Federal authorities on Tuesday accused eight Qwest Communications middle managers of fraud for allegedly inflating sales so Qwest could meet Wall Street expectations in 2000 and 2001.
In the latest stab by the Bush administration to clean up Corporate America, officials hinted that the probe could rise to the top echelons of the USA’s No. 4 local phone company. ”No executive is above the law,” Attorney General John Ashcroft said.
A deeper probe could mean more turmoil for Qwest, which plans to cut $2.2 billion in past revenue because of bad accounting relating to such things as network capacity, equipment sales and billing errors. Qwest says customer service isn’t being affected.
Prosecutors say four former Qwest executives improperly booked $33 million in revenue in 2001 involving equipment and service sales to Arizona schools. Arrest warrants were issued for Grant Graham, 37, Thomas Hall, 51, John Walker, 41, all of Colorado, and Bryan Treadway of Georgia. They were indicted on 12 counts each. Each could face up to 40 years in prison and $2.75 million in fines.
The Securities and Exchange Commission also slapped civil fraud charges against them, three other former executives and one current one. It cites the Arizona deal plus $111 million involving gear and service sales to network operator Genuity. It seeks the return of ill-gotten gains and the barring of some defendants from officer or director slots at public companies.
Qwest has suffered a management shake-up, probes and the telecom meltdown. Officials have stepped up corporate crime crackdowns as they try to restore investor confidence. Last year, four WorldCom employees pleaded guilty to charges stemming from its fraud. Former CFO Scott Sullivan has pleaded not guilty. Why Qwest’s probe might grow:
* Strategy. Prosecutors often target low-level players to get to bosses. They ”have one choice: go to trial or point to someone higher,” says Jack Coffee, securities law expert at Columbia University. Prosecutors used that strategy at Enron and WorldCom. At Qwest, they hope to ascend the ranks, possibly to former CEO Joseph Nacchio and ex-president Afshin Mohebbi, sources say. The two have denied wrongdoing.
* Culture. The indictments conclude the probe’s first phase, officials say. The $145 million in deals represents less than 7% of Qwest’s planned restatement. The SEC says Qwest executives ”placed extraordinary pressure” on underlings to hit or beat financial targets.