DENVER, Colo. – The Securities and Exchange Commission charged former Qwest Communications International Inc. (Q) CEO Joseph Nacchio (search) and six other executives Tuesday with orchestrating a "massive financial fraud" at the telecommunications company that concealed the source of billions of dollars in reported revenue.
In a civil lawsuit, regulators blamed Qwest's problems on aggressive revenue and earnings targets set by Nacchio and others that created a "culture of fear" and enormous pressure on employees to meet those targets.
The charges say the fraud occurred between April 1999 and March 2002, allowing Qwest to fraudulently report approximately $3 billion of revenue that was later restated and helped Qwest's 2000 merger with U S West (search).
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 finance executives.
The SEC described Nacchio, Woodruff and Szeliga as overseers of the fraud, directing the details to meet revenue targets "at all costs." Among other things, the SEC said Denver-based Qwest repeatedly and improperly booked revenue from one-time sales of assets while falsely claiming to investors that the revenue was recurring.
The charges had been expected for months, and Nacchio has repeatedly denied wrongdoing regarding Qwest's accounting practices. His spokeswoman said a statement would be released later.
In October, Qwest agreed to pay $250 million to settle the SEC's civil charges of a "massive financial fraud" at the company, which serves as the primary local phone provider in 14 Western states. But the deal did not cover individuals like Nacchio and Szeliga, who left the company in 2002 and 2003, respectively.
The Justice Department is continuing its criminal probe of the accounting issues, said Jeff Dorschner, a spokesman for the U.S. Attorney's Office in Denver.
The lawsuit was filed hours after former WorldCom CEO Bernard Ebbers (search) was convicted in New York of engineering a multibillion-dollar accounting scheme at the Mississippi-based telecom.
The lawsuit also accuses Nacchio, Woodruff and Szeliga of allegedly causing the manipulation of revenue associated with Qwest Dex, a wholly owned subsidiary. Mohebbi, Casey and Noyes allegedly met goals by backdating contracts, hiding side agreements and making fiber-optic capacity swaps (IRUs) with other telecoms to book one-time revenue.
Documents released by a U.S. House committee in 2002 said officials at Qwest and fiber-optic company Global Crossing Ltd. — which has since been reorganized and left bankruptcy protection — had qualms about swaps of capacity on their networks that appeared to have no other purpose than allowing the companies to inflate revenues to meet analysts' 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.
The government has a spotty record when it comes to 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.
A former senior vice president, Marc Weisberg, has pleaded innocent to charges that he illegally cashed in on investment opportunities at the expense of the company and shareholders and netted $2.9 million for himself and others.