Possible $250 million penalty would settle fraud charges with SEC

By Roger Fillion, Rocky Mountain News
September 11, 2004

Qwest Communications has tentatively agreed to pay $250 million to settle fraud charges with federal regulators, sources told the Rocky Mountain News, in a deal that would sweep away a major stumbling block for the company in its bid to survive.

John Thompson, a Communications Workers of America vice president, on Friday told the News a Qwest official had notified him of the preliminary agreement involving the Securities and Exchange Commission.

Another source familiar with Qwest said details of the deal are expected to be spelled out in federal court within weeks.

The source, speaking to the News, said Qwest wouldn’t admit or deny any wrongdoing under the preliminary accord.

But the current document refers to «pervasive, fraudulent behavior going back several years,» according to the source.

The accord also singles out Qwest’s «hyping of its own stock in press releases citing progress in certain areas of technology» that later proved overblown, the source said.

Wall Street liked the news, pushing Qwest’s stock up more than 5 percent on Friday.

Qwest’s accounting practices have been under federal and state investigation for three years.

«This is a big milestone. It’s very important for Qwest to put this behind it,» said Scott Cleland, chief executive of Precursor, a Washington-based research firm.

Cleland added that the prospect of an SEC settlement raises the possibility that Qwest also will strike a deal with the Justice Department, which has been pursuing a criminal probe.

«It would be surprising if there isn’t a government settlement for the company,» said Cleland. «The SEC and Justice normally work hand in glove.»

It was the second piece of big legal news for a Denver company this week. Tuesday, state and federal regulators announced that Invesco Funds Group had agreed to pay $451.5 million in penalties and reduced fees as part of the «market timing» scandal rocking the mutual fund industry.

Qwest, the No. 4 telecom carrier in the nation, still faces a class-action lawsuit from shareholders in addition to the Justice Department’s probe.

Qwest spokesman Steve Hammack declined to comment on the tentative SEC agreement. «We continue in our efforts to cooperate with the SEC and the Department of Justice in their investigations,» he said.

An SEC attorney in Denver, Fred Chavez, also declined to comment.

A spokesman for the U.S. attorney’s office in Denver, Jeff Dorschner, said his department hadn’t been contacted about any kind of a settlement. He said any settlement would not affect the Justice Department investigation.

A settlement would permit Qwest Chief Executive Dick Notebaert to focus more attention on reducing the company’s $17 billion debt load and boosting sales.

But it doesn’t end the company’s financial woes. «It doesn’t mean that Qwest has a bright future. It means that it’s back from the brink,» said Cleland of Precursor.

For months now, federal investigators have been combing over Qwest’s books and focusing on questionable swaps of communications capacity, stock allocations by vendors to executives and accounting practices by the $14 billion company.

In all, a dozen former Qwest executives are either the subject of civil or criminal charges, or have settled allegations. Former President Afshin Mohebbi was notified by the SEC in January that he could face civil charges.

Qwest took a crucial step last fall toward striking a deal with the SEC when it cleansed its books of $2.5 billion worth of inflated revenues for 2000 and 2001. That included almost $1 billion of revenues from swaps of network capacity with the likes of Global Crossing and Enron.

The inflated sales were recorded under Qwest’s prior CEO, Joe Nacchio. Nacchio, who has denied any wrongdoing, hasn’t been charged criminally or sued by the SEC.

Qwest — which employs some 45,000, including about 11,900 in Colorado — has built up a $500 million reserve to pay for its legal woes.

«I don’t think the significance of a final settlement with the SEC can be understated,» said Bruce Allen, president of Bruce G. Allen Investments, a Denver investment advisory firm.

He stressed the significance of Qwest remaining in Denver as an ongoing concern, saying the company’s survival «can’t be understated» because it is such a large employer here.

Some investors had speculated that Qwest would be forced to pay an SEC settlement of between $300 million to $500 million.

A $250 million pact would nevertheless be the second-largest penalty ever meted out by the SEC outside the financial services industry. It would amount to a third of the $750 million that WorldCom, now MCI, agreed to pay last year after an $11 billion accounting scandal landed the telecom company in bankruptcy.

Legal developments aside, Qwest remains on shaky financial ground in an industry beset by fierce competition and tumbling prices for corporate long- distance service.

«They’ve had three quarters of disappointing results and the telecom sector remains increasingly competitive,» said Banc of America Securities analyst Ana Goshko.

In the second quarter, for example, Qwest reported a much larger-than-expected $776 million loss. The company’s sales were down 4.3 percent from the previous year. The number of phone lines that Qwest operates has been declining as more customers switch to wireless phone service.

Qwest was launched in 1988 by billionaire investor Phil Anschutz as a fiber-optic network company. In 2000, it got into the local phone business with the takeover of U. S. West, the main carrier in 14 Western and Midwestern states since the 1984 breakup of AT&T.

Tom Friedberg, an independent telecom consultant, believes that Qwest’s settlement of its legal problems with the SEC could be the first step toward the sale or merger of the company.

He said Qwest can’t operate independently because it lacks its own wireless network and it doesn’t have the scale or scope of larger telecom companies such as SBC Communications or Verizon. That makes a settlement all the more important.

«Nobody is going to want to buy the equity of a company where there’s undetermined liability,» said Friedberg. «Qwest wanted to settle this to begin the end game.»

SEC settlements

The news of Qwest’s settlement with the Securities and Exchange Commission is the latest in settlements reached between U.S. companies and federal regulators:

• Tuesday: Denver-based Invesco Funds Group and its sister company, AIM Investments of Houston, agree to pay $451.5 million in penalties and reduced fees for improper trading of mutual funds.

• Aug. 18: Denver-based Janus Capital Group agrees to pay $226 million in penalties in another improper trading case.

• Aug. 4: Bristol-Myers Squibb agrees to pay $150 million to end an SEC investigation into whether the company improperly recognized $1.5 billion in revenue.

• Aug. 3: Halliburton Co. says it will pay $7.5 million to settle a probe that it failed to disclose a change in its accounting procedures in 1998.

• May 17: Lucent Technologies Inc. is told to pay $25 million to settle civil fraud allegations after the company failed to fully cooperate in an investigation of its accounting.

• May 2004: The SEC says it has collected $430 million in settlements with investment banks and former employees of Enron, the Houston energy company, since the Enron accounting scandal broke in November 2001.

• May 2003: WorldCom agrees to pay $750 million to settle SEC fraud allegations.

Compiled By News Librarian Carol Kasel.

fillionr@RockyMountainNews.com or 303–892–2467. Bloomberg News and The Associated Press contributed to this report.