As federal investigations of Qwest stretch into their second year, at least one member of Qwest’s board has emerged as a potential key witness for investigators.
Internal Qwest e-mails made public by a congressional investigation last year cast W. Thomas Stephens as a board member who raised concerns, voiced frustrations and attempted to hold the troubled company’s executives to task.
Stephens, a member of the audit committee of Qwest’s board, scribbled “this one stinks” in his notes about a highly scrutinized deal in 2001. He warned in an e-mail he would “pitch a fit” if Qwest executives didn’t resolve certain accounting issues.
And he criticized as “unacceptable” Qwest executives’ attempt to publish a financial report in early 2002 without the audit committee vetting it first.
An expert on federal investigations, after reviewing the e-mails, deemed Stephens an ideal interview candidate for the ongoing probes of Qwest, the Denver regional Bell.
“He’s certainly someone who I would want to ask questions about the context of these e-mails, his concerns and who he talked to in connection with these concerns,” said Carr Conway, a forensic accountant with Dickerson Financial Investigations in Lakewood and a former investigator for the Securities and Exchange Commission.
The SEC and Department of Justice each have probed Qwest’s accounting for more than a year. The SEC already has sued seven former Qwest executives and one current Qwest employee. A Colorado grand jury in February indicted four. Further indictments and civil charges are expected.
It is unclear whether federal investigators have spoken with Stephens, who remains on Qwest’s audit committee. Federal officials declined to comment, and Stephens did not return repeated phone messages seeking comment.
A Fortune reporter caught up with Stephens for a brief comment included in this month’s edition of the magazine. “Ultimately, the whole story will come out,” Stephens told Fortune. “I’m proud of what I and the board did. It will speak for itself.”
Stephens, 60, served as a US West board member, joining the Qwest board upon the merger of the two in June 2000. He was chairman of the board’s audit committee which oversees the company’s financial reporting, audit and accounting practices – until early 2002.
Stephens served as CEO of building-products manufacturer Manville Corp. from 1986 to 1996. He then served as CEO of Canadian forest-products company MacMillan Bloedel Ltd. from 1996 to 1999.
Other Qwest board members have described Stephens as the most vocal of their group with his concerns about what he described as a lack of cooperation and full disclosure by Qwest’s management, led by former CEO Joe Nacchio.
Board members recall Stephens questioning Nacchio about Qwest’s accounting policies and disclosures. In his congressional testimony in October, Nacchio denied receiving specific orders from Stephens about Qwest’s accounting or the tone he set as CEO.
Yet Stephens’ peers count him as one of Nacchio’s harshest critics on the board, and one of the first to suggest his removal as CEO.
One source recalled Stephens at a meeting in late 2001 detailing situations in which Qwest executives had failed to fully inform the board of important developments. The report amounted to a “wake-up call” for the board, the source said.
Even so, the board did not launch the first of two subsequent internal investigations of Qwest’s accounting until February 2002. The second investigation, launched in June 2002, has resulted in Qwest’s plans to erase or shuffle $2.2 billion in revenue on its books for 2000 and 2001. The board did not oust Nacchio until June 2002, replacing him with Richard Notebaert.
A handful of e-mails from Stephens buried near the bottom of more than 1,000 pages of documents released in the congressional probe illustrate the issues Stephens encountered.
In an e-mail from Mark Iwan, the Andersen audit partner overseeing Qwest’s audit, to Stephens on April 18, 2001, Iwan asked to speak with Stephens before a conference call.
“There are several items I would like to make you aware of so you can ask the right questions on the call,” Iwan wrote.
The document included Stephens’ hand-scrawled notes from the subsequent conversation with Iwan.
Stephens noted “nonmonetary trades,” or swaps of fiber-optic lines with other carriers – deals Qwest’s new management has since targeted for removal from its books. He scribbled the “stinks” comment in regard to a swap of lines between Global Crossing and Qwest that has since drawn intense federal scrutiny.
The notes also touched on other accounting issues that have since come to light publicly. “The sky is falling,” Stephens wrote.
In an e-mail to former Qwest CFO Robin Szeliga on Jan. 12, 2002, Stephens expressed irritation with Nacchio’s team. They had scheduled a date for Qwest’s quarterly earnings report without arranging an audit-committee review of the report first.
“The phone message I got indicated the reason for releasing earnings before the audit committee had a chance to have a face-to-face meeting and before it could report to the full board was Joe’s schedule and trying to beat another company who was going to announce,” Stephens wrote. “Those are unacceptable reasons to shortcut what we had agreed we would do at our last meeting, and it is not (the) best practice.”
In a pointed e-mail to other audit-committee members on March 29, 2002, Stephens detailed his frustration with Qwest’s management and then-co-chairman Phil Anschutz.
“The situation is becoming very frustrating for me, as I’m sure it is to you,” Stephens wrote. “I have urged PA (Anschutz) to get involved and provide some leadership to sort out the right path forward. Based on the conversation I had with him last Friday and developments since then, it’s my sense that he doesn’t appreciate the need to drive some of the open questions to ground. It’s also my sense that JN (Nacchio) doesn’t have a handle on the situation either.
“I plan to talk to RS (Szeliga), DT (former general counsel Drake Tempest) and JN tomorrow and pitch a fit over the lack of resolution to open issues this close to the filing deadline,” he wrote. “My position continues to be that we call for full and fair disclosure as to issues where the SEC might not agree with Qwest’s accounting.”
That e-mail came with Qwest’s first internal investigation in full swing. It came nearly three weeks after the SEC announced an informal investigation of Qwest’s accounting, and just a week before that probe became formal.
Jim Monaghan, a spokesman for Anschutz, said Stephens’ e-mails demonstrate an audit-committee chairman doing his job, not a rift on Qwest’s board.
“What should not be read into this e-mail is any sense that there was a major disagreement between Stephens and Anschutz on this matter or governance in general,” Monaghan said.
“What I can tell you with complete certainty is that, in early 2002, Phil Anschutz in his role as a board member was very focused on these problems and the issues Stephens refers to.”
Conway, the former SEC investigator, said he doesn’t believe Stephens’ e-mail is an attempt to document his opinions in anticipation of future investigations.
“You could take a very jaded view that it was CYA (cover your behind), but I think it was the guy trying to do his job,” Conway said.