Free Motion to Consolidate Cases - District Court of Colorado - Colorado

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 187 187 Document 1035-3 08/07/2006 Page 1 of 1 of

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. DENVER EMPLOYEES RETIREMENT PLAN, Plaintiff, v. QWEST COMMUNICATIONS INTERNATIONAL, INC.; PHILIP F. ANSCHUTZ; CRAIG D. SLATER; JOSEPH P. NACCHIO; ROBIN R. SZELIGA; ROBERT S. WOODRUFF; STEPHEN M. JACOBSEN; MARC B. WEISBERG; DRAKE S. TEMPEST; JAMES A. SMITH; LEWIS D. WILKS; and ARTHUR ANDERSEN LLP Defendant. COMPLAINT JURY TRIAL DEMANDED

554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 187 187 Document 1035-3 08/07/2006 Page 2 of 2 of

TABLE OF CONTENTS I. II. III. INTRODUCTION.............................................................................................. 1 JURISDICTION AND VENUE ......................................................................... 5 THE PARTIES................................................................................................... 6 A. B. Plaintiff................................................................................................... 6 Defendants.............................................................................................. 7 2. Individual Defendants ................................................................. 7 a. b. 3. IV. A. Members of Qwest' Board of Directors .......................... 7 s Senior Management ......................................................... 8

Arthur Andersen LLP ................................................................ 13

BACKGROUND.............................................................................................. 13 Qwest' Formation and Growth ............................................................ 14 s 1. 2. 3. B. C. Qwest Communications International, Inc. is Formed................ 14 Qwest Acquires US West in a Reverse Merger .......................... 15 Qwest Promotes an Image of a Dynamic Company with Significant, Sustainable Growth ................................................ 16

Qwest Restates its Financials for 2000, 2001, and First Quarter 2002.... 21 Andersen' Role in the Qwest Fraud ..................................................... 24 s

V.

QWEST' UNLAWFUL MANIPULATION OF ITS FINANCIAL RESULTS S THROUGH IMPROPER TRANSACTIONS AND ACCOUNTING................ 25 A. IRU Capacity Sale Transactions............................................................ 25 1. 2. 3. 4. 5. 6. 7. B. C. STAR Telecommunications, Inc. Transaction............................ 26 Electric Lightwave Inc. Transaction .......................................... 27 CAIS Internet Inc. Transaction .................................................. 27 Novus Networks, Inc. Transaction............................................. 28 ICG Communications Inc. Transaction ...................................... 28 UUNet Transaction ................................................................... 29 Enron IRU Transactions ............................................................ 32

Use of Reciprocal Transactions with KMC to Manipulate Financial Results .................................................................................................. 36 Warwick Valley Telephone Company Improper Revenue Recognition . 37

- i554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 187 187 Document 1035-3 08/07/2006 Page 3 of 3 of

D. E. F. G. H. I. J. VI. A. B. VII.

Concealment of Qwest' Pension Credit ............................................... 37 s Directory Services Manipulations ......................................................... 38 Undisclosed Suspension of Depreciation on Certain Assets................... 41 Consumer and Small Business Services Manipulations ......................... 41 Improper Revenue Recognition on Bill and Hold Transactions ............. 42 Genuity Contract Income Overstatement............................................... 43 Pension Assumptions ............................................................................ 44 KPNQwest Investment.......................................................................... 46 Qwest Improperly Avoided Recording Charges of $2.1 Billion from Losses on its Property and Equipment and Accrued Liability ................ 49 IRU Sales Manipulations ...................................................................... 52 Equipment Sales ................................................................................... 53 Directory Publishing Services Revenues and Costs ............................... 56 KPNQwest Valuation............................................................................ 57 Investment in Qwest Digital Media ....................................................... 57 Other Accounting Improprieties ............................................................ 58 Qwest' Financial Statements Violated Fundamental Concepts of GAAP s ............................................................................................................. 58 Qwest Admits Publishing Materially Incorrect Financial Results .......... 60 Cable & Wireless .................................................................................. 64 FLAG Telecom..................................................................................... 65 Global Crossing .................................................................................... 66

QWEST' ADDITIONAL FINANCIAL STATEMENT IMPROPRIETIES .... 44 S

QWEST RESTATES ITS FINANCIAL STATEMENTS ................................. 50 A. B. C. D. E. F. G. H.

VIII.

THE UNITED STATES CONGRESS INVESTIGATES QWEST ................... 61 A. B. C.

IX. X. XI. XII.

THE SEC INVESTIGATES QWEST............................................................... 69 THE DEPARTMENT OF JUSTICE INVESTIGATES QWEST ...................... 71 THE FALSE AND MISLEADING STATEMENTS ISSUED BY DEFENDANTS PRIOR TO AND DURING THE RELEVANT PERIOD ....... 73 SCIENTER .................................................................................................... 145 A. B. Individual Defendants'Insider Trading ............................................... 147 Qwest/US West Merger Stock Price Terms ......................................... 151

- ii 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 187 187 Document 1035-3 08/07/2006 Page 4 of 4 of

XIII.

ARTHUR ANDERSEN' PARTICIPATION IN THE FRAUD..................... 151 S A. B. C. D. E. Arthur Andersen' False Statements as to Qwest' 1999 Financial s s Statements ................................ ................................ .......................... 153 Arthur Andersen' Fals e Statements as to Qwest' 2000 Financial s s Statements ................................ ................................ .......................... 154 Arthur Andersen Ignored the Audit Evidence It Gathered ................... 155 Arthur Andersen' Audit Procedures with Respect to Qwest' Failure to s s Properly report Its Swap Transactions ................................ ................. 156 Arthur Andersen Knew Qwest' Financial Statements Were Not Free of s Material Misstatements ................................ ................................ ....... 159

XIV. XV.

APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE ................................ ................................ .................. 160 TOLLING OF THE STATUTE OF LIMITATIONS ................................ ...... 161 A. B. Defendants Actively Concealed and Denied the Existence of Any Accounting Improprieties ................................ ................................ .... 161 Tolling of Statute of Limitations by the Filing of The Class Action ..... 162

XVI.

