Four former Qwest executives head to federal court Tuesday for jury selection in the first criminal trial arising from probes of questionable accounting at the telecommunications company.
Prosecutors say the men charged with conspiracy and fraud devised a scheme that allowed Qwest to improperly book $34 million from a computer equipment sale. Prosecutors say they conspired to lie about the deal and hid the facts from then-auditor Arthur Andersen.
The case is the first stemming from investigations that ultimately forced Qwest Communications International Inc. to erase $2.5 billion in revenue from its books and prompted former CEO Joseph Nacchio to quit under pressure in 2002. The trial is expected to last a month.
At issue is a $100 million deal with the Arizona School Facilities Board in the second quarter of 2001. The board hired the Denver-based company to build a network for Internet access to schools statewide.
Grant Graham, Thomas Hall, John Walker and Bryan Treadway are accused of rushing to get equipment for the project delivered by the end of the quarter so revenue could be booked right away, and then claiming Arizona officials wanted it done that way.
In the process, the four are accused of ordering equipment Arizona officials hadn’t agreed to buy and of keeping a warehouse open on a Saturday, the final day of the quarter, to make it appear the material was received on time.
The men booked revenue from the sale before the computer equipment was installed, hoping to meet lofty profit targets and help their own performance reviews and bonuses, prosecutors say.
If convicted, the men could face years in prison and millions of dollars in fines.
Defense attorneys are expected to argue the charges were the result of political pressure to crack down on corporate scandals, and that more senior Qwest officials found nothing wrong with the transaction.
Graham was the chief financial officer of Qwest’s global business unit, while Hall and Walker were vice presidents for government and educational solutions. Treadway was assistant controller.
Attorneys for Walker, Treadway and Hall did not return calls last week. Previously, Hall’s attorneys have said Qwest offered him as a sacrifice to law enforcement officials looking for somebody to blame.
Graham’s attorney said his client was wrongly charged.
“We think that there is no merit to the indictment. We don’t think that Mr. Graham was involved in any wrongdoing,” attorney Daniel Sears said.
Qwest has said only that it is cooperating with investigators. At a Denver luncheon Monday, current CEO Richard Notebaert refused to discuss the company’s troubles.
“I’m not going to look through a rearview mirror,” he said. Asked about changes at the company, he said: “We will stand the test of any scrutiny.”
The four defendants and four other former Qwest executives have all been sued by the Securities and Exchange Commission (news – web sites), which says they inflated Qwest revenues by about $144 million in 2000 and 2001 to meet promises of double-digit revenue growth. That lawsuit is on hold until the criminal trial is over.
No other criminal charges have been announced against the company or any of its employees involving accounting irregularities, but U.S. attorney spokesman Jeff Dorschner said the probe is continuing.
Since 2002, when the SEC began investigating alleged fraudulent transactions designed to inflate revenue, Qwest has restated financial results for 2001 and 2002 to erase about $2.5 billion in revenue.
The company still faces several shareholder lawsuits and about $17 billion of debt.