Qwest says U.S. prosecutors have begun a criminal probe

Earlier, SEC began looking into accounting at telephone company

July 11, 2002|By BLOOMBERG NEWS

Qwest Communications International Inc. said yesterday that federal prosecutors have opened a criminal investigation of the money-losing telephone company, four months after regulators began looking into its accounting.

The U.S. attorney's office in Denver didn't disclose details of the inquiry, Qwest said in a statement. In March, the Securities and Exchange Commission began investigating Qwest's accounting for so-called swaps of long-distance network capacity with rivals such as Global Crossing Ltd., also the target of a criminal probe. The swaps may have inflated revenue.

Qwest, a provider of local-phone service over 17.6 million lines in 14 Western states, piled up $26.4 billion in debt primarily from acquisitions and building capacity that was never used. Chief Executive Officer Richard Notebaert, who replaced Joseph Nacchio last month, is trying to sell assets to help pay down debt and avoid a loan default.

"This is dismaying, and it's going to put a damper" on Notebaert's efforts, said Bruce Allen, who helps manage $300 million at Cascade Financial Management Inc., which owns Qwest shares. "We've been huge sellers of Qwest over the last few years, and now would want to stay 10 feet away until they get all these issues resolved."

This week, President Bush proposed doubling prison time for executives convicted of fraud and set up a group to police corporate wrongdoing. Revelations of botched accounting by companies including WorldCom Inc. and Enron Corp., and fraud probes of prominent chief executives have hammered stocks, sending the S&P 500 index about 22 percent lower this year.

Qwest, with 57,000 employees, declined to discuss the prospects of a bankruptcy filing. The company has reported eight straight quarterly losses, totaling $5.2 billion.

Nacchio quit last month after Qwest shares plunged amid the SEC accounting investigation and investor doubt that the company would be able to repay its debts.

"I can't say anything, given my agreement with Qwest," Nacchio said when contacted by telephone at his New Jersey home. He wouldn't elaborate.

Philip Anschutz, who stepped down as co-chairman when Nacchio was replaced, couldn't be reached for comment.

Moody's Investors Service lowered Qwest's junk credit rating three notches to B2 from Ba2. The criminal probe may hurt Qwest's ability to raise money and retain customers, Moody's said in a statement.

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