Justice Department, SEC Charge Former and Current Qwest Execs with Fraud

A federal grand jury today charged four former executives of Qwest Communications International Inc. with corporate accounting fraud in a 12-count indictment, and the Securities and Exchange Commission has filed separate civil fraud charges against eight current and former officers and employees of the Bell company for allegedly scheming to inflate revenue by approximately $144 million in 2000 and 2001 in a bid to meet revenue expectations.

The Justice Department disclosed issuing arrest warrants for the four defendants charged in the criminal indictment. The defendants, who face up to 10 years in prison on some of the charges and fines as high as $1 million if they are convicted or plead guilty, have 48 hours to surrender to the U.S. Marshal’s Service.

The former Qwest executives have been charged with crafting a scheme to falsely claim about $33 million in revenue for the second quarter of 2001 – “a quarter for which Qwest was experiencing weak sales,” according to a news release the Justice Department issued today.

Federal officials allege the executives violated SEC rules by immediately reporting millions of dollars in revenue through a purchase order with the Arizona School Facilities Board linked to the design and implementation of a statewide school computer network. According to the indictment, the defendants arranged for Qwest to enter a so-called bill-and-hold transaction, by which the company sells the equipment to the buyer and bills the customer, yet holds the merchandise for later delivery. Recognizing the revenue immediately violated SEC requirements on bill-and-hold transactions, the Justice Department said.

Those people named in the indictment include Grant Graham, former CFO for Qwest’s Global Business Unit; Thomas Hall, former senior vice president in the government and educational solutions group within the company’s Global Business Unit; John Walker, former vice president in the governmental and educational solutions group; and Bryan Treadway, former assistant controller.

The defendants are charged with conspiracy to commit an offense against the United States; securities fraud, false/misleading statements, books, records; securities fraud, manipulative and deceptive devices; making false statements; and wire fraud affecting a financial institution. The securities fraud and wire fraud counts carry a maximum prison term of 10 years behind bars.

The SEC and Federal Bureau of Investigation investigated the Arizona School Facilities Board case.

“Today’s indictment concludes only the first phase of the Qwest investigation by the Justice Department,” said U.S. Attorney John Suthers, of the District of Colorado. “There are several other aspects of Qwest’s corporate conduct and the conduct of its executives that are the subject of a continuing investigation.”

Qwest issued a statement in response to the Justice Department and SEC announcements.

“Qwest continues in its efforts to cooperate with the government in connection with the investigations. Fundamental to the spirit of service is complete integrity in all we do. As a company and as individual employees, we hold ourselves to the highest ethical standards as we conduct our business.”

In conjunction with the criminal indictment, the SEC filed civil fraud charges against eight current and former officers and employees of Qwest. The lawsuit, which is filed in the U.S. District Court in Denver, seeks anti-fraud injunctions, civil money penalties and disgorgement of ill-gotten gains, including salaries, bonuses, stock and other forms of compensation. The SEC also is requesting that certain defendants be permanently barred from service as an officer or a director of a public company.

Six of the defendants are charged with participating in the Arizona School Facilities Board fraud case. The SEC alleges the people artificially separated the equipment sale from the installation services and wrongly characterized the sale as a bill-and-hold transaction under generally accepted accounting principles. The federal agency also says the transaction included the accelerated delivery of equipment necessary for the two-year project and the delivery of equipment not approved.

The SEC has charged in connection with the Arizona school fraud case the four defendants named in the criminal indictment in addition to two others: Douglas Hutchins, a former director of the Global Business Unit; and Joel Arnold, a former senior vice president of the same unit.

The SEC also alleges Qwest improperly recognized revenue and earnings through agreements with network service provider Genuity Inc. in the quarter ending Sept. 30, 2000. According to the SEC, Qwest sold equipment to Genuity at an inflated price in one contract while in a second contract agreeing to provide Genuity services at a loss. Those people named in connection with the scandal include Arnold, Graham and two others: Richard Weston, former senior vice president in product development for Qwest’s Internet Solutions unit; and William Eveleth, current CFO of Qwest’s corporate planning and operational finance unit and senior vice president of finance.

“In the first contract, Qwest purported to sell equipment to Genuity at an improperly inflated price. In a second contract, Qwest agreed to provide services to Genuity at a loss to Qwest, and reassumed all risk of loss and obsolescence on the equipment purportedly sold pursuant to the first contract,” an SEC news release states. ”As a result of the fraudulent transaction, Qwest improperly recognized $100 million in revenue and claimed $80 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) in the quarter ended Sept. 30, 2000. Without the fictitious revenue from the Genuity transaction, Qwest would not have achieved the projected double-digit growth for the quarter, and would have recognized growth of 9.8 percent above the same quarter of the prior year rather than the announced 12.4 percent.

“Qwest also improperly recognized revenue of approximately $2.6 million in the quarter ended Sept. 30, 2000, and an additional $8 million in the year ended Dec. 31, 2000, under the service agreement despite the fact that Qwest had not begun providing any services.”

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