Speech by SEC Chairman:
Statement at News Conference Announcing Charges in Qwest Matter
Chairman William H. Donaldson
U.S. Securities and Exchange Commission
February 25, 2003
A strong enforcement program is the cornerstone of the Securities and Exchange Commission's efforts to ensure public confidence in our capital markets. Today, the SEC takes another aggressive step in its fight against corporate fraud and abuse.
The SEC has sued eight executives and employees of Qwest for fraud and other violations of the federal securities laws. These violations resulted in inflation of Qwest's revenues by approximately $144 million in 2000 and 2001.
In its lawsuit, the Commission is seeking repayment of all the defendants' ill-gotten gains including their salaries, bonuses, stock and other compensation.
In addition, the Commission is seeking civil penalties, anti-fraud injunctions and, for five of the defendants, an order barring them from ever serving as an officer or director of any other publicly traded company.
These defendants were part of a corporate culture that placed meeting Wall Street expectations above the duty to serve shareholders and above respect for the law.
Today's action marks the beginning of our public efforts to hold accountable those at Qwest who abused the public trust. This case is the latest example, but by no means the last, of the aggressive action that we at the SEC are committed to take in our pursuit of corporate wrongdoers.
The Commission charges that these eight defendants engaged in fraudulent accounting that allowed Qwest to meet aggressive financial projections. In other words, the defendants played with the numbers so investors would believe the company was doing better than it actually was. That is wrong, and it won't be tolerated.
In two separate transactions, the defendants knowingly and fraudulently caused Qwest to book sales revenue improperly by mischaracterizing and misrepresenting the nature of those transactions.
The first transaction relates to an agreement obligating Qwest to provide certain equipment and services to Genuity Inc.
The Complaint alleges that four of the defendants participated in a scheme to artificially characterize a single transaction as two separate agreements.
As a result of this mischaracterization, Qwest improperly recognized $100 million in revenue and $80 million in earnings before interest, taxes, depreciation, and amortization in the quarter ended September 30, 2000.
Without the fictitious revenue from the Genuity transaction, Qwest would not have been able to claim the double-digit growth it had projected for the quarter.
Simply put, the defendants couldn't make the numbers work by following the rules, so they cheated. They cheated Qwest's shareholders, and they betrayed the trust of the investing public.
The second transaction, which is also the subject of the Justice Department's criminal enforcement actions, involved the sale of Internet equipment and installation services to the Arizona School Facilities Board.
As alleged in the Commission's complaint, six of the defendants took a series of actions designed to disguise the true the nature of the transaction and make it appear that Qwest could book revenues that it wasn't entitled to book.
As part of their scheme, the defendants accelerated delivery to Qwest's warehouse of equipment not yet necessary for the project and caused delivery of equipment to the warehouse that was not needed at all. They also prepared and furnished to Qwest's auditors false letter agreements from the School Board and a fraudulent internal memorandum.
As a result of the transaction, Qwest improperly recognized approximately $33.6 million in revenue. Without this revenue, Qwest would have fallen short of its projected 12 to 13 percent revenue growth for the quarter.
As the SEC's Chairman, I want to make clear that conduct of the sort we've alleged against these Qwest employees simply has no place in our capital markets.
Our markets demand the highest vigilance in this effort and I am committed to ensuring that we meet that demand.
The Commission will continue its vigorous pursuit of fraud. We will continue to bring cases like the one we are announcing today. The Commission and its staff use all of the weapons in our enforcement arsenal to root out and seek just punishment for those who would betray the trust of the investing public.
Before closing, I must recognize the hard work and extraordinary dedication of the Commission staff who brought us to this point: Stephen Cutler, Director of the Enforcement Division, and Randall Fons, Regional Director of the Central Regional Office, both of whom are with me today.
And there are many more talented and committed staff in the Commission's Denver office whose work has led to the filing we announce today. Their efforts will continue as the Commission's investigation in the Qwest matter continues.
I also want to recognize the outstanding contributions and leadership of Attorney General Ashcroft and Deputy Attorney General Larry Thompson, as well as the important accomplishments of the Office of the United States Attorney for the District of Colorado.