Ex-Qwest Officials Indicted On Fraud ChargesFeb 26, 2003 | The Washington Times Four former executives of Qwest Communications International Inc. were indicted yesterday on suspicions of a scheme to falsely create more than $33 million in revenue and cover it up as Qwest, the telecommunications giant, was experiencing a slump in sales.
They are accused of seeking to falsely create more than $33 million in revenue for Qwest by improperly reporting a purchase order with the Arizona School Facilities Board in violation of Securities and Exchange Commission rules.
The 12-count indictment said the Qwest executives sold equipment, including materials to create Internet access, to the statewide school computer network during an 18-month period, but that the company immediately billed the customer while holding the merchandise for later delivery. It said the executives knowingly filed false documents to hide their actions.
"As we continue our efforts to battle corporate fraud, our message is clear: We will protect the integrity of our markets by punishing those who falsify financial information out of sheer greed," Attorney General John Ashcroft said in announcing the indictment during a Justice Department press conference.
The indictments are the latest in a government crackdown on corporate fraud that followed Enron Corp.'s collapse in late 2001. Accounting scandals have led to the prosecution of former officials of Enron, WorldCom Inc., Adelphia Communications Corp. and Tyco International Ltd.
The indictment, handed up in U.S. District Court in Denver, named Grant Graham of Evergreen, Colo., former chief financial officer for Qwest's global business unit; Bryan Treadway of Atlanta, former assistant controller at Qwest; Thomas Hall of Englewood, Colo., former senior vice president for the company; and John Walker of Littleton, Colo., a former Qwest vice president.
Separately, the Securities and Exchange Commission filed a lawsuit in Denver against seven former and one current Qwest executive, accusing them of a "fraudulent scheme orchestrated to meet at all costs Qwest's predictions of double-digit revenue growth."
The seven were Mr. Graham, Mr. Hall, Mr. Treadway and Mr. Walker, with Joel Arnold, former senior vice president for Qwest's global business unit; Douglas K. Hutchins, former director of the unit; Richard L. Weston, former senior vice president of product development; and William L. Eveleth, chief financial officer of Qwest's corporate planning and operational finance division.
They were named in the lawsuit in connection with a scheme to inflate the company's revenue by $144 million in 2000 and 2001 to meet Wall Street's expectations. The suit seeks injunctions, unspecified civil penalties and a "disgorgement of ill-gotten gains," including salaries, bonuses, stocks and other compensation.
"Accurate financial statements are the bedrock of our capital markets," said new SEC Chairman William H. Donaldson, who appeared with Mr. Ashcroft at the press conference.
Mr. Donaldson said the SEC "will pursue aggressively anyone and everyone who has participated in an illegal effort to misrepresent a company's [financial reports] and mislead the investing public."
Arrest warrants were issued for the four Qwest executives. Mr. Ashcroft said they have 48 hours to report to authorities.
Qwest spokesman Steve Hammack said the company is cooperating in the investigation, but declined to comment on the indictments.
"As a company, as individual employees, we hold ourselves to the highest ethical standards as we conduct our business," he said.
Qwest, a global leader in broadband Internet communications, has been under investigation by the Justice Department and the SEC during the past year and has been the subject of congressional hearings into its financial practices.
The investigations have examined whether Qwest artificially inflated its revenue by swapping network capacity with another scandal-plagued telecommunications company, Global Crossing Ltd.
Justice Department officials said yesterday that the investigation is continuing.
The Denver company has restated its financial reports for 1999 to 2001 because of accounting errors, including $950 million in revenue booked from swaps.
It piled up $22.6 billion in debt, primarily from acquisitions and building capacity that was never used. The company has reported 10 straight quarterly losses, hurt by a drop in local telephone lines to about 17 million.
Qwest has said it followed the accounting advice of Arthur Andersen LLP during the period covered by the restatements. Qwest later hired KPMG LLP to replace Andersen, which was convicted last year of obstructing justice in the government's investigation of Enron accounting.
Qwest serves as the local phone company for 14 states, from Minnesota west to Washington state, and southwest to Arizona and New Mexico. The firm's chief executive, Joseph Nacchio, resigned in June under fire. Thousands of workers have been laid off, and Qwest's stock has plummeted.