendants face the chance of jail time.

Brady says the filing of the suit today begins what could be a years-long process of discovery that will eventually conclude in a trial.

— Mark Sullivan, Reporter, Light Reading

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