July 11, 2002

     Wall Street shaken by Qwest inquiry
     From Chris Ayres In New York

     WALL Street suffered another bruising day yesterday after the US Justice
     Department launched a criminal investigation into Qwest
     Communications, the telecoms company, just hours after President
     Bush set out plans to clean up US corporations. 

     The inquiry dealt another blow to the fragile confidence of investors. The
     Dow Jones industrial average fell 282.59 points to 8,813.50 while the
     S&P 500 shed 32.36 points to 920.47, the lowest level since the Long
     Term Capital Management crisis in 1998. One trader said investors had
     been panicked into “indiscriminate selling”. Trading in Qwest, which
     recently appointed KPMG to replace Andersen as its auditors, was
     suspended yesterday. America’s fourth largest local phone company has
     lost $100 billion (£65 billion) of its stock market value over the past two
     years. Its debts are estimated at $27 billion. 

     Qwest said it “plans to fully co-operate with the US Attorney’s office”,
     adding that it did not know what the Justice Department was

     It is believed the criminal investigation will focus on so-called “swap”
     transactions used by telecoms firms to boost their revenues, some say
     falsely. During the high-tech boom analysts valued telecoms firms based
     on their revenues. Executive bonuses were also sometimes linked to
     revenue figures. 

     A swap transaction typically involves a company such as Qwest selling
     long-term capacity on its network to a rival, then booking revenues
     upfront, even though the cash may not be received for years. 

     At the same time, the company buys an identical amount of capacity from
     the rival firm, but books the cost as a capital expense, allowing it to be
     paid off over a long period. 

     The result is that both telecoms companies can book higher revenues,
     without increasing their losses. But some say the revenues from
     long-term deals should be booked over the lifetime of the contracts, not

     Qwest boosted its revenues by more than $1 billion last year through
     swap deals, but insisted that it did nothing to break accounting

     However, Qwest’s chief executive, Joseph Nacchio, resigned abruptly last
     month amid questions over the deals. Qwest is already the target of a
     Securities and Exchange Commission inquiry into its accounting. 

     Like WorldCom and Global Crossing, both also under investigation by
     the Justice Department, Qwest was a stock market star in the 1990s. A
     high-tech start-up specialising in internet services, it stunned investors in
     1999 by launching a $35 billion bid for US West, a local phone company.
     Qwest was founded by Philip Anschutz, the businessman behind the
     Millennium Dome purchase. 

     Other firms facing criminal inquiries:
     Global Crossing
     Enron Corp
     Tyco International
     Computer Associates
     ImClone Systems

No Blood For Oil Page