Hot air wasn't the only thing swirling around

Qwest

(Q)

Tuesday.

On a day that began with fallen stock-market idols declining to testify in Washington, chatter at a Senate telecom hearing quickly turned to former Qwest executives' massive stock sales and the timing of a pending revenue restatement. Meanwhile, people familiar with the inquiries say the Justice Department has been talking with Qwest rivals about the company's efforts to shimmy into the lucrative long-distance phone market.

With Congress pushing to sweep Wall Street clean of financial misdeeds and Qwest wilting in a swamp of eroding revenue streams and questionable accounting, Tuesday's events could push momentum even more decisively against the company. As lawmakers turn a bright light on former executives' actions, investors could face an avalanche of class action lawsuits, at the very least. At the same time, a setback in long distance could seriously damage the company's long-term plans, observers say. Qwest dropped 19 cents to $1.30.

Post Office Poster

The day began with telecom's most dangerous men declining en masse a cordial invitation to address the Senate Commerce Committee's hearings on Financial Turmoil in the Telecom Marketplace. The rogues' gallery was to include Qwest's Joe Nacchio and Phil Anschutz along with Bernie Ebbers of recently collapsed

WorldCom

and Gary Winnick of the long-failed

Global Crossing

.

Appearing in their place were execs who have mostly attempted to draw a bright line between their own righteous, government-assisting cleanup efforts and the most-wanted execs' well-chronicled aggressive practices. The do-gooders, as it were, included John Sidgmore of WorldCom, John Legere of Global Crossing and Afshin Mohebbi of Qwest.

The committee is seeking remedies to the telecom industry's continued decline, which has been riddled by accounting scandals and charges of corruption. Leaning heavily on his characteristic understatement, Sen. John McCain said telecom execs created "a house of cards" that "lined the pockets of corporate executives" through a "confidence scheme unlike any seen before."

Money Talking

Thus, in an unwelcome turn for Qwest shareholders, the discussion turned decisively to Nacchio and Anschutz. McCain cited the executives' massive gains through stock sales dating back to 1999. As the senator pointed out, that happens to be the same time period over which new management says revenues were overstated to the tune of $1.1 billion.

Numbers associated with the insider sales are indeed staggering. As McCain pointed out, Nacchio has sold $226 million in Qwest stock since 1999. And Anschutz, a board director and the largest shareholder, sold $1.5 billion worth of company stock in 1999 alone. As members of the Senate committee pointed out Tuesday, Nacchio in particular sold large chunks of stock within months of predicting continued sales growth for the company.

Of course, there's nothing illegal about executives selling stock. But if investigators can establish a pattern in which insider sales followed stock touting, they could craft a criminal case against the executives, observers say. Qwest itself is already under a number of civil and criminal investigations regarding its business and accounting practices.

Even if criminal charges don't arise from the stock sales, shareholders can easily seek redress through civil lawsuits. With Qwest's shares down well over 90% from their Internet-era peak, the company could make an appealing target for class-action lawyers.

Nacchio's New York criminal defense attorney, Charles Stillman, was unavailable for comment.

Ongoing Probes

If the stock question weren't enough, continued investigations by the

Securities and Exchange Commission

and the U.S. Department of Justice may provide additional challenges.

The Justice Department has been looking at potentially bogus network capacity swaps and questionable accounting practices. It now seems that antitrust investigators are also looking into some of the sweatheart deals Qwest struck with local phone rivals to gain support for long distance entry.

People familiar with these investigations say the discussions intensified earlier this month, but they are unable to say whether the sudden scrutiny is part of a routine review of Qwest long distance applications or a specific focus on these controversial deals to buy competitors' support.

One U.S. attorney's office official said everything was on the table in the Qwest investigation. "Anything is possible," he said.

Sounds of Silence

According to phone company executives who were approached by or who entered deals with Qwest, the exchange typically consisted of discounts or extremely favorable terms on service contracts in exchange for silenced objections to Qwest's long-distance applications.

The inquiry is important because one of the few potential bright spots down the road, should Qwest survive the disclosure that it may restate at least $1.1 billion in revenue, is the prospect of selling its customers long distance service. The Bells have been in the process of opening their local markets to competition so they can in turn compete for long distance customers. The new toll-calling revenues would come at a key time for Qwest and the Bells as their local phone service sales have flattened.

Earlier this year, Minnesota regulators had found about 11 cases where Qwest may have tried to buy support from its rivals for long distance approval. Soon after, several other states opened up investigations. Qwest fought the charges and has appealed to the Federal Communications Commission to have the various state agencies overruled.

A Qwest spokeswoman said there hadn't been any further developments in that case.

One Qwest rival said the company has since reneged on its side of the bargains. Some observers call that evidence of Qwest's slippery qualities -- a point of view that was available in abundance Tuesday.

"I thought Enron was just one rotten apple," said Sen. Barbara Boxer (D.-Calif.). "Since then we've seen a lot of rotten apples. It's beginning to look like we have an orchard here."