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Criminal Probe Of Qwest Begins

Jul 11, 2002 | USA Today

Federal prosecutors have started a criminal investigation into Qwest Communications, casting further gloom over the telecom sector.

Qwest, the No. 4 local telephone company, is already facing an accounting probe by the Securities and Exchange Commission.

Qwest confirmed the investigation Wednesday. Insiders and analysts believe it centers on how Qwest, which provides service in 14 states from Minnesota to Arizona, recognized revenue in 2000 and 2001 when it sold network capacity or equipment to companies from which it also bought capacity and servers.

The SEC also is examining the so-called swaps.

But some analysts say the probe might be highly politically motivated. Qwest was under the impression that the SEC was ready to close its four-month investigation with a mild reprimand before WorldCom's $3.9 billion accounting scandal prompted the Justice Department ( news - web sites) to look harder at companies suspected of accounting misdeeds.

''If it hadn't been for WorldCom, people wouldn't be piling on Qwest and others,'' says analyst Tom Friedberg of Brean Murray. ''There is tremendous pressure, given the political climate, to investigate any alleged corporate wrongdoing.''

U.S. Attorneys often open investigations after referrals from agencies such as the SEC and the FBI ( news - web sites). In the course of its probe, the SEC might have come across what it speculated was fraudulent behavior and passed it on to the U.S. Attorney's Office.

Whatever its origin, the probe will do little to settle the frayed nerves of investors. Federal regulators are already poring over WorldCom, Enron and Global Crossing. The news sent Qwest shares spiraling down 32% to $1.77 in trading Wednesday.

Qwest said the U.S. Attorney's Office in Denver notified it Tuesday of the probe. It wouldn't say what the office is investigating. It plans to cooperate. Last week, Qwest denied a Wall Street Journal report that it was being investigated by the U.S. Attorney and the FBI.

Jeff Dorschner, a spokesman for the U.S. Attorney's Office in Denver, confirmed the probe but declined to say how long Qwest had been under scrutiny.

The beleaguered Denver-based company is already under enormous pressure to reduce its $26 billion debt during a telecom meltdown. On Wednesday, Moody's Investors Service further downgraded Qwest's already junk-rated debt. Last month, Qwest's longtime CEO Joseph Nacchio resigned and was replaced by Richard Notebaert, fomerly of Ameritech.

The cloud of a criminal probe also could depress bids for Qwest's yellow-pages business, says Lisa Pierce of Giga Information Group. The money-making operation, which is on the market to raise cash, could fetch $8 billion to $10 billion. Bids are due Friday.

Still, Qwest's woes aren't on the same scale of WorldCom, which might be forced to file for bankruptcy protection. Qwest boasts strong cash flow and solid assets, a Lehman Bros. report said Wednesday.

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