SEC Press press_release 14 KB 9,344 chars

SEC Charges Former Qwest CEO Joseph Nacchio and Eight Others with Massive Financial Disclosure Fraud

Release: 2005-36
Caption: Securities and Exchange Commission v. Afshin Mohebbi, et al.

summary

Former Qwest CEO Joseph Nacchio and eight executives were charged by the SEC with orchestrating a $3 billion fraud by misclassifying nonrecurring IRU and equipment sales as recurring revenue, backdating contracts, concealing expenses of $71.3 million, and engaging in insider trading, leading to civil penalties, disgorgement, and officer/director bars.

paragraph

Between 1999 and 2002, former Qwest CEO Joseph Nacchio and eight other executives fraudulently recognized over $3 billion in revenue by misclassifying nonrecurring sales of IRUs and equipment as recurring data and Internet service income, violating GAAP and concealing $71.3 million in expenses. They used secret side agreements to allow customers to port capacity—defeating revenue recognition rules—and backdated contracts to meet quarterly targets, while insiders traded stock based on nonpublic knowledge of Qwest’s true financial condition. The SEC sought injunctions, disgorgement, civil penalties, and officer/director bars against Nacchio and top officers, following Qwest’s prior $250 million settlement in 2004.

narrative

Between 1999 and 2002, former Qwest CEO Joseph Nacchio and eight other executives orchestrated a massive financial fraud to mislead investors by falsely recognizing over $3 billion in nonrecurring revenue from IRU and equipment sales as recurring income, masking the company’s declining financial health. To justify this misclassification, they created secret side agreements with IRU customers that allowed capacity porting—knowledge deliberately concealed from auditors—and backdated contracts to falsely show revenue was earned within the correct quarter, violating GAAP. The executives also excluded $71.3 million in expenses and engaged in insider trading, selling Qwest stock based on nonpublic knowledge of the company’s unsustainable revenue practices. Internal communications reportedly likened the reliance on these one-time sales to an 'addiction' and 'heroin,' highlighting the systemic nature of the fraud. Qwest itself settled with the SEC in October 2004 by paying a $250 million penalty without admitting guilt. The SEC’s 2005 civil complaints targeted Nacchio, former CFOs Robert Woodruff and Robin Szeliga, COO Afshin Mohebbi, and others, seeking not only disgorgement and civil penalties but also officer/director bars against the most culpable individuals. Lower-level executives like Hoaglund, Eveleth, Kozlowski, and Noyes were also implicated for their roles in executing the scheme, with some settling for fines and bans without admitting wrongdoing. The case became a landmark example of the SEC’s determination to hold top corporate leaders personally accountable for systemic accounting fraud.

Enriched metadata

Scheme: accounting-fraud (100%)
Court: District of Colorado
Outcome: settled
Settlement: $250,000,000
Disgorgement: $200,000
Civil penalty: $100,000

Classified accounting-fraud(confidence 100%). EDGAR detection: forms 10-K/10-Q/8-K/NT 10-K· recall 80% / precision 48%. detection rule →

Extracted insights

Dollar amounts 7

$3.00B $3 billion ≥$1B
$250.00M $250 million $100M–$1B
$71.30M $71.3 million $10M–$100M
$200K $200,000 $100K–$1M
$100K $100,000 $100K–$1M
$75K $75,000 $10K–$100K
$36K $35,575 $10K–$100K

Entities 12

person afshin mohebbi
person joseph p. nacchio
company qwest communications international inc.
person qwest defendants
person qwest executives
person randall j. fons
person robert s. woodruff
person robin r. szeliga
agency sec central regional office in denver
agency sec division of enforcement
agency Securities and Exchange Commission
person stephen m. cutler

Triples 14

SEC charged Joseph P. Nacchio, Robert S. Woodruff, Robin R. Szeliga, Afshin Mohebbi, Gregory M. Casey, Roger B. Hoaglund, William L. Eveleth, James J. Kozlowski, Frank T. Noyes
Joseph P. Nacchio was former CEO of Qwest Communications International Inc.
Qwest Defendants engaged in fraudulent scheme between 1999 and 2002
Qwest fraudulently recognized $3 billion of revenue
Qwest excluded $71.3 million in expenses
SEC sued Qwest in settled injunctive action October 2004
Qwest agreed to pay $250 million penalty
Robert S. Woodruff was former CFO of Qwest Communications International Inc.
Robin R. Szeliga was former CFO of Qwest Communications International Inc.
Afshin Mohebbi was former COO of Qwest Communications International Inc.
Nacchio, Woodruff, Szeliga fraudulently characterized nonrecurring IRU and equipment revenue as recurring data and Internet service revenues
Qwest Executives used nonrecurring revenue to fill gap between actual and projected revenue
Randall J. Fons is Regional Director of SEC Central Regional Office in Denver
Stephen M. Cutler is Director of SEC Division of Enforcement

