Qwest Communications International Inc. yesterday agreed to pay $250 million to settle Securities and Exchange Commission charges that the company fraudulently booked $3.8 billion in revenue over nearly three years, repeatedly turning to accounting tricks that employees compared to a heroin "addiction."
Qwest employees carried out an extensive fraud, under orders from senior managers who made "outrageously optimistic" assertions that the Denver company would post double-digit profit gains at a time when demand sharply lagged, regulators alleged. The SEC is continuing to investigate the role of individuals in the scheme.
In one common tactic, employees reported revenue from one-time sales of fiber-optic capacity as recurring revenue, referring to such transactions as "one hit wonders." They also swapped assets with other companies but treated Qwest's side of the swaps as if they were sales, producing immediate revenue, the SEC said. Qwest also allegedly understated $231 million in expenses from June 1999 to March 2002.
Employees employed the strategies so often that some began to refer to them as Qwest's "heroin," the SEC said.
The nation's fourth-largest long-distance telephone service provider did not admit or deny wrongdoing as part of the settlement.
"Qwest senior management created a corrupt corporate culture in which meeting Wall Street expectations was paramount," said Randall J. Fons, director of the SEC's Denver regional office. "Senior management projected unrealistic revenue growth and would not tolerate missing the numbers."
Qwest's current chief executive, Richard C. Notebaert, said in a prepared statement: "We are pleased to conclude this matter, which will now allow us to focus even more of our effort to provide exceptional value and service to customers."
Qwest, whose stock price plunged from a high of $55 to less than $2 a share after the fraud surfaced in August 2002, said it would cover the settlement in two separate payments. It will send the agency $125 million soon, and the rest by December 2005. The money eventually will be given to Qwest shareholders, regulators said. Qwest stock closed yesterday at $3.44 a share, up 12 cents.
The company also agreed to hire a compliance official to ensure that managers never again stretch or ignore accounting rules to meet earnings targets and trigger executive bonuses, as was also alleged by the SEC.
Regulators said that Qwest misled investors about its business partnerships and improper relationships with suppliers, who were sometimes pressured by unidentified Qwest officials to award them shares in the supplier before initial public offerings during the Internet boom.
Qwest also failed to disclose to shareholders a $7.6 million aircraft sale between the company and the Anschutz Co., owned by Philip F. Anschutz, Qwest's founder and co-chairman of its board of directors. The May 2001 deal brought tax benefits and savings to Qwest, regulators said. "Disinterested" Qwest board members approved the transaction, according to the SEC order. The order did not question the propriety of the transaction itself, only that it was not disclosed as it should have been in the company's annual report or its proxy statement.
SEC enforcement chief Stephen M. Cutler said yesterday in a prepared statement that the investigation of individuals at Qwest who participated in the fraud is "active and ongoing." Federal prosecutors in Denver said they are continuing to investigate the company and former executives.
Former Qwest chief executive Joseph P. Nacchio, who is referred to by title in yesterday's SEC complaint, recently received notice that the agency planned to file related civil charges against him. Nacchio joined the company in January 1997 and departed under pressure in June 2002.
"Mr. Nacchio never did anything improper or illegal -- nor instructed anyone else to do anything improper or illegal -- during his tenure as the CEO of Qwest," William Anderson, a spokesman for Nacchio, said in a prepared statement yesterday.
Anderson added that many of the activities mentioned in the SEC order were reviewed and approved by lawyers, accountants and Qwest's board.
The SEC and Justice Department prosecutors already have sued several former Qwest managers. Two have pleaded guilty to criminal offenses; two others were acquitted after a seven-week trial this year.