Qwest and Bank of America Accused of Defrauding Retired Teachers

by Axcess Business News Friday, Dec. 27, 2002 at 6:34 PM

The California Teachers Retirement System sued Qwest Communications and Bank of America for engaging in "fraudulent schemes" that cost the teachers' fund millions of dollars.

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Eric Stevenson Editor Qwest and Bank of America
Accused of Defrauding Retired Teachers

By Eric Stevenson - Axcess Business News

The California Teachers Retirement System, commonly referred to as Calstrs, filed a law suit Tuesday, Dec 10, in San Francisco Superior Court against Qwest Communications, (NYSE: Q) Bank of America, (NYSE: BAC) and several of the nation's leading banking and financial service firms for engaging in "fraudulent schemes" that cost the teachers' fund millions of dollars.

Frankly, the suit came as no surprise to Axcess Business News. We've been covering Qwest and Bank of America for some time.

When Wall Street was up in arms over the "witch hunt" going on amongst these so called institutions for providing misleading information to investors, our alert financial columnist, Ms. Freddie Mooche, had covered the story. You will find several links to articles we've written on the saga of both Qwest and Bank of America at the bottom of this page. If I put them all here, it'd look more like a link directory than a commentary!

Calstrs suit claims the Teacher's pension fund lost about $150 million in Qwest's stock that had been sold to the Fund by Bank of America and a host of others.

Bank of America was the largest lender to Telco's in the United States amongst banks here and had over $1.4 billion in outstanding loans to both Qwest and Worldcom when those two companies fell from grace with S&P. Frankly, I thing the whole relationship between Qwest and Bank of America smells.

Philip F. Anschutz Calstrs suit alleges that Qwest founder, Mr. Philip F. Anschutz, took more than $1.9 billion out of the company by means of insider trading.

He got more than I did!The Suit also alleges that Qwest's Chief Executive, Mr. Joseph Nacchio, cost the company another $228 million by his insider trading. Way to go Joe! Taking it out of the mouth's of retired teachers, gee your a swell guy!

In July, Qwest disclosed that for the years 1999 through 2001, it had improperly accounted for over 200 transactions worth about $1.6 billion. In October, Qwest had announced that it would defer $531 million of previously recognized revenue because of improper accounting. Axcess Business News covered that too!

According to the Calstrs law suit, officers of Qwest falsely represented that the company was one of the highest revenue-producing Telco's in the world to ensure that it met its quarterly Wall Street projections.

Here comes the icing on this cake! The financial companies named in the suit knew that their statements in registering Qwest Notes (selling debt in the form of a security) were not true, that they "omitted material facts and were materially misleading," according to the suit.

It's strong language for a law suit when they use the words "omitted material facts" and "materially misleading." In securities jargon, that's a real eye opener and you can bet the SEC already got their hands on a copy of that law suit and are watching those events unwind.

The Plot Thickens

Just the week before Calstrs filed their law suit in San Francisco Superior Court, Qwest announced that it would seek a dismissal of an earlier law suit that aims to block a $12.9 billion debt exchange offer the company unveiled in November.

In the $12.9 Billion swap, bondholders are being offered a greater coupon and higher place in line as creditors in the capital structure. The catch is, they must agree to accept new bonds for less than they paid and with longer maturity dates.

But who are these bond holders? Mega institutions? Your mom and dad?

On DEC 9 five of the investment companies in an unofficial bondholders committee that is attempting to block Qwest's massive debt exchange offer were identified in court documents. These are: Elliott Associated L.P.; Franklin Mutual Advisors L.L.C.; Metropolitan Life Insurance Company; Metropolitan West Asset Management L.L.C. and MFC Global Investment Management.

According to an amended complaint filed with court, the five bondholders represent about $773 million in notes subject to the exchange offer, almost half of the total debt. The amended complaint stated that, "defendants (Qwest) have demanded public disclosure of the names solely to harass members of the Committee and to interfere with their right to protect themselves from the defendants' illegal exchange offer and other violations of law and breaches of fiduciary duty."

Qwest's view is that they, "have a right to know the names of the parties who are suing us and we intend to abide by any guidelines the courts put forth with regard to discovery," said spokesperson Steve Hammack.

This all goes back to the days before Nacchio's resignation from the board, when the SEC began its inquiry on Qwest's questionable accounting practices about the same time Worldcom was collapsing. At that time Qwest had one shinning jewel in its crown the company, or I should say Joseph Nacchio, proclaimed could be sold to pay down its outstanding debt - (and we're talking Bank of America's debt here) Qwest-Dex.

Regulators need to dig deeper into the Qwest/Bank of America affair. There's more going on there than a few life insurance companies crying over the high priced premiums you and I pay them that they invested in Qwest. Metropolitan Life had most of it! Oh don't worry, if they loose they'll get it back through higher premiums charged on their policies!

The fact is that when US West Communications merged with Qwest the combined company was in 14 states and that's a lot of regulation! Qwest-Dex's sale, which Axcess Business News also covered, requires a myriad of federal and state regulators' approval before it can close. And who is it that made the best bid? Investment bankers who know how to take it apart at the seams and sell the peices. Fat chance of that happening when they discover Qwest Communications problems are spilling over onto their plans.

Why else would Qwest Communications be so keen on converting its note holders if they were so sure of the sale of its Qwest-Dex division? It couldn't possibly be their good friends at Bank of America politely asking for a little kiss in their proverbial wallet?

Qwest can be ruthless in its dealing's and while the Telco giant faces a mountain of debt its surrounded itself with very savvy lawyers who know how to fight, especially when the client can pay for it and in this case it appears the lawyers are going to be the only winners.

With Christmas approaching I'm sure both Nacchio and Anschutz are warm and cozy, wrapped in a blanket of green they wove from the "allegedly" purloined retirement funds of California's teachers. Now there's a lesson learned, eh?

Related Articles About Qwest:

Qwest's Shareholders Loose $40.8 Billion
Qwest Losses Widen Adding to Shareholders Concerns
Freddie Blasts Bank of America
Big-Assed CEO's Heading for the Can

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