Qwest probe rocks Ariz. wiring project

The indictment of four Qwest Communications officials in connection with a project to wire all of Arizona’s classrooms to the internet will not affect the project’s completion, state officials say—though they admit they were stunned to learn of this latest development.

A 12-count federal indictment handed down Feb. 25 accuses four former Qwest executives of devising a scheme to create more than $33 million in false revenue by wrongly reporting a purchase order from Arizona’s School Facilities Board and then covering it up.

The board, which oversees Arizona’s program for constructing and maintaining school buildings, hired Qwest for a $141 million project to wire the state’s 1,383 public schools for internet access.

“The Justice Department never let us know about this,” said board spokeswoman Kristen Landry. “But this certainly isn’t going to affect any of the Qwest work that is being done.”

“We are going on with what’s in the contract,” said Jeff Mirasola, a Qwest spokesman in Phoenix. He declined to comment further on the contract or on the indictment.

Attorney General John Ashcroft announced the indictment, which was handed up by a federal grand jury in Denver. New Securities and Exchange Commission (SEC) 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.

Although its contract with the Arizona School Facilities Board provided for Qwest to be paid as the statewide school computer network 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 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.

Graham pleaded innocent Feb. 28 to charges of artificially inflating revenues for the company. He was the last of the four men named in the 12-count indictment to surrender, turning himself in earlier that day. He was the first to enter a plea.

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.

Qwest spokesman Steve Hammack said the company was continuing to cooperate with the government, but could not comment specifically on the indictments. “As a company, as individual employees, we hold ourselves to the highest ethical standards as we conduct our business,” he said.

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 one-and-a-half 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 Ltd.

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 LLP, the auditing firm that was convicted of obstruction of justice in the Enron collapse, and brought in KPMG LLP 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.

So far, Qwest has finished wiring 625 Arizona schools, facilities board spokeswoman Landry said. Work is ongoing at 159 others, and plans are being developed for the remainder.

Landry said all work should be done this August, well ahead of the state-mandated deadline of June 30, 2004.

The project has not proceeded smoothly, however. Although it began in January 2001, the project stalled last May when the company stopped installation work over a contract dispute with the board. In August, the board and the company agreed to an amended contract and work resumed.

School Facilities Board Chairman Logan E. Van Sittert said he and other members were surprised by the federal indictment, but said there have been no problems since the contract was renegotiated.

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 pricier 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.

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Qwest Communications Inc.

Arizona School Facilities Board

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