U.S. Securities and Exchange Commission
Litigation Release No. 18754 / June 21, 2004
Accounting and Auditing Enforcement Release No. 2042 / June 21, 2004
June 21, 2004. SEC v. Steven L. Haggerty , Civil Action No. 04-D-1266 (MJW) (D. Colo.)
Today, the Securities and Exchange Commission (the "Commission") filed an action for civil penalties against Steven L. Haggerty, a resident of Walnut Creek, California, and former senior vice president and officer of Qwest Communications International, Inc. ("Qwest") in the United States District Court for the District of Colorado. Without admitting or denying the allegations in the complaint, Haggerty consented to the entry of judgment by the district court requiring him to pay a civil penalty of $30,000.
In addition, the Commission instituted, and simultaneously settled, a cease-and-desist proceeding against Haggerty. In the Order, In the Matter of Steven L. Haggerty [33-8432], the Commission found that during 2000 and 2001, as well as in other time periods, in Commission 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. Qwest could not, however, meet its projected revenues and earnings growth through communications services. Therefore, Qwest senior management relied on undisclosed Indefeasible Rights of Use ("IRU") sales as a method to make up the difference between Qwest's service revenues and its projected revenue targets. An IRU is an irrevocable right to use a specific amount of fiber for a specified time period. Qwest accounted for IRUs as sales-type leases and, unlike service revenue, recognized nearly the entire amount of the IRU revenue "upfront" at the time of contract execution, rather than over the life of the IRU agreement. Qwest employees and management commonly referred to IRU sales as "gap fillers," in other words, a means to make up the shortfall between the aggressive revenue projections as publicly announced by Qwest and the service revenue earned.
The Commission found that in June 2001, Haggerty, then a Qwest senior vice president, assisted in providing an undisclosed side agreement allowing a purchaser of fiber-optic cable to exchange (or "port") the fiber purchased for different fiber at a later date. The side agreement concealed from Qwest's accountants and outside auditors the purchaser's ability to port, since such an exchange right defeated, under generally accepted accounting principles, the upfront revenue recognition sought by Qwest. According to the Commission's findings, Qwest improperly recognized from the IRU transaction $11.5 million of revenue in the second quarter of 2001, which contributed to Qwest's ability to meet its revenue target for that quarter. As a result, Qwest's quarterly report for the second quarter of 2001, its annual report for 2001, and Qwest's earnings releases for those periods, contained materially false information.
Without admitting or denying the findings in the Commission's Order, Haggerty has agreed to settle the Commission's claims by consenting to the entry of an administrative order requiring him to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("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.
The Commission's complaint in the district court action alleges the same conduct referenced above. In settling for a $30,000 penalty, the Commission considered Haggerty's cooperation in connection with the Commission's ongoing investigation of this matter.