Qwest settles suit
Tentative $400 million pact addresses investor claims

By Jeff Smith
Rocky Mountain News

Wednesday, November 2, 2005

Qwest Communications on Tuesday announced that it settled its consolidated class-action shareholder suit for $400 million, erasing a huge dark cloud stemming from the telco's accounting scandal of 1999-2002.

"This lawsuit has been a significant overhang on our stock in our opinion, and its settlement represents an important step for the company," Qwest CEO Dick Notebaert said during a conference call.

Said Donna Jaegers, a telecommunications analyst with Janco Partners in Greenwood Village:  "This was really the big dog."

The proposed settlement resolves the biggest chunk of shareholder lawsuits alleging that the Denver telco misled investors and inflated its sales by billions of dollars during the tenure of former CEO Joe Nacchio.

Qwest said Arthur Andersen, a co-defendant and Qwest's former auditing firm, would be contributing $10 million to Qwest to help settle the claims.

The tentative deal, which must be approved by the court, would settle claims against Qwest and some of its former executives and directors but not against Nacchio or former Chief Financial Officer Robert Woodruff.  The plaintiffs said Tuesday that they plan to proceed to trial against Nacchio and Woodruff.

In a telephone interview, Notebaert likened the importance of resolving the company's largest litigation to settling accounting fraud allegations with the Securities and Exchange Commission for $250 million last year.

But the deal isn't a sure thing.

The plaintiffs in the consolidated lawsuit led by the New England Health Care Employees Pension Fund have the option of terminating the agreement if Qwest isn't allowed to distribute the $250 million SEC settlement to the class of shareholders.  That effectively would make Tuesday's agreement a $650 million settlement.

The class-action settlement consolidates many lawsuits but doesn't cover eight similar, albeit smaller, lawsuits filed mostly by pension funds.  One of those pension funds, the California State Teachers' Retirement System, or Calstrs, said Monday that it intends to separately pursue litigation against Qwest, Nacchio and others.

It's not unusual for some institutional investors to opt out of a settlement, betting on eventually winning a premium over what the overall class stands to recover.

Qwest had hoped for a global settlement resolving all securities fraud suits.  But a mediation session with all the plaintiffs last year failed spectacularly, with one participant describing the scene as the "room blew up."

Qwest was still trying hard to get the various holdouts to join in the class-action settlement in recent weeks, according to a source familiar with the negotiations.

Randall Fons, SEC regional director in Denver, said the SEC hasn't made any decision on how to distribute the $250 million SEC settlement.  Qwest has paid the first $125 million installment, which is in an interest-bearing account, Fons said.

"We'll be looking for the most effective, efficient and cost-beneficial way to get the money back to aggrieved investors," Fons said.  Sometimes that's through a class-action settlement, he said.

At one time, lawyers for the class-action suit had threatened to go after billions of dollars.

But the $400 million settlement wound up within the amount Qwest already had placed into a litigation reserve.  Qwest had put $750 million into the reserve, with $500 million remaining after subtracting the $250 million SEC settlement.

The class in the $400 million settlement includes all individuals who purchased Qwest stock between May 24, 1999, and July 28, 2002.

So, is the settlement fair?

"Fair?  No," said John Breane, counsel for the New England Health Care Employees Pension Fund.

"The losses are probably in the many of billions of dollars for the (entire) class," Breane said.  "But you have to be realistic as well in terms of pushing the corporation.  A major factor in the negotiations is what the company can pay and still stay in business."

Patrick Coughlin, partner of Lerach Coughlin Stoia Geller Rudman & Robbins, the lead law firm in the litigation, said that a lot of companies facing such litigation will just "disappear" or go bankrupt.

"We always wanted more money . . . (but) you've got to hand it to these guys for doing the job they did, revamping the management and staying around," Coughlin said of Qwest and the team led by Notebaert.  "It's a good settlement based on the economics of the company."

Coughlin said Nacchio and Woodruff aren't included in the settlement because "we're interested in something more (from them), so we're going to proceed with the case against them."

He noted that Woodruff was the CFO during much of the time in question and sold about $50 million of Qwest stock. Nacchio, who is under criminal investigation, cleared around $250 million while at Qwest.

In a statement Tuesday, Charles Stillman, Nacchio's attorney, reiterated that Nacchio "has repeatedly denied any wrongdoing, and will defend this case and fully assert his rights and defenses as Qwest's former CEO."

Woodruff couldn't be reached for comment.

Coughlin and others said Qwest at different points offered a combination of cash and stock.  But the plaintiffs deemed that taking Qwest stock was too risky, especially when the distribution isn't likely to take place for a year.

Attorneys said it's too early to know how many stockholders will qualify for the settlement and how much the settlement will work out to on a per-share basis.

Qwest's stock was virtually unchanged Tuesday, despite the news.  But the market was down overall, and Qwest also announced modest third-quarter results.  In addition, many investors may have figured a similar settlement into their valuation of Qwest stock.

But Qwest's ability to settle its biggest civil securities case by using its reserve rather than tapping its cash account may already have had an effect:  Qwest announced plans Tuesday to buy back $3 billion of high-interest debt, using mostly cash.

Settlement checklist

Qwest Communications said Tuesday that it has reached an agreement on settling its consolidated class-action shareholder lawsuit for $400 million, the latest step toward clearing the decks of its accounting scandal from 1999 to 2002. Here's the scorecard:

Settled

Securities and Exchange Commission:  $250 million

Consolidated securities fraud lawsuit:  $400 million

Still pending

  Eight lawsuits, mostly by pension funds, alleging that Qwest misled investors

  One suit alleging that Qwest mismanaged employee 401(k) plan

  One suit alleging that KPN Qwest's revenues were inflated

  Technically, Qwest still is under investigation by the Department of Justice.

Shareholders still are suing former Qwest CEO Joe Nacchio.

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