STATUTORY SAFE HARBOR ................................ ................................ .... 164

FIRST CLAIM FOR RELIEF FOR VIOLATION OF SECTION 10(B) OF THE 1934 ACT AND RULE 10B-5 AGAINST ALL DEFENDANTS............................ 165 SECOND CLAIM FOR RELIEF FOR VIOLATION OF SECTION 20(A) OF THE 1934 ACT AGAINST DEFENDANTS ANSCHUTZ, NACCHIO, WOODRUFF, AND SZELIGA ................................ ................................ ............................. 166 THIRD CLAIM FOR RELIEF FOR VIOLATIONS OF SECTION 18 OF THE 1934 ACT AGAINST QWEST, WOODRUFF, ANSCHUTZ, NACCHIO, SLATER, AND SZELIGA ................................ ................................ ............................. 167 FOURTH CLAIM FOR RELIEF FOR VIOLATIONS OF SECTION 18 OF THE 1934 ACT AGAINST ARTHUR ANDERSEN ................................ ....................... 169 FIFTH CLAIM FOR RELIEF FOR VIOLATION OF SECTION 20A OF THE 1934 ACT AGAINST NACCHIO, ANSCHUTZ, SZELIGA, WOODRUFF, JACOBSEN, TEMPEST, WEISBERG, SMITH, WILKS, AND SLATER ..... 171 SIXTH CLAIM FOR RELIEF VIOLATION OF COLORADO SECURITIES ACT C.R.S. §§ 11-51-501 AND 11-51-604(3) AGAINST ALL DEFENDANTS.... 172 SEVENTH CLAIM FOR RELIEF VIOLATION OF COLORADO SECURITIES ACT C.R.S. § 11-51-501 AND 11-51-604(5)(B) AGAINST DEFENDANTS ANSCHUTZ, NACCHIO, WOODRUFF, AND SZELIGA ............................ 174

- iii 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 187 187 Document 1035-3 08/07/2006 Page 5 of 5 of

EIGHTH CLAIM FOR RELIEF AIDING AND ABETTING QWEST' VIOLATION S OF C.R.S. § 11-51-501 AND 11-51-604(5)(C) AGAINST ARTHUR ANDERSEN ................................ ................................ ................................ .. 175 NINTH CLAIM FOR RELIEF COMMON LAW FRAUD AGAINST ALL DEFENDANTS ................................ ................................ ............................. 175 TENTH CLAIM FOR RELIEF AIDING AND ABETTING COMMON LAW FRAUD AGAINST ALL DEFENDANTS EXCEPT QWEST................................ ...... 176 ELEVENTH CLAIM FOR RELIEF NEGLIGENT MISREPRESENTATION AGAINST ALL DEFENDANTS ................................ ................................ ... 177 TWELFTH CLAIM FOR RELIEF FOR COMMON LAW CIVIL CONSPIRACY AGAINST ALL DEFENDANTS ................................ ................................ ... 179 PRAYER FOR RELIEF................................ ................................ ............................. 181 JURY DEMAND................................ ................................ ................................ ....... 181

- iv 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 187 187 Document 1035-3 08/07/2006 Page 6 of 6 of

I.

INTRODUCTION 1. Denver Employees Retirement Plan (hereinafter referred to as "Plaintiff"), brings

this action (the "Action") against Qwest Communications International, Inc. ("Qwest"), Philip F. Anschutz, Craig D. Slater, Joseph P. Nacchio, Robin R. Szeliga, Robert S. Woodruff, Stephen M. Jacobsen, Marc B. Weisberg, Drake S. Tempest, James A. Smith, Lewis O. Wilks, and Arthur Andersen LLP (collectively, "Defendants"). 2. The Action arises out of Defendants'fraudulent and unlawful practice of

significantly and materially overstating Qwest' publicly-reported growth, revenues, earnings, s and earnings per share between at least as e arly as March 31, 1999 and July 28, 2002 (the "Relevant Period"). Defendants'unlawful conduct was intended to, and did, artificially inflate the value and price of Qwest' securities to the detriment of Plaintiff. s 3. During the Relevant Period: a. Qwest entered into transactions with little or no legitimate business

purpose, and engaged in improper accounting practices, with the result that Qwest' financial s results as publicly reported were inaccurate, false and misleading; b. Qwest filed with the Securities and Exchange Commission ("SEC"), and

published and distributed for public review, annual, quarterly and other reports, as well as registration statements and prospectu ses in connection with securities issuances, which contained false and misleading information; c. Defendants issued press releases, made public statements, held or

appeared at investor conferences and similar events or otherwise publicly communicated false

- 1554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 187 187 Document 1035-3 08/07/2006 Page 7 of 7 of

and misleading information about Qwest' business, business prospects, investments, financial s results and similar matters; and d. Defendants assured Wall Street analysts and others that Qwest' business s

and financial results were sound, even as similarly situated telecommunications companies were experiencing revenue and earnings declines, causing their securities prices to fall. Defendants orchestrated this fraud to create a false perception that Qwest was a dynamic, growing business that consistently met or exceeded Wall Street expectations. 4. Defendants'unlawful conduct during the Relevant Period served to maintain

Qwest' common share price at artificially high levels and enabled (i ) Qwest to acquire US West, s Inc. ("US West") in July 2000 in a stock for stoc k transaction valued in excess of $44 billion and (ii) various of the Individual Defendants (as hereinafter defined) to sell their personally held Qwest shares for proceeds in excess of five hundred million dollars. Certain of the Individual Defendants so ld their Qwest common shares at inflated values at about the same time that Plaintiff DERP was purchasing its Qwest shares. 5. Both in number and magnitude, Qwest' improper transactions and accounting s

violations as alleged herein are substantial. They demo nstrate Defendants'fraudulent intent to deceive the investing public as to the true nature of Qwest' business. Qwest' accounting s s violations include, but are not limited to: a. Fraud relating to transfers of optical capacity, including, but not limited to ,

optical capacity transfers with (i) Global Crossing; (ii) Enron; (iii) FLAG Telecom Holdings Ltd. ("FLAG"); and (iv) Cable & Wireless, Inc. ("C&W");

- 2554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 187 187 Document 1035-3 08/07/2006 Page 8 of 8 of

b.

Fraud relating to equipment sales, including, but not limited to, over stated

equipment sales with (i) Genuity, Inc.; (ii) the Arizona School Facil ities Board ("ASFB"); and (iii) KMC Telecom Holdings, Inc. ("KMC"); c. Fraud relating to the shifting of delivery dates of telephone directories

published by QwestDex, Inc. ("QwestDex") for the purpose of boosting reve nue as needed to meet various Wall Street earnings estimates and guidance; d. in KPNQwest; and e. Fraud relating to the overstatement of Qwest' property, plant and s Fraud relating to the retention of an inflated value of Qwest' investment s

equipment in 2000 and 2001. Instead of writing down the fair value of these assets in accordance with General Accepted Accounting Principles ("GAAP") when it became clear that their value was impaired, Qwest continued to carry the assets on its books at inflated values. 6. During the Relevant Period, and in connection with publishing false and

misleading financial statements, Qwest violated numerous applicable accounting standards, principles, rules and regulations, including but not limited to, GAAP, interpretative publications and opinions of the American Institute of Certified Public Accountants'Financial Accounting Standards Board ("FASB"), Statements of Financial Accounting Standards ("SFAS") and Accounting Principles Board ("APB") opinions, and SEC Ru le 4-01(a) of SEC Regulation S-X (17 C.F.R. 9210.4-01 (a) (1)). 7. Arthur Andersen LLP ("Andersen") issued unqualified audit opinion letters with

respect to Qwest' annual financial statements for the years 1999, 2000 and 2001 and designed, s approved of and/or "passed" on numerous Qwest accounting improprieties. In connection with

- 3554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 187 187 Document 1035-3 08/07/2006 Page 9 of 9 of

performing its independent public accounting services, as alleged herein, Andersen violated Generally Accepted Auditing Standards ("GAAS"). In its capacity as Qwest' auditor, during s the Relevant Period , Andersen earned millions in fees from Qwest, all to the detriment of Plaintiff. 8. In early 2002, Qwest came under increasing regulatory and public scrutiny. In