View original SEC press releasesec.gov

Extracted body text (9,344c)

SEC Charges Former Qwest CEO Joseph Nacchio and Eight Others with Massive Financial Disclosure Fraud FOR IMMEDIATE RELEASE 2005-36 Washington, D.C., March 15, 2005 - The Securities and Exchange Commission today charged Joseph P. Nacchio, former co-chairman and chief executive officer of Qwest Communications International Inc., and eight other former Qwest officers and employees with fraud and other violations of the federal securities laws. In three separate but related civil actions, the Commission alleges that, between 1999 and 2002, the Qwest defendants engaged in a multi-faceted fraudulent scheme designed to mislead the investing public about the company's revenue and growth. According to the SEC's complaints filed in the United States District Court for the District of Colorado, Nacchio and others made numerous false and misleading statements about Qwest's financial condition in annual, quarterly, and current reports, in registration statements that incorporated Qwest's financial statements, and in other public statements, including earnings releases and investor calls,. As a result of that scheme, Qwest fraudulently recognized over $3 billion of revenue and excluded $71.3 million in expenses. The Commission, in October 2004, sued Qwest in a settled injunctive action in which the company agreed to pay a $250 million penalty for its misconduct. In addition to Nacchio, the Commission's complaints name former chief financial officers Robert S. Woodruff and Robin R. Szeliga, former chief operating officer Afshin Mohebbi, former executive vice president of wholesale markets Gregory M. Casey, former senior vice president of pricing and offer management Roger B. Hoaglund, former senior vice president of finance William L. Eveleth, former director of financial reporting James J. Kozlowski, and former senior manager of financial reporting Frank T. Noyes. The complaints seek injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties against all of the defendants, and officer/director bars against Nacchio, Woodruff, Szeliga, Mohebbi, Casey, and Eveleth. "The disclosure fraud at Qwest was orchestrated at the highest level of the company to deceive investors," said Randall J. Fons, Regional Director of the Commission's Central Regional Office in Denver. "Qwest's CEO and other top executives projected revenue and earnings that they knew were overly aggressive, and then all of the defendants used smoke and mirrors to meet those unrealistic projections. These individuals must now answer for their conduct and the enormous decline in shareholder value that they caused." Stephen M. Cutler, Director of the Commission's Division of Enforcement, added, "Joseph Nacchio and others at Qwest wanted the company's shareholders to believe that the company was doing better than it actually was. Today's enforcement action once again tells corporate executives that they will be held personally accountable when they keep the truth from the marketplace." The Commission's complaints, which were filed in the United States District Court for the District of Colorado, allege as follows. Nacchio and Others Fraudulently Misrepresented Qwest's Revenue Sources In Commission filings and other public statements, Nacchio, Woodruff, and Szeliga fraudulently characterized nonrecurring revenue from the one-time sales of capacity in the form of indefeasible rights of use (IRUs) and equipment as recurring "data and Internet service revenues," thereby masking Qwest's declining financial condition and artificially inflating its stock price. Qwest used such nonrecurring revenue to fill the gap between actual and projected revenue. Over time, in fact, Qwest's dependence on such one-time transactions grew to the point that it was likened internally to an "addiction" and the nonrecurring IRU and equipment sale transactions were likened to "heroin." Among other things, the Qwest executives' misrepresentations about Qwest's revenue sources allowed Qwest to maintain a stock price sufficiently high to complete its pending merger with US West, Inc. Fraudulent IRU Revenue Recognition and Other Fraudulent Conduct Nacchio, Woodruff, and Szeliga traded in Qwest stock on the basis of non-public material information. Specifically, they knew the extent to which Qwest relied on nonrecurring revenue sources to meet the unrealistic revenue and earnings projections and the true financial health of Qwest. Woodruff, Szeliga, Kozlowski, and Noyes ignored generally accepted accounting principles (GAAP) by recognizing revenue upfront on IRU transactions. Under GAAP, Qwest should not have recognized any revenue on those