UNITED STATES OF AMERICA
In the Matter of
Steven L. Haggerty,
ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER
The Securities and Exchange Commission ("Commission") deems it appropriate that public cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Steven L. Haggerty ("Respondent" or "Haggerty").1
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except that Respondent has admitted the Commission's jurisdiction over him and over the matters set forth herein, Respondent has consented to the entry of this Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order") as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds2 that:
1. Qwest Communications International, Inc. ("Qwest") is a telecommunications company based in Denver, Colorado. On July 18, 1999, Qwest entered into a merger agreement with US West, Inc., then a "Baby Bell" telephone company for a 14-state western region. Pre-merger, Qwest was a broadband Internet-based data, voice and image communications company building fiber-optic cable networks. Qwest currently provides broadband Internet communications, data, and multimedia services on a national and global basis, as well as wireless services, local telephone service and related services in a 14-state local service area.
2. Qwest's common stock is registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 ("Exchange Act") and the company files reports on Forms 10 K and 10 Q. Qwest common stock is traded on the New York Stock Exchange. Qwest registered exchange offerings by filing Forms S-4 with the Commission on January 17, 2001, July 12, 2001, and October 30, 2001. Moreover, on December 5, 2001, April 30, 2002, and June 28, 2002, Qwest filed Forms S-8 registration of securities to be offered to employees in employee benefit plans. On October 31, 2001 and November 5, 2001, Qwest filed Forms SC TO-I and SC TO-I/A, tender offer statements by issuer for securities to be offered to eligible employees. Many of the stock offering materials incorporated by reference Qwest's financial statements filed with the Commission.
3. Haggerty, age 57, of Walnut Creek, California, was an officer of Qwest from November 1999 until his resignation in May 2003. From November 1999 to December 2000, Haggerty was a Regional Vice President of "Qwestlink," Qwest's construction business unit responsible for building its fiber-optic cable network in the United States. From December 2000 to May 2003, Haggerty was the Senior Vice President of Qwestlink.
4. In the United States, through its Qwestlink business unit, Qwest constructed its fiber-optic network by laying fiber-optic cable around and between major metropolitan cities. In addition to building the network for Qwest's use, Qwestlink sold fiber-optic cable to other telecommunications companies.
5. During 2001, as well as in other time periods, in SEC filings and in public statements, Qwest emphasized its projected revenues and earnings growth, and focused investors on the revenues and growth generated from its nationwide fiber-optic network. In turn, Qwest senior executives placed extraordinary pressure throughout the company to meet or exceed the revenue targets. Qwest could not, however, meet its targets through legitimate means.
6. Therefore, Qwest senior management relied on undisclosed "IRU" sales as a method to make up the difference between Qwest's real revenues and its projected revenue targets. An IRU, or Indefeasible Right of Use, is an irrevocable right to use a specific amount of fiber-optic cable or fiber capacity for a specified time period. Qwest accounted for IRUs as sales-type leases, and recognized revenue upon purported delivery and acceptance of the fiber (i.e., upfront). Qwest senior management commonly referred to IRUs as "gap fillers." IRUs were further referred to as "heroin," and Qwest as a drug user, meaning that Qwest was addicted to using IRUs as a means to meet revenue targets.
7. In June 2001, Qwestlink persuaded a purchaser of dark fiber to enter into an IRU agreement ahead of any actual business requirement for the fiber. The purchaser agreed, but only on condition of having the ability to port, or exchange, the fiber purchased for other fiber in the future. Haggerty understood that the IRU transaction would not be executed without an agreement to port. Haggerty also knew or was reckless in not knowing that Qwest's corporate accountants would deny upfront revenue recognition if the contracts contained any reference to portability. Portability created a future contingency defeating, under Generally Accepted Accounting Principles ("GAAP"), the upfront revenue recognition sought by Qwest.
8. Haggerty knew that all aspects of an IRU agreement must be contained within the four corners of the contract so that Qwest's accountants could review the agreements fully. Therefore, in order to circumvent Qwest's internal accounting controls, Haggerty assisted in providing the purchaser with an undisclosed verbal side agreement to port. Haggerty knew or was reckless in not knowing that providing an undisclosed verbal side agreement, rather than including portability in the IRU agreement, would conceal material facts from Qwest's corporate accountants.
9. Because the IRU sale wrongly appeared eligible for upfront revenue recognition, Haggerty was a cause of Qwest recognizing improperly $11.5 million of revenue for the second quarter ended June 30, 2001.
10. Section 17(a) of the Securities Act makes it unlawful to employ any device, scheme, or artifice to defraud in the offer or sale of any securities. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit the misrepresentation of or misleading omission of material facts in connection with the purchase or sale of securities. By engaging in the conduct described in paragraphs III.7. through III.9. above, Haggerty was a cause of Qwest's violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
11. Section 13(a) of the Exchange Act requires all issuers with securities registered under Section 12 of the Exchange Act to file periodic and other reports with the Commission containing such information as the Commission's rules prescribe. Pursuant to Section 13(a), the Commission promulgated Rules 13a-1, 13a-11 and 13a-13 that require issuers to file annual, current and quarterly reports, respectively. The reporting requirements necessarily include the requirement that the issuer supply accurate information. In addition, Rule 12b-20 requires that reports contain such further material information as may be necessary to make the required statements, in light of the circumstances under which they were made, not misleading. As a result of the conduct described in paragraphs III.7. through III.9. above, Haggerty was a cause of Qwest's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder.
12. Section 13(b)(2)(A) of the Exchange Act states that every Section 12 registrant must "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." Rule 13b2-1 provides that no person shall, directly or indirectly falsify or cause to be falsified, any book, record, or account subject to Section 13(b)(2)(A). As a result of the conduct described in paragraphs III.7. through III.9. above, Haggerty committed violations of Rule 13b2-1 of the Exchange Act, and was a cause of Qwest's violations of Section 13(b)(2)(A) of the Exchange Act.
13. Section 13(b)(5) of the Exchange Act provides that: "No person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account described in [Section 13(b)(2)]." By engaging in the conduct described in paragraphs III.7. through III.9. above, Haggerty committed violations of Section 13(b)(5) of the Exchange Act.
14. In determining to accept the Offer, the Commission considered Respondent's cooperation afforded the Commission staff.
15. Respondent undertakes to cooperate with the Commission staff in preparing for and presenting any civil litigation or administrative proceeding concerning any transaction or related transaction that is the subject of the Order. Respondent understands that if he fails to comply with these undertakings, the Commission reserves the right to reopen this proceeding and reconsider the appropriateness of the Order imposed.
16. In determining whether to accept the Offer, the Commission has considered these undertakings.
In view of the foregoing, the Commission deems it appropriate to impose the sanction agreed to in Respondent Haggerty's Offer.
Accordingly, it is hereby ORDERED that Respondent cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder.
By the Commission.
Jonathan G. Katz
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