Free Motion for Appointment - District Court of Colorado - Colorado

Case 1:04-cv-01267-WYD

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 04-cv-01267-WYD

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. AUGUSTINE M. CRUCIOTTI, Defendant. ______________________________________________________________________________ Plaintiff Securities and Exchange Commission's Unopposed Motion for Distribution of Funds in CRIS Account and Application for Appointment of Distribution Agent ______________________________________________________________________________ Plaintiff, United States Securities and Exchange Commission (the "Commission") hereby moves the Court to distribute, in the manner set forth below, funds deposited with this Court in a Fair Fund pursuant to Section 308 of the Sarbanes-Oxley Act of 2002 [15 U.S.C. § 7201, et seq.] ("Sarbanes-Oxley Act") for the benefit of aggrieved investors as a result of settlements arising from the Commission's financial fraud investigation of Qwest Communications International Inc. ("Qwest"). In support thereof, the Commission states as follows: Background 1. On October 21, 2004, the Commission filed a complaint against Qwest in the U.S.

District Court for the District of Colorado. SEC v. Qwest Communications International Inc., Civil Action No. 04-02179-WYD. The Commission's complaint against Qwest alleged that, among other things, from at least the second quarter ended June 30, 1999 and continuing through

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the first quarter ended March 31, 2002, Qwest engaged in a massive financial fraud designed to mislead the investing public about its revenue and growth. The complaint alleged that in annual, quarterly, and current reports, in registration statements that incorporated Qwest's financial statements, and in other public statements, including earnings releases and investor calls, Qwest made numerous false and misleading statements about its financial condition. The complaint alleged that Qwest fraudulently recognized over $3.8 billion in revenue and excluded $231 million in expenses. The complaint alleged the fraudulent scheme, approved and directed by Qwest's senior management and implemented by numerous other managers and employees, was orchestrated to meet the company's outrageously optimistic revenue projections, artificially inflate Qwest's stock price, and falsely present Qwest as a "new technology" company with enormous earnings growth and potential. 2. To date, the Commission has settled all claims against Qwest and has also reached

settlements with four individuals whom the Commission alleged participated in Qwest's fraud. Each of the five defendants (collectively, the "Qwest Defendants") consented to entry of judgment, without admitting or denying the allegations in the Complaints, and the Court entered Final Judgments against: Augustine M. Cruciotti on June 21, 2004; Qwest on November 4, 2004, amended on December 3, 2004; Roger B. Hoaglund on March 17, 2005 (SEC v. Hoaglund, Civil Action No. 05-00482-OES; William L. Eveleth on April 28, 2005 (SEC v. William L. Eveleth, Civil Action No. 05-00481-RPM); and Gregory M. Casey on September 7, 2005 (SEC v Joseph P. Nacchio, et al., Civil Action No. 05-00480-MSK). Pursuant to the terms of the Final Judgments, Qwest paid $1 in disgorgement and $250,000,000 in civil penalties; Cruciotti paid $200,000 in disgorgement plus prejudgment interest and $150,000 in civil

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penalties; Hoaglund paid $200,000 in disgorgement plus prejudgment interest and $100,000 in civil penalties; Eveleth agreed to pay $35,575 in disgorgement plus prejudgment interest and $75,000 in civil penalties; and Casey paid $1,390,344 in disgorgement plus prejudgment interest and $250,000 in civil penalties. 3. Each of the Qwest Defendants paid the relevant settlement amounts to the Clerk

of Court, who deposited the funds with the Court Registry Investment System ("CRIS") in an interest bearing account, account number 1:04-CV-001267, under the case name designation "SEC v. Augustine M. Cruciotti," pursuant to the directives in the Final Judgments.1 Based on current settlements reached with the Commission, the Qwest Fair Fund will total $252,898,832 in principal after all installments are paid through April 2006. Pursuant to Section 308 of the Sarbanes-Oxley Act, the Qwest Fair Fund was established for the benefit of aggrieved investors. The principal amount of the Fair Fund and all post-judgment interest earned thereon is hereafter referred to as the "Distribution Fund." 4. Moreover, the Commission is currently engaged in litigation against six former

officers, directors, and/or employees of Qwest that may result in additional payments into the Distribution Fund. These individuals are Joseph P. Nacchio, Robert S. Woodruff, Robin R. Szeliga, James J. Kozlowski, Frank T. Noyes, and Afshin Mohebbi. SEC v. Joseph P. Nacchio, et al., Civil Action No. 05-MK-480 (OES) (D. Colo.).
The Proposed Distribution Plan

5.

