U.S. Securities and Exchange Commission
Litigation Release No. 18755 / June 21, 2004
Accounting and Auditing Enforcement Release No. 2043 / June 21, 2004
June 21, 2004. SEC v. Augustine M. Cruciotti , Civil Action No. 04-D-1267 (MJW) (D. Colo.)
Today, the Securities and Exchange Commission (the "Commission") filed an action for civil penalties against Augustine M. Cruciotti, a resident of Elizabeth, Colorado, and former executive 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, Cruciotti consented to the entry of judgment by the district court requiring him to pay a civil penalty of $150,000.
In addition, the Commission instituted, and simultaneously settled, a cease-and-desist proceeding against Cruciotti. In the Order, In the Matter of Augustine M. Cruciotti [33-8431], 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 three IRU transactions executed between December 2000 and June 2001, Cruciotti, then the executive vice president of Qwest's local networks, authorized subordinates to provide, or provided himself, undisclosed side agreements allowing the purchasers of fiber-optic cable to exchange (or "port") the fiber purchased for different fiber at a later date. The undisclosed side agreements concealed from Qwest's accountants and outside auditors the purchasers' ability to port, since such exchange rights defeated, under generally accepted accounting principles, the upfront revenue recognition sought by Qwest. According to the Commission's findings, Qwest improperly recognized from the three IRU transactions $26.6 million of revenue in the first and second quarters of 2001, which contributed to Qwest's ability to meet its revenue targets for those quarters. As a result, Qwest's quarterly reports for the first and second quarters 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, Cruciotti 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, and to pay disgorgement plus prejudgment interest thereon in the amount of $200,000.
The Commission's complaint in the district court action alleges the same conduct referenced above. The Commission expects the penalty to be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002.