Qwest was a leading provider of voice, video, and data services across America and the world. Homes and businesses around the globe rely on the company’s dial tone connection. On March 15, 2005, the Securities and Exchange Commission charged Joseph P. Nacchio, former co-chairman and chief executive officer, and eight other former Qwest officers and employees with fraud and other violations of the federal securities laws. The Commission alleged that, between 1999 and 2002, the Qwest defendants engaged in a multi-faceted fraudulent scheme designed to mislead the investing public about the company's revenue and growth. Nacchio and others traded Qwest stock knowing that the public disclosures were inconsistent with their private information. The SEC accused Qwest and its management team of numerous false and misleading statements about Qwest's operational performance in periodic financial reports, in registration statements, and in other public statements, including earnings releases and investor conference calls. Inconsistent with the public disclosures, the SEC concluded that Qwest fraudulently recognized over $3 billion of revenue and excluded $71.3 million in expenses. 

The listing of Qwest management and their titles (when employed by Qwest) from the SEC press release included:

• Joseph P. Nacchio, co-chairman and chief executive officer

 • Robert S. Woodruff, chief financial officer 

• Robin R. Szeliga, chief financial officer

 • Afshin Mohebbi, chief operating officer 

• Gregory M. Casey, executive vice president of wholesale markets 

• Roger B. Hoaglund, senior vice president of pricing and offer management 

• William L. Eveleth, senior vice president of finance 

• James J. Kozlowski, director of financial reporting 

• Frank T. Noyes, senior manager of financial reporting Qwest projected overly aggressive estimates of revenue and earnings and used “smoke and mirrors” to meet those unrealistic projections. More specifically, the SEC alleged the following acts: 

• The perpetrators characterized nonrecurring revenue from one-time sales of capacity (indefeasible rights of use or IRUs) and equipment as recurring "data and Internet service revenues," using the fraudulent revenue to meet projections. Such accounting for non-recurring transactions is a violation of generally accepted accounting principles (GAAP). 

• Qwest provided secret side agreements to IRU customers allowing those customers to exchange or "port" the capacity purchased for different capacities. The secret side agreements effectively concealed the true nature of the contracts from Qwest's accountants and auditors because exchange rights would have prevented the immediate recognition of revenue under GAAP. 

• Executives backdated IRU agreements so that the revenue could be recognized in earlier quarters than permitted by GAAP. 

• The company reduced expenses relating to compensated absences but failed to disclose the change in accounting for compensated absences in the notes to the financial statements. The impact of the accounting change totaled $71.3 million. 

• Qwest also concealed its actions by disclosing misleading information to the SEC and the public concerning the true nature of the transactions, the true underlying financial performance reflected in the income statement, and its related impact on the company’s financial condition (balance sheet). Prior to the SEC investigative findings, on July 29, 2002, Qwest admitted it had used improper accounting methods that boosted its profits by more than $1 billion during a three-year period. The company admitted to prematurely recording hundreds of millions of dollars of revenue at the end of its quarterly reporting periods. However, Qwest insisted that the "accounting errors" were made under policies approved by auditor Andersen. Maybe more interesting is that Qwest’s admission came one day before President George W. Bush signed the Sarbanes-Oxley Act of 2002, legislation to address concerns over corporate fraud and accounting abuses. In the words of George W.: 

• This law says to honest corporate leaders: your integrity will be recognized and rewarded because the shadow of suspicion will be lifted from good companies that respect the rules. 

• This law says to corporate accountants: the high standards of your profession will be enforced without exception; the auditors will be audited; the accountants will be held to account. 

• This law says to shareholders that the financial information you receive from a company will be true and reliable, for those who deliberately sign their names to deception will be punished. 

• This law says to workers: we will not tolerate reckless practices that artificially drive up stock prices and eventually destroy the companies, the pensions, and your jobs. 

• And this law says to every American: there will not be a different ethical standard for corporate America than the standard that applies to everyone else. The honesty you expect in your small businesses, in your workplaces, in your community, or in your home, will be expected and enforced in every corporate suite in this country. On April 19, 2007, Joseph Nacchio was found guilty, not of perpetuating a fraud scheme, but on 19 counts of “insider trading” associated with his sale of $100 million of Qwest stock. In fact, prosecutors had been banned from telling jurors that Qwest had restated revenues to the tune of $2.48 billion in 2000 and 2001. On July 29, 2007, Nacchio was fined $19 million and forced to forfeit $52 million in stock profits that he was convicted of illegally acquiring and sentenced to 6 years in prison. Mr. Nacchio was 57 at the time. CenturyLink acquired Qwest in a stock transaction in 2011. Sources: SEC Charges Former Qwest CEO Joseph Nacchio and Eight Others with Massive Financial Disclosure Fraud, March 15, 2005. Glackin, Michael, Qwest Admits to Improper Accounting, The Scotsman, July 30, 2002. O’Clery, Conor, Qwest Executives Made Fortunes in Stock Sales as Firm floundered, the Irish Times, July 31, 2002. Searches, Dionne, Peter Lattman, Peter Grant and Amol Sharma, “Qwest’s Nacchio is Found Guilty in Trading Case, The Wall Street Journal, April 20, 2007.

Question- Why should the stock markets be concerned about if, and when, executives sell stock? In your opinion, should executive stock sales be disclosed? Why or why not?

Answer rating: 100% (QA)

Answer With the evergrowing ethical concerns in the stock markets in the 21 st century stock markets should be concerned if and when executives sell s... View the full answer