March 2002, Qwest announced that the SEC had begun an investigation of its accounting practices. In April 2002, Qwest announced that the SEC had issued a formal notice of investigation. Then, on July 28, 2002, Qwest announced that it would need to restate prior period financials. In separate disclosures in October and December 2003, Qwest admitte d to overstating its revenues by $2.874 billion and understating its losses by $25.488 bi llion during the period January 1, 2000 through March 31, 2002. Income was overstated by $2.497 billion in 2001 and by $1.432 billion in 2000, and Qwest' pension fund "surplus," reported to be $4.1 s billion as of December 31, 2000, had become a deficit of $314 million by December 2002. The restatements involved revenue recognition issues related to optical capacity asset transactions, equipment sales and directory pub lishing procedures, as well as Qwest' purchase accounting for s the US West transaction, Qwest' maintenance of assets on its financial statements at excessive s values at a time when Qwest knew that the values of such assets were impaired, and numerous other accounting improprieties and errors. 9. As the truth concerning Qwest' use of accounting manipulations and improper s

transactions to manage its financial results began to be revealed, Qwest' stock price dropped to s a fraction of the amount at which Plaintif f had acquired its securities. Revelations of the fraud led to investigations of Qwest by the United States Congress and the United States Department

- 4554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 10 of 187 Document 1035-3 08/07/2006 Page 10 of 187

of Justice ("DOJ") in addition to the SEC. In July 2002, Defendant Joseph Nacchio resigned as Qwest' CE O and co-chairman of the board. Shortly thereafter, Qwest was forced to sell its s profitable directory publishing units, QwestDex, to raise funds to survive. 10. As a result of Qwest' unlawful conduct, to date: s a. Qwest has settled civil fraud charges brought b y the SEC and agreed to

pay the SEC $250 million as part of that settlement; b. Four former Qwest executives have pled guilty to criminal charges,

including securities fraud, in proceedings initiated by the DO J. These individuals are Robin R. Szeliga, who s erved as Qwest CFO fro m April 18, 2001 through August 28, 2003, and who succeeded Robert S. Woodruff in that position; Marc B. Weisberg, Qwest Executive Vice President responsible for mergers and certain Irrevocable Right of Use ("IRU") sale transactions; Thomas Hall, Senior Vice President of Qwest' Global Business Market Unit ("GBMU"); and s Grant Graham, CFO of the GBMU. Qwest' former CEO, Joseph Nacchio, was indicted on s December 20, 2005 after a three-year investigation on 42 counts of criminal insider trading; and c. Qwest has agreed to settle federal securities fraud class litigation pending

in the District of Colorado for $400 million. 11. Plaintiff purchased or acquired Qwest securities during the Relevant Period and

has suffered many millions of dollars of losses as the result of Defendants'unlawful acts as alleged herein. II. JURISDICTION AND VENUE 12. Jurisdiction over those claims arising under the Securities Exchange Act of 1934

is conferred by § 27 of that Act, 15 U.S.C.A. §78aa.

- 5554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 11 of 187 Document 1035-3 08/07/2006 Page 11 of 187

13.

The federal claims asserted herein arise under 15 U.S.C. § 78j(b) (Section 10(b)

of the 1934 Act) ; 15 U.S.C. § 78r (Section 18 of the 1934 Act); and 15 U.S.C. § 78t(a) (Section 20(a) of the 1934 Act); and 15 U.S.C. § 78t-1 (Section 20A of the 1934 Act). 14. The Court has supplemental jurisdiction under 28 U.S.C. § 1367(a) over the

Colorado Securities Act claims alle ged herein (Colo. Rev. Stat. §§ 11 51 501, et seq.) and the common law claims alleged herein. 15. Venue is proper in this District pursuant to § 27 of the Securities Exchange A ct of

1934, 15 U.S.C.A. § 78aa. Many of the false and misleading statements were made in or issued from this District. 16. Qwest' principal executive officers are in Denver, Colorado, where the day -tos

day operations of the Company are directed and managed. III. THE PARTIES A. 17. Plaintiff The Denver Employees Retirement Plan is a defined benefit retirement plan

established in 1963 for the purpose of providing benefits for its members and beneficiaries upon retirement, disability, or death. The City and County of Denver , Colorado and the Denver Health and Hospital Authority, as well as their employees, contribute a percentage of the employees'wages to the trust fund. Contributions, plus income from investments, fund the benefits for members an d beneficiaries. As of Ja nuary 1, 2006, there were 18,377 total participants or members in the Plan. This number was comprised of 8,634 active members, 3,543 terminated vested members, 522 members in the Deferred Retirement Option Plan

- 6554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 12 of 187 Document 1035-3 08/07/2006 Page 12 of 187

(DROP) and 5,678 retired members. As of Jun e 30, 2006 the Plan had over $1.7 billion in assets. 18. From June 1999 to July 28, 2002, Plaintiff purchased 58,800 shares of Qwest

stock. As a result of these purchases of Qwest stock, Plaintiff suffered losses in the amount of approximately $ 1.2 million. B. 19. Defendants Defendant Qwest is a Delaware corporation with its corpora te headquarters

located at 1801 California Street, Denver, Colorado 80202. Qwest is a telecommunications and internet services company. The Company files annual, quarterly and other reports with the SEC, and its common stock is listed and traded on the New York Stock Exchange ("NYSE") under the symbol "Q". The NYSE is an efficient market. 2. Individual Defendants a. 20. Members of Qwest' Board of Directors s

During the Relevant Period, Defendan t Philip F. Anschutz ("Anschutz") was co -

chairman of the Qwest board of directors. Through his ownership of the Anschutz Company, which, during the Relevant Period, owned approximately 284 million shares of Qwest, and other Anschutz entities, Anschutz is Qwest' largest shareholder. According to a Qwest Form 13D s filed on October 23, 2003, on that date Anschutz and his companies beneficially owned 17.1% of Qwest. In May 1999, Anschutz sold 33.3 million shares of his Qwest stock for proceeds in excess of $ 1.5 billion. In May and June 2001, Anschutz sold a total of 5.1 million shares of Qwest st ock for $213.5 million. On May 2, 2001, according to a Business Week article

- 7554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 13 of 187 Document 1035-3 08/07/2006 Page 13 of 187

examining insider trades at Qwest, Anschutz sold approximately 10 million shares of Qwe st for $408 million. 21. Defendant Craig D. Slater ("Slater") is a director of Qwest. During the Relevant

Period Slater served as President of Anschutz Investment Company and Executive Vice President of The Anschutz Company and The Anschutz Corporation. Slat er collected over $38.4 million from the sale of Qwest shares between April 2000 and April 2001. On April 26, 2001, Slater (i) acquired 350,000 Qwest shares through the exercise of optio ns at $15.00 per share and (ii) sold these shares for $38.94. He col lected $13.6 million from that sale. b. 22. Senior Management

