BUSINESS DIRECTORY
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MARCH 16, 2005
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NEWS ANALYSIS
By Christopher Palmeri and Amy Borrus
Now Its Qwest in the Crosshairs
The SEC charges former CEO Joseph Nacchio and six colleagues with massive financial fraud. Will criminal charges follow?
Just hours after the guilty verdicts were read at the trial of WorldComs Bernard J. Ebbers, former executives at another onetime telecom highflier were getting their own bit of bad news (see BW Online, 31605, Ebbers Giant Fraud, Simple Conclusion
). Former Qwest Communications International (Q
) CEO Joseph P. Nacchio and six other former execs were sued by the Securities Exchange Commission on Mar. 15 for allegedly taking part in what regulators called massive financial fraud. Four other former Qwest execs agreed to settle lesser claims.
The SEC action follows a nearly three-year investigation by its Denver office. The complaint accuses the group of engineering a 3 billion scheme to inflate Qwests revenues from 1999 to 2002 by backdating contracts, initiating swaps of network capacity that werent needed, and even pushing up the publication dates of the companys phone directories. Last October, Qwest settled similar charges without admitting guilt, paying 250 million in penalties.
CULTURE OF FEAR.
In a statement, Charles Stillman, an attorney for Nacchio, said his client did nothing wrong and did not instruct anyone else to do anything wrong during his tenure at Qwest, and he looks forward to being vindicated. Other parties named in the complaint include former Chief Financial Officers Robert S. Woodruff and Robin R. Szeliga and former President Afshin Mohebbi. Their attorneys couldnt be immediately reached for comment.
The complaint paints a particularly harsh portrait of the management at Qwest, which one employee said had created a culture of fear. According to the government, Nacchio emphasized delivering financial results above all else.
The most important thing we do is meet our numbers, Nacchio allegedly said during an all-employee meeting in January, 2001. Its more important than any individual philosophy. We stop everything when we dont make the numbers.
KEPT UNDER WRAPS.
While the complaint alleges that Qwest execs used a number of tricks to inflate revenues, the heart of the case involves swaps of fiber-optic network capacity between Qwest and other telecom companies. The swaps, the government alleges, were often initiated near the end of a quarter to meet Qwests projected sales and earnings targets on Wall Street. As result, Qwest employees called them heroin and SLUTs, short for simultaneous legally unrelated transactions.
Qwests former accounting firm, Arthur Andersen, emerges as an unexpected good guy. According to the complaint, the outside auditor pushed on several occasions for Qwest management to disclose more information about the swaps to investors. But, the complaint says, Woodruff ordered additional information about the swaps dropped from the 1999 annual report, which was filed with the SEC on Mar. 17, 2000. This was done without the auditors knowledge.
That date is significant, sources tell BusinessWeek Online, because the government had to file the case this week because the five-year statute of limitations was about to end. While the SEC often files fraud complaints in conjunction with criminal charges from the Justice Dept., a Justice source says its still investigating former Qwest executives. Federal prosecutors arent subject to the same time constraint.
JUST IN TIME.
A criminal case against the execs is hardly a sure thing. Last year, federal prosecutors were unable to win a single conviction in a jury trial of four lower-level Qwest execs charged with financial shenanigans involving a large contract with the state of Arizona.
In its civil charges, the SEC is seeking disgorgement of more than 300 million in salary, bonuses, and stock sales made by the former execs. About 216 million was attributed to Nacchio. The government is also seeking to permanently bar those charged from serving as officers or directors of public companies.
The telecom boom is history, but as Ebbers conviction and Qwests latest troubles demonstrate, its legacy will linger in the legal system for some time to come.
Palmeri
is a senior correspondent in BusinessWeek
s Los Angeles bureau, and Borrus
is a correspondent in the Washington bureau
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