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Qwest Resists SEC Request For Report

May 28, 2003 | USA TODAY Settlement talks between Qwest Communications and the Securities and Exchange Commission are stalled because Qwest won't hand over a 2002 report explaining why some deals now deemed improper were then considered immaterial to its financial results, USA TODAY has learned.

The SEC, which has been probing Qwest's books for more than a year, wants to see the report analyzing Qwest's network capacity and equipment sales back to 1999. That ''extended investigation'' found that Qwest didn't need to change its financial results regarding those deals because potential problems with them were not ''quantitatively or qualitatively material,'' say March 2002 audit committee summaries.

Some of those deals are being reversed as part of Qwest's $2.2 billion planned restatement of results for 2001 and 2002.

The SEC wants Qwest to waive attorney-client privilege and release the report to ensure its probe of Qwest is complete, people close to the probe say. Qwest fears that doing so would mean it will have to do the same for plaintiffs in shareholder lawsuits. Qwest is negotiating to give the SEC the report without waiving privilege for others, people close to it say.

The USA's No. 4 local phone company will update its restatement Thursday when posting first-quarter results. Under new CEO Richard Notebaert, Qwest has been cleansing its books.

Companies under investigation are facing more pressure from the government to waive attorney-client privilege. If they don't, they could face stiffer penalties.

An item accounting for 10% of revenue is often considered material, but so could a minor deal that helps a company meet its growth targets. So far, regulators and prosecutors have accused eight current and former Qwest employees of fraud.

The materiality debate at Qwest reached its top ranks. When former Qwest CFO Robin Szeliga found possibly improper deals in October 2001, she told Qwest's audit committee that they weren't material, according to previously released data. She said Qwest's former audit firm, Arthur Andersen, former Qwest CEO Joe Nacchio and former general counsel Drake Tempest agreed. Nacchio, who could not be reached, has said he did nothing wrong. Tempest, the SEC and Qwest declined comment.

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