Defendant Joseph P. Nacchio ("Nacchio") joined Qwest in January 1997 as

President and Chief Executive Officer. From February 1999 until June 2002, Nacchio was Chairman and Chief Executive Officer of Qwest. Between August 1999 and May 2001, Nacchio sold 4,983,467 shares of his Qwest stock for proceeds of $213.48 million. Between January and June 2001, Nacchio sold 3.9 million Qwest shares for $140.8 million. During the Relevant Period, Nacchio was al so paid millions of dollars in salary and bonuses. At the request of Qwest' Board of Directors, Nacchio resigned as an officer and as a member of the board as of s June 16, 2002. Nacchio received severance pay of $12.2 million in addition to his $1.1 mill ion salary for the first half of 2002. He also received additional compensation of $479,964. In October 2003, Nacchio agreed to pay $400,000 to settle charges brought by the New York State Attorney General for improperly profiting from initial public off ering ("IPO") shares offered to him by Solomon Smith Barney ("SSB") in exchange for him to give Qwest' banking business to s

- 8554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 14 of 187 Document 1035-3 08/07/2006 Page 14 of 187

SSB, a division of Citigroup, Inc. In December 2005, after a three -year investigation, the Department of Justice indicted Nacchio o n 42 counts of criminal insider trading charges. 23. Defendant Robin R. Szeliga ("Szeliga") was Qwest' Chief Financial Officer s

from April 18, 2001 until July 7, 2002. Prior to her appointment as CFO on April 18, 2001, Szeliga was Senior Vice Presi dent of Fin ance, and from March 1, 2001 through April 18, 2001, following the dep arture of the prior CFO, Robert S. Woodruff, Szeliga was Interim Chi ef Financial Officer. On April 30, 2001, Szeliga sold 10,000 shares of her Qwest stock for proceeds of $410,000. In July 2002, Szeliga resigned as Qwest CFO to take a lesser position in the company, executive vice president of finance. Szeliga left Qwest in August 2003. In June 2004, the Department of Justice indicted Robin Szeliga for insider trading. She subsequent ly entered into a plea agreement and agreed to cooperate with prosecutors. 24. Defendant Robert S. Woodruff ("Woodruff) was Qwest' Chief Financial Offic er s

until his departure on March 2, 2001. In his capacity as Qwest' Chief Financial Officer, s Woodruff was directly responsible for the accuracy and truthfulness of Qwest' financial s statements, and for the accounting treatment accorded by Qwest to the numerous improper transactions during the Relevant Period through at least Dece mber 31, 2000, as alleged herein. During the Relevant Period, Woodruff sold 1,155,000 shares of his Qwest stock f or proceeds of $52.79 million. 25. Defendant Steven M. Jacobsen ("Jacobsen") was Executive Vice President of the

Qwest GBMU. Jacobsen participated in a scheme to inflate Qwest revenues from transactions with Genuity Inc. and was also aware of the improper "flash" revenue recognition practices, as

- 9554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 15 of 187 Document 1035-3 08/07/2006 Page 15 of 187

alleged herein. During the Relevant Period, Jacobsen sold 1,036,900 shares of his Qwest stock for proceeds of $49.57 million. 26. Defendant Marc B. Weisberg ("Weisberg") was, until September 2001, Executive

Vice President of Corporate Development at Qwest. Weisberg was responsible for mergers and acquisitions at Qwest, and was involved in Qwest merger with U.S. West. In June 2001, Weisberg and other Qwest employees persuaded Sonus Networks and Broadband Utility Resources to buy a $20 million IRU from Qwest. In return, Qwest was to buy $33.6 million in equipment from Sonus Networks. During the relevant period, Weisberg sold 793,750 share s of his Qwest stock for proceeds of $37.84 million. In 2004, Marc Weisberg, a former Qwest EVP, was indicted by the Department of Justice on wire fraud and money l aundering charges. On December 28, 2005, six days before his scheduled trial, Weisberg ple d guilty to one count of wire fraud and agreed to pay a $250,000 fine. 27. Defendant Drake S. Tempest ("Tempest") was Qwest' Executive Vice President, s

General Counsel, Chief Administrative Officer and Corporate Secretary. Between November 1999 and April 2001, during the peak period of Qwest' stock prices, Tempest sold 476,600 s shares of Qwest stock for proceeds of approximately $21.48 million. Tempest resigned from Qwest on December 8, 2002. He received $1.8 million in severance pay and $155,696 in "other" pay, including $54,480 for "travel and living" expenses. 28. Defendant James A. Smith ("Smith") was Qwest' Executive Vice President for s

Small Business and Consumer Markets. Smith sold 281,826 shares of his Qwest stock for proceeds of $11.48 million between August 2000 and April 2001. Smith realized most of his

- 10 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 16 of 187 Document 1035-3 08/07/2006 Page 16 of 187

gains on April 26, 2001, before Qwest' stock dropped precipitously in the summer of 2001, s when he sold 208,130 shares for approximately $8.11 million. 29. Defendant Lewis O. Wilks ("Wilks") was President, Internet and Multi -Media

Markets at Qwest until October 2000 when he became Executive Vice President, Internet Business Development and Chief Strategy Officer of Qwest. Wilks was involved in several improper "bill and hold" transactions as alleged here in. Wilks resigned from Qwest in September 2001. During the Relevant Period, Wilks sold 1,415,000 shares of his Qwest stock for proceeds of $65.16 million. 30. Defendants Anschutz, Slater, Nacchio, Szeliga, Woodruff, Jacobsen, Weisberg,

Tempest, Smith, and Wilks, will be referred to herein as the "Individual Defendants." 31. By virtue of the Individual Defendants'positions within the Company, they had

access to undisclosed adverse information about its business, operations, operational trends, finances, revenue recognition policies and practices, markets, and present and future business prospects. The Individual Defendants would ascertain such information through Qwest' s internal corporate documents (including the Company' operating plans, budgets, forecasts, and s reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, conversations and connections with vendors and customers, attendance at sales, management, Office of the Chair and board of dire ctors'meetings, including committees thereof, and through reports and other information provided to them in connection with their roles and duties as Qwest officers and directors. 32. It is appropriate to treat the Individual Defendants collectively each as a group for

pleading purposes and to presume that the materially false, misleading, and incomplete

- 11 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 17 of 187 Document 1035-3 08/07/2006 Page 17 of 187

information conveyed in the Company' public filings, press releases and other publications as s alleged herein was the result of the collective actions of the Individual Defendants identified above. The Individual Defendants, by virtue of their high -level positions within Qwest, directly participated in its management, were directly involved in its day -to-day operations, and were privy to confidential proprieta ry information concerning Qwest and its business, operations, prospects, growth, finances, and financial condition. 33. The Individual Defendants were involved in drafting, producing, reviewing,

approving, and/or disseminating materially false and misleading statements and information concerning Qwest, including SEC filings, press releases, and other public documents; were aware of or recklessly disregarded the fact that materially false and misleading statements were being issued regarding Qwest, and approved or ratified these statements, in violation of federal securities law, Colorado and New Jersey securities laws, and common law. 34. As officers and controlling persons of a publicly -held company whose common

stock was, and is, registered with the SEC pursuant t o the Securities Exchange Act of 1934, and was traded o n the NASDAQ, and since January 3, 2000 on the NYSE, and governed by the provisions of the federal securities laws, the Individual Defendants each had a duty promptly to disseminate accurate and truthf ul information with respect to Qwest' financial condition and s performance, growth, operations, financial statements, business, markets, management, earnings, and present and future business prospects, and to correct any previously issued statements that had become materially misleading or untrue, so that the market price of Qwest' publicly traded s securities would be based upon truthful and accurate information. The Individual Defendants' material misrepresentations and omissions violated these specific r equirements and obligations.

