Qwest Communications (Q) has agreed to pay $250 million to settle charges that it improperly booked $3.8 billion in revenue to meet “outrageously optimistic” revenue forecasts, the Securities and Exchange Commission said Thursday.
The nation’s No. 4 local phone company agreed to the settlement, which had been expected for weeks, without admitting or denying guilt, closing out a 21/2-year SEC probe. The entire penalty will be doled out to investors.
Qwest also must appoint a chief compliance officer to ensure it obeys the law and responds to employee ethics complaints.
A Justice Department probe is ongoing. The SEC separately has sued several current and former Qwest employees. From 1999 to 2002, Qwest fraudulently booked more than $3.8 billion in revenue and excluded $231 million in expenses, the SEC says.
Touting itself as a cutting-edge technology company when it went public in 1997, Qwest resorted to the scheme after its predictions of double-digit growth were upended by the telecom industry implosion, the SEC says in a 56-page complaint. Qwest, the agency says, also had to keep its stock price above $22 to complete its purchase of US West.
To meet its forecasts, regulators say, Qwest sold fiber-optic capacity and capital equipment but improperly characterized the deals in public filings as “data and Internet service revenues.” That allowed the company to disguise the one-time gains as recurring revenue, propping up its stock price, the SEC says.
When fiber demand cooled, Qwest entered into capacity swaps in which it and other telecom companies agreed to buy fiber capacity from each other. While Qwest claimed the assets it bought and sold were different, regulators disagreed and said the sales simply allowed the participants to inflate their revenue.
The SEC says that Qwest internally referred to the capacity and equipment sales as “one-hit wonders,” likening the practice to an “addiction” and “heroin.” The agency says Qwest also:
Booked revenue from the sales upfront when it should have recognized it over a longer period;
Backdated contracts to meet quarterly goals;
Failed to disclose it bought hundreds of millions of dollars in gear it never planned to use, partly to let senior executives get stock in the suppliers;
Improperly recognized $112 million of revenue in its wireless unit and understated costs relating to sales commissions and absences.
Top executives “created a corrupt corporate culture in which meeting Wall Street expectations was paramount,” says SEC regional director Randall Fons.
Qwest CEO Richard Notebaert, who wasn’t with the firm during the improprieties, says executives and employees the past two years have “worked tirelessly” to promote “best-in-class policies and practices. We are pleased to conclude this matter.”