transactions. Kozlowski and Noyes participated in the top executives' scheme to mislead the public about Qwest's revenue sources. Mohebbi, Casey, and Hoaglund provided, or knew others provided, secret side agreements to IRU customers allowing those customers to exchange, or "port," the capacity purchased for different capacity. The purpose of the secret side agreements was to conceal from Qwest's accountants and auditors the purchasers' ability to port, as such exchange rights would have defeated, under GAAP, the immediate recognition of revenue. Mohebbi, Casey, Hoaglund, Eveleth, and Noyes participated in backdating IRU agreements to demonstrate falsely that the agreements were completed by the end of the quarter as required by GAAP to recognize revenue in that quarter. To close IRU sales, Mohebbi, Casey, Eveleth, and Noyes caused Qwest to purchase capacity Qwest did not need. Under GAAP, Qwest should not have recognized revenue where there was no legitimate business need for the IRU assets received. Nacchio, Woodruff, and Szeliga made misleading statements in Commission filings concerning revenue from its directory services unit, Qwest Dex, Inc. In particular, they stated that changes in period-over-period revenue were attributable to changes in the "number," "mix," or "length" of directories published. In fact, Qwest had advanced the publication dates of certain directories and extended the lives of others for the sole purpose of meeting revenue or earnings targets. Szeliga reduced expenses relating to compensated absences by $71.3 million to help Qwest meet earnings targets and fraudulently failed to disclose in Commission filings Qwest's change in accounting for compensated absences. Settlements Without admitting or denying any allegations, Hoaglund consented to the entry of a judgment enjoining him from violating the antifraud, reporting, books and records, and internal control provisions of the federal securities laws, and directing him to pay a civil penalty of $100,000 and disgorgement of $200,000 plus prejudgment interest. Similarly, without admitting or denying any allegations, Eveleth consented to entry of a judgment enjoining him from violating the antifraud, reporting, books and records, and internal control provisions of the federal securities laws, directing him to pay a civil penalty of $75,000 and disgorgement of $35,575 plus prejudgment interest, and prohibiting him from acting as an officer or director of any public company for five years. Related Actions On March 15, 2005, the Commission instituted settled cease-and-desist proceedings and filed related civil actions for penalties against Mark A. Schumacher and Brian K. Treadway, former controllers at Qwest (Litigation Release Nos. 19134 and 19135; Sec. Exch. Act. Rel. Nos. 34-51373 and 34-51375). On March 15, 2005, the Commission instituted settled cease-and-desist proceedings against Jennifer J. Black, a former director of finance at Qwest (Sec. Exch. Act. Rel. No. 34-51374). In October 2004, the Commission filed a settled civil action against Qwest Communications International Inc. (Litigation Release No. 18936). In July 2004, the Commission filed a civil injunctive action against Michael Felicissimo, the former CFO of Qwest's wireless division (Litigation Release No. 18800). In June 2004, the Commission instituted settled cease-and-desist proceedings and filed related civil actions for penalties against Augustine M. Cruciotti, a former Qwest executive vice president, and Steven L. Haggerty, a former Qwest senior vice president (Litigation Release Nos. 18754 and 18755). In September 2003, the Commission instituted a settled cease-and-desist proceeding and filed a related civil action for penalties against Loren D. Pfau, a former Qwest sales manager (Litigation Release No. 18374). In February 2003, the Commission filed a civil injunctive action against former Qwest officers Joel M. Arnold, William L. Eveleth, Grant Graham, Thomas W. Hall, Douglas K. Hutchins, Bryan K. Treadway, John M. Walker, and Richard L. Weston (Litigation Release No. 17996). For further information contact: Randall J. Fons Regional Director, Enforcement Central Regional Office (303) 844-1042 Donald M. Hoerl Associate Regional Director, Enforcement Central Regional Office (303) 844-1060 Mary S. Brady Assistant Regional Director, Enforcement Central Regional Office (303) 844-1023 Additional Materials See also the Litigation Releases 19136 See also the Complaint (SEC v. Nacchio, et al.) See also the Complaint (SEC v. Eveleth) See also the Complaint (SEC v. Hoaglund) http://www.sec.gov/news/press/2005-36.htm Home | Previous Page Modified: 03/15/2005

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