- 12 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 18 of 187 Document 1035-3 08/07/2006 Page 18 of 187

35.

The Individual Defendants, by virtue of their positions of control and authority as

officers and/or directors of Qwest were able to and did control the content of the various SEC filings, press releases, and other public statem ents pertaining to Qwest. The Individual Defendants were provided with copies of the documents alleged herein to be misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly, they are responsible for the accuracy of the SEC filings, public reports, and press releases detailed herein. 3. 36. Arthur Andersen LLP

Defendant Andersen, during the Relevant Period, was a limited liability

partnership headquartered in Chicago, Illinois, and maintained offices in various states and places, including New York and Colorado. Andersen partners resided in various states across the country and throughout the world. Andersen served as Qwest' "independent auditor" from s 1999 through 2001, and provided accounting, tax, and consulting services to Qwest. Qwest paid Andersen millions in fees during the Relevant Period. For example, in 2001 alone, Qwest paid Andersen $1.4 million for auditing, $2.2 million for related services, i ncluding preparing or reviewing certain SEC filings, and $8.3 million for tax-related and consulting services. IV. BACKGROUND 37. Each Defendant is liable for (i) making false statements, and/or (ii) failing to

disclose adverse facts known to him/her about Qwest. Defendants'fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Qwest publicly traded securities was a success, as it (i) deceived the investing public regarding Qwest' prospects and s business; (ii) artificially inflated the prices of Qwest' pu blicly traded securities; (iii) caused s

- 13 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 19 of 187 Document 1035-3 08/07/2006 Page 19 of 187

Plaintiff to purchase or otherwise acquire Qwest publicly traded securities at inflated prices; (iv) allowed the Individual Defendants to sell over 11 million shares of their Qwest stock for proceeds in e xcess of $500 million; and (v) allowed the Qwest/US West merger to be completed. A. Qwest' Formation and Growth s 1. 38. Qwest Communications International, Inc. is Formed

In 1988, Anschutz purchased the Southern Pacific Railroad ("SPR") for

approximately $1.8 billion. Shortly thereafter, an SPR subsidiary, Southern Pacific Telecom ("SP Telecom"), began to lay high technology telecommunications cables along SPR' railroad s lines. SP Telecom leased the fiber to AT&T and other carriers for long dista nce telecommunications services. 39. In 1995, Southern Pacific Telecom combined with Qwest Corporation, a small

Dallas-based digital microwave firm, to form Qwest. In 1996 Anschutz sold SPR to Union Pacific; Qwest, however, retained railroad rights of way n ecessary to continue laying fiber along both SPR' and Union Pacific' railroads. s s 40. In January 1997, Nacchio joined Qwest as CEO. In June 1997, Qwest stock was

offered to the public in an initial pubic offering, raising approximately $320 million. Qwest' s annual revenues had grown from $125 million in 1995 to almost $700 million in 1997. 41. In 1998, Qwest acquired LCI International, Inc., Icon CMT Corp., EUnet

International, Inc. and Phoenix International Inc. By March 1998, following Qwest' acquisition s of LCI International, a long distance telephone company, for $4.4 billion, Qwest had become the fourth largest long -distance carrier in the United States. In November 1998, Qwest and Royal

- 14 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 20 of 187 Document 1035-3 08/07/2006 Page 20 of 187

KPN, the Dutch telephone company, announced a $1.2 billion joint vent ure under the name of KPNQwest to build a fiber -optic Internet Protocol network in Europe. 2. 42. Qwest Acquires US West in a Reverse Merger

In June 1999, Qwest launched a hostile takeover of both US West, a former

Regional Bell Operating Company that provided lo cal telephone service to 14 states, and Frontier Corp., then the nation' fifth largest long distance company. At the time, both US West s and Frontier had signed merger agreements with Global Crossing, a company that was building an undersea international fiber optic network. Shortly thereafter, Global Crossing agreed to acquire Frontier and not to acquire US West and Qwest and US West agreed to merge. US West paid a break-up fee of $140 million to Global Crossing once it agreed to merge with Qwest. 43. Qwest used its stock as currency in its merger with US West. Pursuant to the

merger agreement, US West could cancel the merger if Qwest' share price fell below $22 per s share, and Qwest was obligated to pay US West cash consideration if Qwest' share price fe ll s below $38.40 per share. This was known by the parties to be a "collar" provision in the merger agreement and was designed to protect US West in the event that Qwest' share price fell. The s Qwest and US West boards of directors approved the merger in 1 999 and the merger became effective in June 2000. 44. The merger was accounted for as a reverse acquisition, with US West deemed the

acquirer and its historical financial statements were carried forward as those of the newly combined company. This was significant because it meant that Qwest, when it restated its financials for the period January 1, 2000 through March 31, 2002, was not required to restate

- 15 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 21 of 187 Document 1035-3 08/07/2006 Page 21 of 187

1999 and prior period financials, even though it had engaged in the same kinds of inappropriate transactions in 1999 that it engaged in subsequently during the Relevant Period. 3. 45. Qwest Promotes an Image of a Dynamic Company with Significant, Sustainable Growth

Beginning in 1999 and continuing through early 2002, Qwest and various

Defendants promoted Qwest to anal ysts and the investing public as a high margin technology company as opposed to a low margin, low growth telephone company. Qwest' earnings s releases emphasized the Company' significant projected earnings and revenue growth. s Defendants encouraged invest ors to consider revenue growth as sound earnings indicators of Qwest' business performance. s 46. In Qwest' 1999 Annual Report, issued on March 10, 2000, Nacchio targeted 30 s

35% annual growth in revenue and 40-50% annual growth in earnings before interest, tax es, depreciation and amortization ("EBITDA"). (Letter to Shar eholders, 1999 Annual Report at 6). 47. In Qwest' 2000 Annual Report, issued on March 6, 2001, Nacchio stated, "Our s

pro forma revenue in 2000 grew more than 14% to $19 billion. Pro forma earnings before interest, taxes, depreciation and amortization (EBITDA) grew more than 17% to $7.4 billion. . . . We expect our 2001 revenues in the business market to grow 25 to 30 percent." (Letter to Shareholders, Qwest 2000 Annual Report at 3). Qwest announ ced as a "strategic priority" that it would meet or exceed its financial targets of 15 to 17% revenue growth and 20% growth in EBITDA annually for the next five years (Qwest 2000 Annual Report, at 23). 48. In Qwest' 2001 Annual Report, issued on March 8, 2002, Qwest announced that s

the Company' total revenues grew by 18.6% over revenue figures for 2000. s

- 16 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 22 of 187 Document 1035-3 08/07/2006 Page 22 of 187

49.

