U.S. Attorney General John Ashcroft announced Tuesday the indictments of four former Qwest officials, the first salvos of what he promised would be a long war against the beleaguered Baby Bell.
With seven top federal lawmen at his side, Ashcroft said the four midlevel executives intentionally deceived investors by conspiring to inflate revenues by $33 million. He said they falsified documents in a sale of Internet equipment and services to the Arizona School Facilities Board.
At the same briefing, Securities and Exchange Commission Chairman William Donaldson announced that civil fraud charges had been filed against eight people – the four who were indicted as well as one current and three former Qwest executives.
A federal grand jury in Denver returned the four indictments Tuesday morning, just before Ashcroft’s news conference. Former Qwest Chief Financial Officer Robin Szeliga and employees of Arthur Ander- sen, Qwest’s former auditor, will testify for the prosecution, according to court documents.
Named in the 12-count indictment were Grant Graham, 37, of Evergreen, a former chief financial officer for Qwest’s global business unit; Thomas Hall, 51, of Cherry Hills Village, a former senior vice president in government and educational solutions; John Walker, 41, of Highlands Ranch, a former vice president in government and educational solutions; and Bryan Treadway, 37, of Atlanta, a former assistant controller.
Jeff Springer, an attorney representing Hall, said his client is being offered up as a “human sacrifice” by Qwest. Graham’s attorney said Graham isn’t responsible for any criminal activity. Walker, reached at his home in the Ken Caryl subdivision, declined to comment. Treadway couldn’t be reached for comment.
The four have 48 hours to surrender, Ashcroft said.
If convicted, they face up to 10 years in prison and fines of $1 million.
The SEC’s civil action alleges that Qwest inflated revenue by $144 million in the deal with Arizona schools and a transaction with Genuity, an Internet service provider and fiber-optic company whose assets have since been acquired by Broomfield-based Level 3 Communications.
The SEC is asking that the eight executives forfeit all “ill-gotten gains” – including salaries, bonuses, stock and other compensation .
The SEC also seeks to bar five of the executives from ever again serving as a director or officer of a publicly held company.
Qwest, a regional local phone provider and nationwide Internet network operator, was a high-flying telecommunications company under former Chief Executive Joe Nacchio. Its stock prices began to crash in 2001 as the economy faltered and questions arose about Qwest’s accounting practices and executive compensation.
The deals referred to Tuesday are relatively minor when compared with the $2.2 billion in revenue that the Denver telco has erased because of improper accounting in 2000 and 2001. The news conference didn’t even touch on Qwest’s controversial swaps of communications capacity with Global Crossing, Enron and others.
But in a theme the officials repeated throughout the Justice Department news conference, the Qwest investigation is only through its “first phase.” Ashcroft would not say how long the probe, already under way for nearly a year, would take.
“No boardroom is beyond the reach of the law,” Ashcroft intoned. “Those convicted of fraud and deceit should and will spend time in prison.”
Some experts viewed Ashcroft’s presence on a deal involving such a small amount of revenue to be an indication of how significant he views the Qwest case, while others took it to be a largely symbolic message to corporate America.
“The fact that the AG announced this case suggests it’s viewed as one part of a much more systematic fraud not only at Qwest, but at other companies under investigation,” said Sean Connelly, a Denver attorney with Hoffman Reilly Pozner & Williamson. Connelly spent 12 years with the Justice Department.
The Qwest prosecutions are part of the Bush administration’s Corporate Fraud Task Force, established last July to tackle widening boardroom scandals. Ashcroft said the task force has brought criminal charges against 160 people, including executives at Adelphia, WorldCom and Enron.
Experts said federal prosecutors obviously decided initially to focus on a case that they consider egregious and easy to explain to a jury.
Stephen Waters, a managing partner with Robinson Waters & O’Dorisio in Denver and a former assistant U.S. attorney in Colorado, said it’s not unusual for the government to start at a low level. This indicates that “the investigation isn’t over by a long shot,” he said.
“The only surprise would be if there aren’t any further indictments,” said Waters, who handles white-collar criminal defense.
While other experts agreed more indictments are to be expected, they said it remains to be seen how high up Qwest’s corporate ladder prosecutors will get.
“The (fiber-optic capacity) swaps are very intricate accounting issues and far more difficult to make into a criminal matter,” noted Carr Conway, a former SEC investigator and now forensic accountant for Lakewood-based Dickerson Financial Investigation Group.
Qwest spokesman Chris Hardman said Tuesday that the company “continues in its efforts to cooperate with the government in connection with the investigations. Fundamental to the ‘Spirit of Service’ is complete integrity in all we do. As a company and as individual employees, we hold ourselves to the highest ethical standards as we conduct our business.”
U.S. Attorney John Suthers, who is spearheading the Qwest criminal probe, said: “There are several other aspects of Qwest’s corporate conduct and the conduct of its executives that are the subject of a continuing investigation.”
Suthers said that Qwest’s new management team cooperated in phase one and that he “hopes and expects” the cooperation to continue.
The first wave of indictments had little effect on Qwest’s stock, which closed up 2 cents at $3.40 on moderate trading.
“I don’t think it has much impact on their operations, other than it damages the brand and undermines their sales force somewhat,” said Pat Comack, a telecom analyst for Guzman & Co. in Miami.
But Comack said there could be “headline risk” to Qwest’s stock as the investigation moves forward.
“I was surprised to see the indictments came from equipment revenue rather than the swaps,” Comack said.
The SEC may have more latitude ultimately to act. Randall Fons, the director of the SEC’s Denver regional office, characterized the individuals named Tuesday as acting “illegally to carry out Qwest’s ‘make the numbers’ culture.” He pledged that the SEC “will continue investigating until all have been brought to justice.”
One source close to the SEC investigation has said that one of the SEC’s goals is to get a number of individuals, possibly including former CEO Nacchio, to “disgorge” or give back some or much of their stock profits. Nacchio netted more than $230 million in stock sales between 1999 and 2001; he has denied any knowledge of improper deals.
In addition to those named in the indictments, the SEC civil suit named Joel Arnold, 39, of Los Gatos, Calif., a former senior vice president of global business; Douglas K. Hutchins, 32, Denver, a former director of global business; William Eveleth, 46, of Evergreen, current chief financial officer of Qwest’s corporate planning and operational finance unit; and -Richard L. Weston, 46, of Lone Tree, the former senior vice president in product development for Qwest’s Internet solutions unit. Weston declined to comment. The others could not be reached Tuesday.
The SEC action alleges that Arnold, Graham, Hall, Treadway, Walker and Hutchins were involved in the Arizona transaction. Involved in the Genuity transaction were Weston, Eveleth, Arnold and Graham, according to the SEC suit.
Of those named in the Justice Department and SEC cases, only Eveleth remains with Qwest. Hardman wouldn’t say what action, if any, Qwest is taking against Eveleth.
Jeff Dorschner, spokesman for U.S. Attorney Suthers, said prosecutors are working through defense lawyers to have those indicted surrender to FBI agents.
“The FBI will bring them to the marshal’s office (in downtown Denver) for processing.”