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SEC, Justice Department Target 8 Qwest Employees

Feb 25, 2003 | The Wall Street Journal

The Securities and Exchange Commission filed civil charges against eight former and current employees of Qwest Communications International Inc. alleging that the employees fraudulently boosted the company's revenue by approximately $144 million in 2000 and 2001.

The Justice Department has also filed a criminal complaint against some of the Qwest employees. Attorney General John Ashcroft will detail the charges at a Washington, D.C. press conference planned for late Tuesday morning.

In a complaint filed in a U.S District Court for the District of Colorado, the SEC alleges that members of Qwest's Global Business Markets unit artificially accelerated revenue recognition on sales of telecom-equipment to the Arizona School Facilities Board and telecom carrier Genuity Inc.

The complaint says that the employees prepared false agreements and internal memorandum to aid in the revenue recognition. As a result of the transaction, Qwest recognized approximately $33.6 million in revenue for the quarter ended June 30, 2001. Without the fraudulent revenue, the complaint alleges, Qwest's sales for the quarter would have fallen short of projected 12% to 13% growth for the period.

Since former Chief Executive Joseph Nacchio's departure last June, the company has restated its revenue by $2.2 billion, largely because the company found it had improperly recognized hundreds of millions of "swaps" of telecom capacity with other telecom carriers.

Today's charges focus on a different area Qwest's sales of telecom equipment to its customers. In the Genuity matter, for instance, the SEC alleges that Qwest purported to sell equipment to Genuity at an improperly inflated price. Using a second contract, Qwest then agreed to provide services to Genuity at a loss to Qwest, and assumed the risks of loss and obsolescence on that very equipment.

As a result of that transaction, the SEC alleges that Qwest improperly recognized $100 million in revenue for the quarter ending Sept. 30, 2000. Without that revenue, the company would have been unable to meet its announced goal of making double-digit revenue growth.

Among the eight people charged by the SEC are William L. Eveleth, the company's current chief financial officer of Qwest's corporate planning and operational finance unit, as well as Bryan Treadway, the company's former assistant controller.

Level 3 Communications Inc. recently purchased the assets of Genuity out of Chapter 11 bankruptcy protection for $242 million in cash.

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