The Securities and Exchange Commission charged former Qwest Communications CEO Joseph Nacchio and six other executives Tuesday with orchestrating a “massive financial fraud” at the telecommunications company that concealed the source of billions of dollars in revenue later wiped off the books.
The civil lawsuit blamed Nacchio and others for creating a “culture of fear” and putting enormous pressure on employees to meet revenue and earnings goals through bogus sales procedures that became an addiction.
The suit is the most dramatic development yet in the government’s three-year investigation of Denver-based Qwest Communications International Inc., the primary local phone provider in 14 Western states. It was filed hours after former WorldCom Inc. CEO Bernard Ebbers was convicted in New York of engineering a multibillion-dollar accounting scheme at his Mississippi telecom.
The SEC said the fraud at Qwest occurred between April 1999 and March 2002, allowing it to improperly report approximately $3 billion in revenue that facilitated its 2000 merger with U S West. The revenue was later restated.
Among other things, the SEC said Qwest repeatedly booked revenue from one-time sales while falsely claiming to investors that the income was recurring — allowing defendants to reap tens of millions in profits.
Also named in the SEC’s complaint were former chief financial officers Robert Woodruff and Robin Szeliga; former Chief Operating Officer Afshin Mohebbi; Gregory Casey, a former executive vice president of Qwest’s wholesale business; and James Kozlowski and Frank Noyes, two former accountants.
The SEC described Nacchio, Woodruff and Szeliga as the scheme’s overseers, directing the key details to meet revenue targets “at all costs.”
At one point in 2001, regulators said, Nacchio told employees that “(t)he most important thing we do is meet our numbers. It’s more important than any individual product, it’s more important than any individual philosophy. It’s more important than any individual cultural change that we’re making. We stop everything else when we don’t make the numbers.”
At the same time, Nacchio, Woodruff and Szeliga were cashing in Qwest shares, the SEC said, profiting by roughly $300 million. The government contends Nacchio alone reaped an estimated $216 million during the time period in question through salary, bonuses, stock sales and other compensation.
Charles Stillman, an attorney for Nacchio, said his client had never misrepresented Qwest’s financial condition.
“The SEC unfairly seeks to impute to Mr. Nacchio and others at Qwest responsibility for the results of a widespread industry downturn in a deteriorating economy,” Stillman said. “As Mr. Nacchio has consistently stated, he did nothing wrong and did not instruct anyone else to do anything wrong during his tenure at Qwest, and he looks forward to being vindicated.”
Kozlowski’s attorney, Kevin Evans, said the charges are “as sensational as they are insupportable.”
Attorneys for the other former executives could not immediately be reached for comment. A Qwest spokesman said the allegations involve long-ago events that no longer concern the company.
Other charges settled
The SEC is also seeking a court order requiring all seven to repay an amount to be determined at trial and civil penalties and that would include interest. It said none of the defendants, except for the two accountants, should ever serve as officers or directors of a public company.
Also Tuesday, the SEC settled charges with five other former Qwest officials. A spokesman declined comment on whether the agency’s investigation is complete, but a spokesman for the U.S. attorney’s office in Denver said the government’s criminal investigation was continuing.
Last fall, Qwest agreed to pay $250 million to settle SEC charges of fraud. The deal did not cover former executives like Nacchio and Szeliga, who now face charges including fraud, failure to maintain book and records, lying to auditors and false filings with the SEC.
The SEC said Nacchio, Woodruff and Szeliga received secret compensation in the form of newly issued stock from companies doing business with Qwest or seeking deals with the company. The lawsuit also accuses the three of causing the manipulation of revenue associated with Qwest Dex, a subsidiary.
Mohebbi, Casey and Noyes, meanwhile, allegedly met goals by backdating contracts, hiding side agreements and making fiber-optic capacity swaps (IRU) with other telecoms to book one-time revenue. Documents released by a U.S. House committee in 2002 said the swaps appeared to have no other purpose than allowing the companies to inflate revenues to meet analyst expectations.
“Qwest relied so heavily on the immediate revenue recognition from one-time IRU and equipment sales transactions to meet the aggressive revenue and growth targets that Qwest management and employees referred to the practice as a ’drug,’ an ’addiction,’ ’heroin,’ and ’cocaine on steroids,”’ the SEC said in Tuesday’s filing.
The government has had mixed success prosecuting former Qwest executives. Of four men accused of improperly booking revenue in an Arizona schools deal, two were acquitted, another was sentenced to probation and a fourth is expected to receive probation.