A federal judge in Denver dealt a blow this week to the Securities and Exchange Commission’s civil lawsuit against five former Qwest officials, including former chief executive Joe Nacchio.
U.S. District Judge Marcia Krieger ruled that the SEC doesn’t have enough evidence to prove allegations of improper accounting connected to billions in revenue from 1999 to 2002.
She ordered the SEC to focus on claims that the defendants misled investors by combining lump sum, one-time sales with monthly, recurring revenue in Qwest’s regulatory filings and not disclosing that they had done so.
Investors generally place more value on recurring revenue because it better reflects a company’s financial condition.
“It becomes a very technical case, and sounds like one that is not going to be very easy for them to win,” said former SEC attorney Peter Henning, now a law professor at Wayne State University.
The SEC said Friday it is deciding whether to ask Krieger to reconsider.
“The SEC is planning on going forward,” said SEC attorney Polly Atkinson.
An April 14 hearing will review the disclosure allegation — which Krieger says is “the major thrust” of the case.
In addition to Nacchio — who is serving a six-year prison term for criminal insider trading — defendants in the SEC case include former Qwest president Afshin Mohebbi, former chief financial officer Robert Woodruff and former accountants Frank Noyes and James Kozlowski.
The SEC is seeking the repayment of stock-sale profits, bonuses and salaries earned from 1999 to 2002.
Initial claims focused on the accounting for billions of dollars in supposedly phantom revenue from swaps of network capacity between Qwest and other telecommunications companies. Qwest recorded the revenue in a lump sum rather than spread out over the life of the multi-year contracts.
With the suit now focused on disclosure rather than accounting issues, several weeks could be trimmed off a potential trial and the number of witnesses reduced by at least half.
“This is a pretty significant development,” said attorney Kevin Evans, who represents Kozlowski. “If this case were to go to trial in the posture that it is today . . . it would alleviate my need to call at least 30 witnesses.”
Krieger left intact a claim against Noyes connected to the alleged backdating of a network capacity sale between Qwest and Enron in 2001.
Insider-trading charges against Nacchio and Woodruff also remain. Krieger ruled that the SEC can’t use findings from Nacchio’s criminal trial because the facts in the cases are different.
Andy Vuong: 303-954-1209, avuong@denverpost.com or
