SEC Launches Formal Probe of Qwest

Updated from 6:24 p.m. EST

The Securities and Exchange Commission told Qwest (Q) Thursday that it had begun a formal investigation of the Denver telco.

The agency has been informally looking at Qwest's business and accounting practices for some time, but making the probe a formal investigation typically gives the SEC subpoena power and generally indicates a significant rise in the seriousness of the matter.

The SEC has been informally probing the troubled telecom industry in the wake of the collapse of the tech stock bubble in early 2000. Qwest, WorldCom and bankrupt network builder Global Crossing have been among the companies named recently in informal probes. Now the SEC is stepping up what began as an informal inquiry into Qwest's controversial revenue-recognition policies for so-called "indefeasible rights of use" capacity sales, among other things.

The news comes just three days after Qwest disclosed in a regulatory filing that the SEC staff favored investigating the company for its handling of expense data in its 2000 earnings report. That report, made public in January 2001, failed to offer investors full financial data according to generally accepted accounting principles, regulators said. Instead, it favored the pro forma earnings statements that companies have increasingly used in recent years to put their best foot forward to investors.

Qwest said in the filing it believed any action would be without merit; the company has long defended its practices. The company said Thursday that it would cooperate with the agency and that it wouldn't comment further on the matter.

As part of its investigation into the collapse of Global Crossing, the SEC asked for documents from IRU swap partner Qwest. Last month, TheStreet.com profiled a questionable 11th-hour deal between Enron Broadband and Qwest; four days later, the SEC started its informal inquiry into Qwest's IRU practices.

When it opened the investigation, the SEC said it wanted more information on IRU sales of optical transmission capacity, "particularly sales to customers from whom the company agreed to purchase optical capacity." The latter describes the sort of swap that critics contend often involve overpriced assets being shifted around by telecommunications companies to goose revenues and cash flows in order to meet analysts' targets and, later, loan covenants.

Qwest was one of the more aggressive telcos involved with IRU sales, observers say, in that the company would book the proceeds of such deals up front as one-time sales, instead of over the duration of the contract. Meanwhile, costs involved with the purchase of IRUs were often treated as investments rather than traditional expenses.

Qwest saw its shares fall 29 cents Thursday to $7.26. The stock has lost more than 80% of its value over the past year as the debt-heavy next-generation telco has seen its financial situation deteriorate.

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