[A-List] Financial regulatory crisis

[Keaney Michael]

Watchdog sniffs around Qwest accounts

David Teather in New York
Tuesday March 12, 2002
The Guardian

Qwest Communications, one of the so-called Baby Bell telecoms firms,
yesterday became the latest name in corporate America to find its
accounts coming under scrutiny.

The company, facing a crisis of confidence among investors, said the US
financial regulator, the securities and exchange commission, had
requested documents from it on Friday.

Shares in Qwest - already trading 31% lower since the beginning of the
year - were down by another 5% in mid-day trade.

There are fears that Qwest, which operates local telephone services for
much of the western US, could become the latest victim of the
nervousness on Wall Street following the bankruptcies of Enron, Global
Crossing and Kmart. Qwest is already under the microscope for its
dealings with Global Crossing, which in January became the biggest
telecoms failure to date.

The informal SEC inquiry is focusing on Qwest's accounting practices in
the years 2000 and 2001. It is chiefly concerned with the accounting for
"capacity swaps", in which telecoms companies give each other space on
their networks to fill gaps in infrastructure.

The same issue is being scrutinised by the SEC and the FBI at Global
Crossing.

Regulators also want details on equipment sales to companies from which
Qwest bought services or for which Qwest provided equity financing.

The SEC inquiry comes at a difficult time for Qwest as it tries to close
a $1.5bn bond issue today to improve its cash position. Its credit
rating has been downgraded twice in the past month, leaving Qwest bonds
just one notch above "junk" status.

The company has already drawn down on its entire $4bn bank facility, and
has lost access to the commercial paper market because of its low credit
rating.

It has $850m of maturing long-term debt to repay in July and is in talks
to amend its banking agreements.

Qwest said it planned to "fully cooperate" with the SEC's inquiry. It
has denied any hint of improper accounting, and said the financial
regulator had indicated that the inquiry was not based on the belief
that any violation of the law had occurred.

Qwest chief executive Joseph Nacchio said he did not believe the inquiry
would have any effect on the outcome of the fundraising. "This inquiry
is not surprising, given the formal investigation of Global Crossing and
the increased media scrutiny that the telecommunications industry is
under," he said.

"They've asked us for some documents. They haven't told us why, other
than they want to explore these areas. We'll just let that play out."

Global Crossing has been accused by a former employee of improperly
accounting for capacity swaps to inflate the company's revenues and keep
the share price artificially high. The allegations have been firmly
denied but formed the basis for the continuing regulatory
investigations.

A month ago, the SEC asked Denver-based Qwest for documents related to
Global Crossing as part of that investigation.

In January, Qwest said its fourth-quarter loss had widened to $516m as
sales dropped to $4.7bn, due to a slowdown in the demand for its
services.

The company said the kind of capacity sales in question, in which there
were reciprocal agreements, made up 2.8% of sales in 2000 and 5.1% in
2001.

Full article at:
http://www.guardian.co.uk/business/story/0,3604,665909,00.html

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney at mbs.fi