In each Annual Report for fiscal years 1999, 2000, and 2001, Qwest emphasized

that it was on track to increase revenue by more than 14% annually. 50. Until the end of second quarter 2001, with one ex ception (quarter ended

December 31, 1999) Qwest also reported pro forma Earnings Per Share that met, or exceeded, Wall Street expectations. This is illustrated in the following Table: QUARTER 6/30/99 9/30/99 12/31/99 3/31/00 6/30/00 9/30/00 12/31/00 3/31/01 6/30/01 51. REPORTED EPS $0.02 $0.03 $0.04 $0.04 $0.05 $0.14 $0.16 $0.13 $0.08 CONSENSUS $0.01 $0.03 $0.05 $0.04 $0.03 $0.10 $0.13 $0.13 $0.11

On June 20, 2001, Morgan Stanley & Co. Inc. ("Morgan Stanley") publ ished an

analysts'report that questioned Qwest' ability to sustain its double -digit growth rates. s ("Morgan Stanley' June 20, 2001 Report" or the "Report"). Morgan Stanley suggested that s Qwest' earnings and rates of growth were not sustainable because Qwest would need to write s down its carrying value in KPNQwest from in excess of $7 billion to approximately $2 billion. The Report also identified certain aggressive accounting techniques used by Qwest, the effect of which were to boost Qwest' revenue. For example, in 2000, Qwest raised the assumed rate of s return on the investment of its pension assets from 8.8% to 9.4%. This action caused this aspect of Qwest' operations to contribute to Qwest revenues of $405 million for fiscal year 2000 as s opposed to a loss of $8.0 million for 1999 under the previously assumed rate of return.

- 17 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 23 of 187 Document 1035-3 08/07/2006 Page 23 of 187

52.

As the result of its findings, Morgan Stanley lowered Qwest' earnings estimates s

and downgrad ed the stock. On June 20, 2001, Qwest stock fell over 9% intra -day, amid heavy volume of 26 million shares-- more than four times the average daily trading volume. 53. Within hours of Morgan Stanley' June 20, 2001 Report' release, Nacchio s s

convened an analysts'conference call. During this call he stated: Number one, there are no accounting issues or improprieties in Qwest' financial reporting. Let me repeat that, there are no s accounting issues or improprieties in our reporting. . . . Two, innuendoes on our integrity are not going to be tolerated, irrespective of who makes them including what I used to believe was a reputable firm, Morgan Stanley. Thirdly, and very importantly, as a fiduciary of your investment money, the unsupportable assertions made in this report about our ability to generate future growth in revenues, cash flow and ea rnings are inaccurate and unsupportable. 54. On the analysts'call, Nacchio "reiterate[d] guidance" issued previously, and

called the Morgan Stanley report "inaccurate and unsupported," and "hogwash." Szeliga stated that she was "surprised and perplexed" that the problems listed could be the basis for a downgrade. 55. Morgan Stanley issued a second report on July 28, 2001, this time examining

Qwest' disclosures concerning IRU sales. The report suggested that Qwest should disclose the s amount of revenue it derived from capacity swaps. Morgan Stanley analyst Simon Flannery wrote, "We would like to know how much, if any, of this [revenue] was purchased through capacity swaps. This would determine how much, if any, of the revenues for the quarter were due to one -time capacity swaps." 56. In August 2001, Morgan Stanley issued a third analysts'report on Qwest and

questioned again the completeness of Qwest' disclosures about its capacity swap transactions. s

- 18 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 24 of 187 Document 1035-3 08/07/2006 Page 24 of 187

The report did not challenge Qwest' accounting for swaps or indi cate that the accounting was s not in accordance with GAAP, but questioned whether Qwest could sustain its 12 % revenue growth if it was booking revenue from capacity swaps. Qwest responded to Morgan Stanley' s report by denying the significance of the issue s raised. Shortly after the August 2001 report was released, Nacchio appeared on television channel CNBC and stated: "It is sad, the quality of analysis going on at that firm." 57. Qwest also denied that its capacity swap transactions or accounting for such

swaps were improper. As the Denver Post reported on September 22, 2001, Qwest engaged in a public relations campaign to assure investors and analysts that its accounting and financials were sound: Qwest for its part, blitzed the subject in the past 10 day s, commenting in public and fleshing out financial details in a quarterly filing made late Tuesday with the U.S. Securities and Exchange Commission. Chief financial officer Robin Szeliga spent three days in Boston last week speaking with major investors about accounting questions. During the same trip, chief executive officer Joe Nacchio fielded questions on the subject at a U.S. Bancorp Piper Jaffrey Conference. ` some situations, we sell optical capacity and we also purchase In capacity from the same (co mpany), Szeliga said Wednesday. ` That has been deemed swaps by some. That' inappropriate. s When we sell, we book revenue and the associated costs. And we realize margin on that service.' If we purchase from the same person, it' a separate transaction ,'she said. When we purchase an s asset, we book a capital expenditure (as an investment in property, plant and equipment) and pay cash for it.' 58. On September 10, 2001, Qwest announced for the first time that it would not meet

analysts'expectations for the summer. Nacchio blamed Qwest' failure to meet its earnings s estimates on the economy. In a letter to Business Week in October 2001, Nacchio wrote:

- 19 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 25 of 187 Document 1035-3 08/07/2006 Page 25 of 187

This chatter about accounting issues is beside the point. The misfortunes of our national and regional ec onomy, along with investor' flight from growth stocks to the value and dividend s plays, may slow our emergence as an industry leader. It will happen when the economy recovers and investors again turn to growth stocks. We take some comfort in the well -known line from the early days of the Clinton Administration, "It' the economy, s stupid." 59. As would later be revealed, Qwest' subsequent change in fortune was not due to s

the economy, but was predicated on unreasonable growth predictions sustained through fraudulent accounting practices. 60. In September 2001, the Qwest Board of Directors praised Nacchio' performance, s

labeling him in a performance review that month as "perhaps the best creative mind in the industry." The Board also approved a four year contract e xtension for Nacchio that amounted to a 25% salary increase above his base salary of $1.2 million, a boost of his maximum annual bonus to 250% of his salary, or $3.75 million, from a maximum of $2.4 million; and 7.25 million in stock options. 61. While the Morgan Stanley reports of June, July and August 2001 raised the

visibility of Qwest' accounting for swaps and IRU sales, and the revenues it derived from s capacity swaps, these reports did not suggest that Qwest' accounting was illegal or improper. s After the reports were issued Qwest assured investors that its accounting for such transactions was sound. As one analyst from U.S. Bancorp Piper Jaffrey stated following a Nacchio August 2001 speech at a Piper Jaffrey conference, "I walked away very comfortable and talked to a lot of investors who walked away comfortable." Deutsche Bank analyst Gary Jacobi wrote in August 2001: "I really don' think they' doing anything illegal or unethical, I think people just t re want to understand what [Nacchio] is doing."

- 20 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 26 of 187 Document 1035-3 08/07/2006 Page 26 of 187

62.

