Four former executives of Qwest Communications were accused in a federal fraud indictment Tuesday of devising a scheme to create more than $33 million in revenue by wrongly reporting a purchase order and covering it up.
Attorney General John Ashcroft announced the indictment handed up by a federal grand jury in Denver. New Securities and Exchange Commission chairman William Donaldson, standing next to Ashcroft, announced the filing of civil fraud charges in U.S. District Court in Denver against the same four former executives and four other past or current Qwest officials.
The defendants named in the 12-count indictment were accused of seeking to create over $33 million in revenue by wrongly reporting the order with the Arizona School Facilities Board. The action violated SEC rules, the indictment said.
The government said Qwest agreed to design and build a statewide school computer network with Internet access. While the contract provides for Qwest to be paid as the system was installed over an 18-month to two-year period, the company instead counted all of the revenue immediately, in violation of SEC rules, the government said.
The Justice Department also said that Qwest knowingly filed false documents to hide its actions.
"As we continue our efforts to battle corporate fraud, our message is clear: We will protect the integrity of our markets by punishing those who falsify financial information out of sheer greed," Ashcroft said in a statement.
Arrest warrants were issued for these former employees: Grant P. Graham of Evergreen, Colo., chief financial officer for Qwest's global business unit; Thomas W. Hall of Englewood, Colo., senior vice president in the global business unit; John M. Walker of Littleton, Colo., vice president in the unit; and Bryan K. Treadway of Atlanta, assistant controller.
Ashcroft said the indicted business figures have 48 hours to report to authorities.
Qwest had been under investigation by both the Justice Department and the SEC and was the subject of congressional hearings into its financial practices. Both agencies said their investigations were continuing.
The SEC's civil fraud charges allege that the eight former or current Qwest executives inflated the company's revenues by some $144 million in 2000-2001 to meet Wall Street's expectations. The agency said it wanted the men to repay their salaries, bonuses and stock gains during the 1 1/2 years they allegedly engaged in fraudulent activities.
"The defendants played with the numbers so investors would believe the company was doing better than it really was," Donaldson said. "The defendants couldn't make the numbers work by following the rules, so they cheated."
The four others sued by the SEC are Joel M. Arnold, former senior vice president of the company's Global Business division; Douglas K. Hutchins, a former director of the division; Richard L. Weston, former senior vice president of product development in Qwest's Internet Solutions division; and William L. Eveleth, currently chief financial officer of the company's corporate planning and operational finance division and a senior vice president of finance.
The probes have examined whether Qwest artificially inflated its revenues by swapping network capacity with another scandal-plagued telecommunications company, Global Crossing.
The company said it was restating its financial reports for 1999 to 2001 because of accounting errors, including $950 million in revenue booked from swaps.
The company fired Arthur Andersen, the auditing firm that was convicted of obstruction of justice in the Enron collapse, and brought in KPMG in June to look at its books.
Last June, chief executive Joseph Nacchio resigned under fire. Thousands of workers have been laid off and the company's stock plummeted. Lawmakers have charged that Qwest executives cashed in millions of dollars in options before the stock fell.
The House Energy and Commerce Committee in December completed its own probe into Qwest's business practices.
Qwest has had other woes as well. In August, Qwest agreed to pay the state of Colorado $1 million, plus payments to customers, to settle complaints that it failed to adequately inform consumers of the least expensive telephone service they could obtain, instead encouraging them to buy pricer packages. Others complained of poor customer service.
Qwest is the local phone company for 14 states extending from Minnesota west to Washington state and southwest to Arizona and New Mexico. It bought US West, one of the Baby Bells created from the breakup of AT&T, following a bidding war with Global Crossing.