DENVER – Telecommunications company Qwest Communications (Q) said on Monday the Securities and Exchange Commission has demanded documents related to its purchase of assets from Global Crossing as part of the SEC's investigation into the bankrupt phone company.
"All that has happened is that we are responding to a routine request to provide some documents to the SEC in connection with its investigation of Global Crossing," Tyler Gronbach, a spokesperson for Qwest, said.
"We have not been informed by the SEC that we are the subject of an investigation," he added.
Qwest's shares fell 24 cents, or 2.5 percent, to $9.36 on very heavy trading, as Qwest's stock briefly replaced Tyco International Ltd. as the most active issue. Tyco had topped the most-active list for 10 days amid questions about its accounting, debt ratings and restructuring plans.
Global Crossing Friday said the SEC was investigating the company after a letter from a former employee raised concerns about its accounting practices.
The letter, from former vice president of finance Roy Olofson, alleged that the firm had used improper accounting methods that artificially inflated revenues.
In a double blow to Global Crossing -- a high speed telecommunications network operator which filed for Chapter 11 bankruptcy on Jan. 28 -- federal law enforcement officials said the Federal Bureau of Investigations had also launched a probe into the company.
Qwest's Tyler refused to give specific details about what documents Qwest had been asked to provide, but said, "It's in regards to assets that were purchased from Global Crossing."
Tyler was referring to deals under which Global Crossing and Qwest bought capacity on each others' fiber optic networks. Such deals, known as IRUs or Indefeasible Rights of Use, are common between carriers as a way of filling in gaps in their own networks by buying capacity from each other.
The way Global Crossing booked revenues from those deals was at the heart of Olofson's allegations.
"It's common in the telecommunications industry for carriers to buy capacity from each other in order to provide service in an area where one company has routes or capacity that another needs. ... That's our relationship with Qwest," Becky Yeamans, a Global Crossing spokeswoman said.
The concern with such deals is that a carrier would sell capacity to another carrier, which would then sell the same capacity back to the first carrier, analysts said.
"I believe there's some concern that the same fiber was actually being resold a number of times so multiple parties could make their revenue projections for the quarter," Susan Kalla, an analyst with Friedman, Billings Ramsey said.
The other problem was the way carriers accounted for the revenue, David Bank, an analyst with brokerage firm RBC Capital Markets, said.
Typically, money from an IRU sale was accounted for as cash revenue on the carriers' income statement but the associated expense showed on the balance sheet -- not the income statement -- as a capital expenditure, he said.
"Which means it showed up as pure profit," Bank said.
Kalla said that in Global Crossing's case, the additional revenues were enough to enable the company to post a profit, before earnings, interest, taxes, depreciation and amortization in the first half of 2001.
In an interview with Reuters earlier this month, Global Crossing's Chief Financial Officer Dan Cohrs said the company did report its IRU sales as cash revenue on its income statement, but he insisted the company always fully disclosed the underlying numbers in generally accepted accounting principles statements.
"It's absolutely true we did these transactions ... but we put it right in our press releases and it was fully described in our SEC filings," Cohrs said.