In February 2002, a former employee of Global Crossing, Roy Olofson, publicly

revealed a letter that he had written to Global Crossing' General Counsel in August 2001 about s his fears that Global Crossing was engaged in sham capacity exchange transactions wit h other telecommunications carriers to boost revenue. Among the telecommunications carriers that Olofson identified in these swap transactions was Qwest. 63. The revelations by Olofson led to an SEC investigation of Qwest' accounting for s

its swap transaction s with Global Crossing. On February 11, 2002, Qwest announced that the SEC had served it with a subpoena relating to its investigation of capacity swaps at Global Crossing. On February 13, 2002, The Wall Street Journal published an article questioning Qwest' accounting for its capacity swaps and equipment sales, particularly sales to KMC and s Calpoint. 64. On March 11, 2002, Qwest disclosed that the SEC had begun an informal

investigation into Qwest' accounting for capacity swaps and sales of equipment, and in April s 2002, Qwest disclosed the possibility that the SEC could force Qwest to restate its financials because of improper accounting for capacity swap deals and certain equipment sales. Amid increasing controversy, Nacchio resigned from Qwest in June 20 02. B. 65. Qwest Restates its Financials for 2000, 2001, and First Quarter 2002 On July 28, 2002, Qwest announced that it planned to restate its financials for the

years 2000 and 2001. Fourteen months later, on October 16, 2003, Qwest filed with the SEC its Annual Report on Form 10 -K for Fiscal Year 2003. In its 2003 Form 10-K, Qwest restated its 2001 and 2000 consolidated financial statements (hereafter referred to as "October 2003 Restatement").

- 21 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 27 of 187 Document 1035-3 08/07/2006 Page 27 of 187

66.

On December 3, 2003, Qwest filed with the SEC its Quarterly Repor t on Form

10-Q for the fiscal quarter ending March 31, 2002 (the "December 2003 Restatement"). In this filing, Qwest reported: "We have determined that, in certain cases, we misinterpreted or misapplied GAAP in our 2001 and 2000 consolidated financial statements and, accordingly, we have restated our consolidated statements for each of the years. . . ." The following Table highlights the impact of Qwest' October 2003 and December 2003 Restatements: s
Revenue Pre-Tax Earnings (Loss) Net Earnings (Loss) Earnings (loss) per share

Year ending December 31, 2000 (Dollars, in millions, except for loss per share) Previously reported Restated Difference 16,610 15,665 (945) 126 (1,306) (1,432) (81) (1,037) (956) (0.06) (0.82) (0.76)

Year ending December 31, 2001 (Dollars, in millions, except for loss per share) Previously reported Restated Difference 19,695 18,152 1,543 (3,958) (6,455) (2,497) (4,023) (5,603) (1,580) (2.42) (3.37) (0.95)

Quarter ending March 31, 2002 (Dollars, in millions, except for los s per share) Previously reported Restated Difference Total Restatement for 2000 and 2001, and First Quarter 2002 4,369 3,983 386 2,874 (740) (1,164) 424 (4,353) (698) (23,650) 22,952 (25,488) (0.42) (14.19) 13.77 (15.48)

- 22 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 28 of 187 Document 1035-3 08/07/2006 Page 28 of 187

67.

Thus, while Qwest originally reported an $81 million net loss and revenues of

$16.6 billion for 2000, Qwest restated its results for 2000 to report a $1.037 billion net loss and revenues of $15.7 billion. For 2001, Qwest originally reported a $4 billion loss and revenues of $19.7 billion but restated these results to report a $5.6 billion loss and revenues of $18.1 billion. In other words, Qwest overstated its revenue by $1.543 billion in 2001, and by $945 million in 2000, a total of $2.488 billion in inflated revenue over a period of two years. Combined with the December 2003 restatement, which reduces the revenues reported for the quarter ending March 31, 2002 by $386 million, Qwest' revenue for nine quarters was overstated by $2.874 s billion. Qwest' losses for the same period, originally reported as $4.802 billion, were restated s by $25.488 billion. 68. In the October 2003 and December 2003 Restatements, Qwest identified over two

dozen different examples of accounting errors in 2000 and 2001, all of which boosted Qwest' s revenues for those periods. These accounting errors include improperly recognizing revenue from (i) optical capacity asset transactions, (ii) equipment sales, (iii) directory publishing and (iv) contractual termination fees assessed to customers; products being given away in connection with wireless promotions; and sales of customer premise equipment based on the scheduled completion date instead of actual completion date. In addition, Qwest acknowledged that it also improperly accounted for its losses and costs asso ciated with the purchase accounting for the Qwest-US West merger; impairment of assets and goodwill; valuation of investments, including KPNQwest and Qwest Digital Media; network labor costs; and other errors. Further, a significant portion of Qwest' res tated losses, as reported in the December 2003 restatement, are s

- 23 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 29 of 187 Document 1035-3 08/07/2006 Page 29 of 187

attributable to asset impairment and loss of goodwill charges, which Qwest should have charged over the course of 2000 and 2001. C. 69. Andersen' Role in the Qwest Fraud s Andersen issued clean and un qualified audit opinion letters in connection with

Qwest' financial statements for 1999, 2000, and 2001, which were incorporated with s Andersen' approval in Qwest' public filings. Andersen participated in Qwest audits from 1999 s s through 200l, and prepare d, reviewed, approved, and directed the production of financial statements, reports and releases issued or disclosed by Qwest throughout this period. 70. Andersen audited Qwest' materially false and misleading financial statements s

during the Relevant Period a nd issued materially false and misleading opinions on those financial statements. Andersen also consented to the use of its unqualified opinion on Qwest' s financial statements and reports filed with the SEC and otherwise disseminated to the investing public during all relevant periods. These financial statements were incorporated into and made a part of the Company' public filings and offering memoranda with the knowledge and express s consent of Andersen. Andersen reviewed, prepared, directed and control led all public financial disclosures, including public filings, statements to the press and investing public, earnings releases, and press releases relating to financial issues of Qwest, made by the Company during all relevant periods. Andersen thus parti cipated in the scheme, plan and common course of conduct alleged herein. 71. Andersen' role in the fraud at Qwest is two -fold. First, Andersen devised certain s

of the accounting protocols by which Qwest recognized revenue up -front from the sales of IRUs and from capacity swaps. Second, in furtherance of its profitable financial relationship with

- 24 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 30 of 187 Document 1035-3 08/07/2006 Page 30 of 187

Qwest, Andersen ignored Qwest' violations of established accounting principles. Each of s Andersen' audit letters for 1999, 2000, and 2001, which stated that Qwest' financial statements s s for the respective fiscal period were in conformity with GAAP, were false. V. QWEST' UNLAWFUL MANIPULATION OF ITS FINANCIAL RESULTS S THROUGH IMPROPER TRANSACTIONS AND ACCOUNTING A. 72. IRU Capacity Sale Transactions Qwest' financial results we re inflated during the Relevant Period through the use s

of IRU capacity sale transactions. In general, these contracts provided for the purchase by third parties of an irrevocable right to use telecommunications capacity on Qwest' fiber -optic and s cable lines. The contracts were often made at inflated prices which customers would agree to pay only because Qwest had agreed to buy services or capacity from the same customers at similarly inflated prices. These were usually multi-year agreements in which Qwe st was obligated to keep capacity available for several years and would be paid over the terms of the contracts. However, to accelerate revenue recognition, Qwest would recognize the full contract value at the beginning of the contract. Moreover, because Qwest had a finite amount of capacity, these sales did not represent revenues from ongoing business operations but rather more accurately represented the sale of an asset. 73. In order to make Qwest look more successful than it was, and then to make the

