Four former Qwest Communications executives have been indicted on charges of developing a scheme to artificially boost revenue and then covering it up, nearly a year after regulators began investigating the company’s accounting practices.
None of those indicted was a top-level executive.
“The biggest question is, ‘Is this it?'” said analyst Michael Bowen of SoundView Technology Corp. “We’re all waiting for the investigations to end.”
The federal grand jury indictment announced Tuesday stemmed from a deal Qwest had with the Arizona School Facilities Board to build a statewide school computer network with Internet access.
Qwest incorrectly reported the sale of some equipment so it could record more than $33 million in revenue immediately, instead of booking the revenue as the system was installed over an 18-month to two-year period, the government said.
The men provided auditors false letters to support the incorrect treatment of the deal, prosecutors alleged.
The defendants, plus four other current or former executives, also faced civil fraud charges brought by the Securities and Exchange Commission related to the Arizona deal and another separate deal.
Arrest warrants were issued for these former employees: Grant P. Graham of Evergreen, Colo., chief financial officer for Qwest’s global business unit; Thomas W. Hall of Englewood, Colo., senior vice president in the global business unit; John M. Walker of Littleton, Colo., vice president in the unit; and Bryan K. Treadway of Atlanta, assistant controller.
The four others sued by the SEC are Joel M. Arnold, former senior vice president of the company’s Global Business division; Douglas K. Hutchins, a former director of the division; Richard L. Weston, former senior vice president of product development in Qwest’s Internet Solutions division; and William L. Eveleth, current chief financial officer of the corporate planning and operational finance division and a senior vice president of finance.
“We think this is a case where Tom Hall has been offered up as a human sacrifice by a corrupt corporation,” said Jeffrey Springer, Hall’s lawyer. “He’s a salesperson who was given guidance and instruction from people in the finance department, the accounting department.”
Defense lawyers would not comment on whether settlement talks were being held.
Qwest said it was cooperating with the government. “As a company, as individual employees, we hold ourselves to the highest ethical standards as we conduct our business,” spokesman Steve Hammack said.
The SEC’s civil fraud charges allege that the eight former or current Qwest executives inflated the company’s revenues by about $144 million in 2000-2001 to meet promises of double-digit revenue growth.
It said Qwest charged the Internet backbone company Genuity Inc. double what it charged another customer for similar equipment, then provided services at a loss to Qwest.
The SEC said it wanted the men to repay their salaries, bonuses and stock gains during the 1 1/2 years they allegedly engaged in fraudulent activities.
“The defendants played with the numbers so investors would believe the company was doing better than it really was,” new SEC chairman William Donaldson said. “The defendants couldn’t make the numbers work by following the rules, so they cheated.”
The Justice Department and the SEC investigations into Qwest are continuing. Qwest also was the subject of congressional hearings, and Rep. Diana DeGette, D-Colo., said she would request further investigations into board responsibility.
The probes have examined whether Qwest propped up revenues by swapping network capacity with another scandal-plagued telecommunications company, Global Crossing Ltd.
Since firing Arthur Andersen LLP, the auditing firm that was convicted of obstruction of justice in the Enron collapse, Qwest has restated about $2.2 billion in revenue for 2000 and 2001 because of accounting errors.
Qwest became the dominant local phone company for 14 states extending from Minnesota west to Washington state and southwest to Arizona and New Mexico after it bought Baby Bell U S West after a bidding war with Global Crossing.
Since the merger in 2000, the company has seen its stock price plummet, with lawmakers charging that Qwest executives cashed in millions of dollars in options beforehand.
The company still faces shareholder lawsuits, about $20 billion of debt and declining revenue.
Chief executive officer Joseph Nacchio resigned in June under fire, and new CEO Dick Notebaert has ushered the company through its restatements.
“It sound strange, but I don’t think it’s a negative,” Kaufman Bros. analyst Vik Grover said of the indictments. “It just shows the company is making progress on putting fires out. It’s probably not the end of the story.”