SEC brings fraud case against former Qwest chief Nacchio

Dana Cimilluca and Otis Bilodeau

Wednesday, March 16, 2005 | 9:18 a.m.

Qwest Communications International Inc.'s former Chief Executive Joseph Nacchio and six other ex-officials were accused of orchestrating a $3 billion fraud in a lawsuit by the Securities and Exchange Commission.

Nacchio, 55, and executives including a former president and two ex-chief financial officers misreported sales at Qwest, the No. 4 U.S. local-telephone company, from 1999 to 2002, the SEC said in court papers. Five other former Qwest executives settled fraud accusations, the SEC said separately.

Nacchio and associates may be forced to give back what the SEC called "ill-gotten" gains, including $300 million in compensation and proceeds from stock sales. Should the government prevail, six of the officials would be barred from serving as officers or directors of a public company. The lawsuit culminates a three-year investigation into sham transactions that inflated sales at Denver-based Qwest.

"The massive financial fraud directly resulted from aggressive and rigid targets for Qwest's revenue and earnings growth set by Nacchio" and former finance chiefs Robert Woodruff, 56, and Robin Szeliga, the SEC said.

Qwest in October agreed to pay $250 million to settle SEC allegations that it inflated sales by disguising swaps of long- distance capacity as recurring revenue. Qwest's reliance on such bogus transactions to meet Wall Street estimates was likened internally to a "heroin" addiction, the SEC said.

Nacchio, who amassed $26 billion in debt, was ousted in 2002 as the accounting probe began.

"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," his lawyer, Charles Stillman, said in a statement.

Nacchio and his associates are among telecommunications executives accused by the government of inflating results to mask waning demand after the burst of the Internet bubble in the 1990s. Bernard Ebbers, the former CEO of WorldCom Inc., was convicted of criminal securities-fraud charges by a federal jury today and could spend the rest of his life behind bars.

Qwest booked the "spurious" sales from the second quarter of 1999 to the first quarter of 2002, the SEC said in October when the settlement was announced.

Qwest didn't admit or deny the allegations.

Nacchio and his colleagues placed "extreme pressure" on subordinates to "meet these aggressive targets at all costs and the pressure spread throughout the company, causing a 'culture of fear,' " the SEC said today.

Qwest shares rose 12-fold from 1997 to 2000, reaching a high of $66 in March of that year, on expectations for surging network use that evaporated when the Internet bubble burst.

The decline in Qwest's shares, which fell 5 cents to $3.86 in New York Stock Exchange composite trading Tuesday, wiped out $91 billion in shareholder wealth, the SEC said.

David Meister, Woodruff's attorney at Clifford Chance in New York, declined to comment. Terry Bird of Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg in Los Angeles, declined to comment on behalf of Szeliga, 44.

The Qwest settlement is the second-largest ever for a non- financial company, exceeded only by the $750 million paid by WorldCom, which was forced into bankruptcy by an $11 billion accounting fraud. WorldCom, which has emerged from Chapter 11, is now known as MCI. The company is the subject of a takeover battle between Qwest and Verizon Communications Inc.

After Nacchio's ouster in June 2002, new CEO Richard Notebaert restated Qwest's 2000 and 2001 results to remove $2.5 billion of sales.

Other officials sued in U.S. District Court for the District of Colorado are ex-President Afshin Mohebbi, 41, former Qwest Executive Vice President of Wholesale Markets Gregory Casey and finance department officials James Kozlowski and Frank Noyes, 35.