Company appear to be a more attractive merger partner for US West and to avoid breaking the "collar" in the US West merger pact, Qwest and the Individual Defendants issued false and misleading statements regarding, and improperly accounting for, several transac tions in 1999. Qwest has reported that, although it would not have to restate 1999 and 2000 pre -merger results,

- 25 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 31 of 187 Document 1035-3 08/07/2006 Page 31 of 187

it recognized $1.32 billion of revenue in optical capacity asset transactions during this time based on the same improper method that it restat ed for post -merger results. 1. 74. STAR Telecommunications, Inc. Transaction

On March 31, 1999, the last day of Qwest' first fiscal quarter, Qwest made the s

following statement in a press release: Qwest Communications International Inc, today announced that it has received an additional $15 million commitment for highspeed, broadband capacity from STAR Telecommunications. The agreement builds upon the companies'original 20 -year, $70 million contract and extends the term of STAR' commitment to s $85 million. Additionally, Qwest will purchase international long distance services from STAR. Press Release, Qwest Awarded Additional $15 million Contract from STAR Telecommunications, March 31, 1999. 75. The March 31, 1999, press release, which portrayed the $85 million tr ansaction as

a straightforward "win" for Qwest, was false and misleading. Rather, on March 24, 1999, STAR and Qwest modified the agreement to allow Qwest to purchase the STAR revenue through a "vendor financing" arrangement. Under the new arrangement, Qw est swapped its capacity for the "international long distance services" it said it would "purchase" from STAR on a monthly basis. Further, STAR could meet its obligations under the contract by either IRU' switched s services or through dedicated private li ne services. As STAR said in a footnote to a subsequent filing: On March 24, 1999, the agreement was amended to include the following terms: Qwest Communications International, Inc. ("Qwest") agreed to allow the conversion of a substantial portion of STAR' outstanding liability to a vendor financing arrangement. s The terms of this arrangement allow STAR to provide long distance services to Qwest with the balance being offset against

- 26 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 32 of 187 Document 1035-3 08/07/2006 Page 32 of 187

STAR' liability to Qwest on a monthly basis. Additionally, s STAR was given the option to meet its obligation through the purchase of a combination of IRU' switched services and s dedicated private line services. Any remaining balance outstanding to Qwest as of April 30, 2001 must be paid in full. The remaining balance due under this arrangement as of December 31, 1999 was approximately $45 million. STAR Telecommunications, Inc. SEC Form 10 -K, filed 4/14/00. 2. 76. Electric Lightwave Inc. Transaction

In June 1999, Qwest and Electric Lightwave, Inc. revised a $122 million deal

signed a year earlier for Electric Lightwave to lease network routes from Qwest. Qwest cut by $25 million the amount Electric Lightwave had agreed to pay Qwest in the original deal. For its part, Electric Lightwave agreed to buy a $9 million IRU, which it could pay for over four years. Qwest, however, recorded the full value of the $9 million IRU in the quarter ended June 30, 1999. Electric Lightwave Inc. SEC Form 10 -Q, filed 8/3/99, Exhibit 10.21.1. 3. 77. CAIS Internet Inc. Transaction

On September 30, 1999-- the final day of Qwest' third fiscal quarter -- Qwest s

made the following statements in a press release: Qwest Communications International Inc. (Nasdaq: QWST), the broadband Internet communications company, and CAIS Internet (Nasdaq: CAIS), a pioneer in broadband ac cess solutions, today announced a strategic relationship worth approximately $69 million for the delivery of high-speed Internet access to new markets. Qwest has been awarded a $54 million contract from CAIS for high-speed Internet capacity and broadband Internet communications services. The agreement also calls for Qwest to invest $15 million in CAIS Internet to accelerate the company' s network and high -speed multi-user technology. CAIS will purchase $44 million of capacity on Qwest' fiber s network, supe rceding previous leasing agreements. The Qwest capacity will provide CAIS with significant network cost savings

- 27 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 33 of 187 Document 1035-3 08/07/2006 Page 33 of 187

and support the delivery of CAIS network services to 35 points of presence (POPs) by year -end 1999. CAIS has also committed to purchase $10 million of Qwest' communications services, which s may include application hosting, e-commerce and web hosting. 78. This press release was false and misleading because it did not mention that Qwest

had agreed to make the $15 million "investment" in CAIS preferred stock in lieu of payment for the IRU, and failed to note that Qwest also agreed to let CAIS defer payment of an additional $14.5 million for several years. CAIS Internet, Inc. SEC Form 10 -Q, filed 11/14/00. 4. 79. Novus Networks, Inc. Transaction

Qwest also ent ered into a reciprocal transaction with Novo Networks, Inc. in the

3rd Quarter of 1999. On June 17, 2002, a former Qwest customer brought suit against the Company entitled Novo Networks, Inc. v. Qwest Communications Corp., Case No. A452142, alleging that on September 30, 1999 (the last day of Qwest' third quarter), Qwest told Novo that s if Novo did not buy from Qwest an IRU at the "inflated" price of $15 million, and a $10,000 per month maintenance contract, Qwest would "pull" all of its business from a No vo subsidiary. Complaint, Novo Networks, Inc. v. Qwest Communications Corp., Case No. A452142; see also Deborah Solomon, Novo Sues Qwest, Alleging Deal Required $15 Million Purchase, Wall Street Journal, June 19, 2002. Novo' lawsuit alleges that a Qwest executive stated that Qwest s "needed" the sale to "make its quarter." Id. at 124. 5. 80. ICG Communications Inc. Transaction

In December 1999, Qwest sold approximately 18,000 miles of fiber optic network

and additional broadband capacity to ICG Communications in an IRU deal worth $140 million, according to ICG' SEC filings. See Jed Graham, Iffy Qwest Books Buoyed Stock, Cinching Its s US West Takeover Capacity, Investor' Business Daily, August 2, 2002. Then, the following s

- 28 554065.1

CaseCase 1:06-cv-01539-REB 1:01-cv-01451-REB-KLM

Document 1-1 FiledFiled 08/15/2006 Page 34 of 187 Document 1035-3 08/07/2006 Page 34 of 187

month (early January 2000), Qwest reciprocated by agreeing to buy an IRU from ICG for $126 million. ICG Communications Inc. SEC Form 10-K, filed March 30, 2000. 81. These transactions had the effect of artificially inflating Qwest' earnings. The s

deals "show Qwest was ` a sense buying revenue,'s aid Davenport & Co. analyst Drake in Johnstone." See Graham, supra. Moreover, Qwest' and the Individual Defendants' s misstatements and improper accounting for these deals permitted the Company to consummate the US West merger on terms favorable to Qwest. A s Davenport & Co. analyst Johnstone further stated: "If Qwest had reported revenues, earnings and cash flow as it should have, its growth may not have looked so enticing. There is a chance the US West shareholders would have rejected the merger.