Federal prosecutors have charged that a $140 million project to bridge the “digital divide” in Arizona’s public schools was used as a vehicle for accounting fraud in late 2001 by officials of the telecommunications giant Qwest Communications International Inc.
A 12-count criminal indictment filed in the federal district court in Denver in February alleges that four former executives of the Denver-based company, and possibly others, juggled revenue figures, created a bogus document trail, and covered up the true terms of its business agreement with the Arizona School Facilities Board.
The alleged motive: to pump up Qwest’s revenue by $33.6 million and meet its quarterly target for earnings. According to the indictment, the activities took place from March 2001 through the end of January 2002.
Edward E. Boot, the interim executive director of the facilities board, a state entity set up by the legislature to remedy certain inequities in the state’s schools, said the allegations taint by association the project to give 1,400 schools high-speed links to the Internet, but do not materially affect it.
“It didn’t concern us—only that our name was on the invoices,” he said. “We hope justice prevails.”
The four executives—Thomas Hall, a senior vice president; John Walker, a vice president; assistant controller Bryan K. Treadway; and Grant P. Graham, the chief financial officer for Qwest’s global business unit—were each indicted on all 12 counts and have pleaded not guilty to the charges, the most severe of which carry penalties of up to 10 years in prison and fines of up to $1 million.
The trial date is May 5, but one of the accused, Mr. Graham, has asked for a delay.
The four former executives are also in trouble with the federal Securities and Exchange Commission, which has filed a civil suit against them, along with three other former Qwest executives and one current one, for allegedly inflating revenues by $144 million in 2000 and 2001.
The SEC suit seeks civil penalties and the “disgorgement” of the individuals’ compensation from any illegal activities, including salaries, bonuses, and stock earnings. The company has revised downward its reported revenues from 1999 through 2001 by more than $2 billion since the SEC began its investigation in the spring of last year.
Pay Now, Buy Later?
Qwest is the overall contractor for the facilities board’s technology program, called “Students FIRST,” which the Arizona legislature enacted in 1998 to comply with a state supreme court decision.
Five months after the accounting fraud allegedly took place, Qwest began withholding its services to the project in a dispute that became a public controversy over the total cost of the deal, variously estimated at $100 million or $170 million. The reason for the discrepancy was that many schools had not yet been surveyed to determine what technology they required to reach the project’s technology standard. (“Arizona’s One-Stop Internet Education Zone Hits a Snag,” June 19, 2002.)
That dispute was resolved last September, and a scaled-down, $140 million version of the project was restarted.
Philip E. Geiger, a former schools superintendent and the former president of a company that manages charter schools, was hired by the Arizona facilities board in 1999 and developed its program to wire state classrooms and install equipment meeting a common technical standard. He also set up the process for selecting the vendors, including Qwest.
Mr. Geiger resigned last May because of an unrelated controversy over his outside consulting business.
He says that Qwest approached him in 2001 and asked that the facilities board complete the purchase of millions of dollars of equipment needed for the technology project, even though the schools were not ready for the equipment to be installed.
“They asked us to transfer ownership of Cisco equipment from them to us,” Mr. Geiger said in an interview with Education Week last month. “They told me it’s sitting in a warehouse, and unless we take possession, they’re going to have to give it to other customers.”
According to Mr. Geiger, the board agreed to complete the purchase so it would not lose the equipment, which would have caused big delays to the project.
But the board insisted on several conditions—principally, that Qwest would have to store the equipment in its warehouse, be responsible for it, and take back any equipment that turned out not to be needed in the schools, Mr. Geiger said.
He said he did not know that the company wrote the revenue from the deal into its books immediately by calling it a “buy and hold agreement,” or that, at the time, standard accounting rules barred companies from counting such revenues under the conditions that the facilities board tied to it.
“I certainly and no one else in [the school facilities board] have never been engaged in [Qwest’s] accounting process,” he said.
The school facilities board was scrupulous in approving its contracts, Mr. Gieger said. “Every document I signed on that transfer of the equipment,” he said, “I had reviewed by the assistant [state] attorney general on that issue.”
The company, which has teetered on the edge of bankruptcy and brought in new top management during the past year, has distanced itself from the indicted former officials, at least one of whom the company fired in August.
Claire Maledon, a spokeswoman for Qwest, which provides local telephone services in 14 states, including Arizona, said the company holds its executives to the highest standard of integrity and would complete the school wiring project this summer on schedule.
