settlement bill may go up
Some shareholder groups opt out of class-action case
By Jeff Smith
Rocky Mountain News
Friday, May 5, 2006
Qwest Communications may have to cough up hundreds of
millions of dollars more to settle civil securities fraud
allegations stemming from the Joe Nacchio era. Shareholder
groups alleging investment losses of $2.8 billion from 1999
to 2002 have opted out of a proposed $400 million
class-action settlement, according to a regulatory filing
Most made their decision in recent weeks, and many are
pursuing separate lawsuits against Qwest and its former
While eventual settlements still are likely to be a fraction
of the total investment loss, a wild card is what damages a
jury might decide to award if any of the cases go to trial.
Simon Flannery, a telecommunications analyst at the New York
investment banking firm of Morgan Stanley, wrote in a report
Thursday that the "significant numbers" of shareholders
deciding to exclude themselves from the class-action
settlement causes concern.
"This raises the risk of higher legal expenses and
settlements, and could even threaten the proposed
class-action settlement," Flannery wrote.
Flannery and another Morgan Stanley analyst were the first
to question Qwest's accounting during Nacchio's regime in
Qwest Chief Executive Dick Notebaert said in a telephone
interview Wednesday that "obviously" the Denver telco would
like every plaintiff to stay in the class-action
settlement. But he added it's almost become the norm for
some investors to opt out.
"Assuming everything is approved (on the proposed
class-action settlement), a majority of the litigation is
done," Notebaert stressed.
Kathleen Walsh, spokeswoman for Lerach Coughlin, the lead
law firm for the class-action plaintiffs, said in response
to the Flannery report that the law firm doesn't comment on
The next hearing on the proposed class-action settlement is
scheduled for May 19 in U.S. District Court in Denver.
Qwest may be a victim of its own success, with institutional
investors more aggressive now that the company is on firmer
But Donna Jaegers, a telecommunications analyst at Janco
Partners in Greenwood Village, sees something else at play:
the recent indictment of former Qwest CEO Nacchio on 42
counts of insider trading.
"If he goes to trial and he's shown to be guilty of
manipulating the numbers, then that strengthens the hands of
these other lawsuits against Qwest," Jaegers said.
The proposed class-action settlement actually is $650
million because it includes the $250 million Qwest agreed to
pay to settle fraud allegations made by the Securities and
Qwest already had put $750 million into a reserve to cover
litigation, which would be down to around $100 million after
paying off the class-action claims. But the company has not
made any adjustments to its reserves.
Qwest reiterated in a quarterly filing Wednesday that the
reserve is the best estimate of its minimum liability.
"The ultimate outcomes of these matters are still uncertain
and the amount of loss we may ultimately incur could be
substantially more than the reserves we have provided," it
Curtis Kennedy, attorney for the Association of U S West
Retirees, said the opt-outs play to the advantage of the
little investors such as individual retirees.
"When the institutions pull out, a bigger piece of pie is
left to be shared by everyone who's left."
Cracks in Qwest's proposed class-action settlement?
Investors that recently
opted out: New York State Common Retirement
Fund, San Francisco Employees Retirement System, Fire and
Police Pension Association of Colorado, Pennsylvania Public
School Employees' Retirement System and a number of
Total alleged investment
losses: $1.9 billion
Groups that opted out before
the proposed class-action settlement was announced last
year: State of New Jersey, California State
Teachers' Retirement System, State Universities Retirement
System of Illinois, Stichting Pensioenfonds, New York City
pension funds, Shriners Hospital for Children, Teachers'
Retirement System of Louisiana
Total alleged investment
losses: $900 million
- 3 cents