Pursuant to each of the orders entered against the Qwest Defendants, the

Commission may by motion propose a plan to distribute the Distribution Fund subject to the
The Commission intends to ask the Court to amend Eveleth's Final Judgment to direct the Clerk of this Court, upon receipt of Eveleth's final payment, to forward the payment to an account in the control of the proposed Distribution Agent.
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Court's approval. The Commission proposes transferring the Distribution Fund for distribution to aggrieved investors through the proposed consolidated class action settlement in In re Qwest Communications International Inc. Securities Litigation, Civil Action No. 01-CV-1451-REBCBS (D. Colo.) (the "Consolidated Class Action"). 6. Based in large part on the same fraudulent scheme alleged by the Commission in

its complaints against the Qwest Defendants, class action plaintiffs have also filed federal district court actions against Qwest and several former officers and employees of the company. On November 23, 2005, Qwest and other defendants in the Consolidated Class Action filed a Stipulation of Partial Settlement (the "Stipulation", attached as Exhibit A) contemplating Qwest's settlement of the consolidated securities class action litigation for $400 million. On January 5, 2006, the Court in that action issued an Order Preliminarily Approving Partial Settlement and Approving Form and Manner of Notice (attached as Exhibit B). The Court approved, in form and content, the Notice of Pendency and Proposed Partial Settlement of Class Action (attached as Exhibit C). 7. The Commission is vested with broad discretion in fashioning distribution plans

for disgorgement funds. See SEC v. Certain Unknown Purchasers, 817 F.2d 1018 (2d Cir. 1987); SEC v. Levine, 881 F.2d 1165 (2d Cir. 1989); SEC v. Wang, 944 F.2d 80, 84 (2nd Cir. 1991) (distribution plan will be approved if it is "fair and reasonable"). See also SEC v. Finacor Anstalt, 1991 WL 173327, at *3 (S.D.N.Y. 1991) (rejecting challenge to SEC's proposed distribution plan and holding that the "equities weigh in favor of limiting payment at this time to the claimants suffering the greatest injury"). This discretion "includ[es] the flexibility to decide that certain groups of claimants would receive payments and others would not." Levine, 881

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F.2d at 1182. This authority is directly relevant to Fair Fund distributions authorized under the Sarbanes-Oxley Act, which allows penalties to be distributed with disgorgement. 8. In distributing the Distribution Fund, which is substantially less than total investor

losses, the Commission seeks here to maximize the amount of money returned to aggrieved investors and to minimize administrative costs. The Commission believes that these goals will best be reached by adopting the distribution procedures currently being considered in the Consolidated Class Action. 9. Because the Consolidated Class Action complaint sets forth allegations that are

substantially similar to the allegations in the Commission's complaint, investors who submit valid claims under the proposed plan of allocation in the Consolidated Class Action, reflect also the group of injured investors who are entitled to recover from the Distribution Fund. The scope of the class includes all persons or entities that purchased Qwest common stock, notes, debts, and options during the period beginning May 24, 1999, through and including, July 28, 2002. Based on the misconduct alleged by the Commission, investors purchasing Qwest securities during the period July 27, 1999, through July 28, 2002, may be eligible to recover form the Distribution Fund.2 In essence, the investors allegedly injured as a result of the conduct alleged in the Commission's cases appear to be a subset of the class that is entitled to receive funds in the Consolidated Class Action. 10. Moreover, investors who traded within the relevant time period and who choose

to opt out of the distribution from the Consolidated Class Action are nevertheless entitled to
On July 27, 1999, Qwest issued its second quarter earnings release and Form 8-K announcing earnings for its second quarter ended June 30, 1999, the earliest period of misconduct alleged by the Commisison. On July 28, 2002, Qwest issued a press release announcing its intention to restate its financial statements. As a consequence, the Commission believes that investors purchasing through and including these times may be eligible to receive a distribution from the Distribution Fund.
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recover from the Distribution Fund. The distribution to opt-out plaintiffs will also be based on the plan of allocation developed in the Consolidated Class Action. 11. Finally, counsel for plaintiffs in the Consolidated Class Action will receive no

portion of the Distribution Fund as payment for their fees or expenses. Additionally, the Distribution Fund will not be considered as increasing the total fund for the purpose of calculating compensation for class action plaintiffs' counsel. See Securities Exchange Act of 1934 § 21(d)(4) [15 U.S.C. § 78u(d)(4)]. Appointment of Consolidated Class Action Claims Administrator as Distribution Agent 12. The Commission requests that the Court appoint Gilardi & Co., LLC, as claims

administrator for the Distribution Fund. Gilardi is the claims administrator appointed in the Consolidated Class Action and it will be responsible for processing and allocating the settlement funds to class members in accordance with the proposed Consolidated Class Action allocation plan. See Exhibit B, at 10. The settlement proceeds obtained in the Consolidated Class Action are contemplated to be $400 million. Gilardi is also willing to act as distribution agent for the Distribution Fund in exchange for the nominal fees outlined in its Fair Fund Administration Estimate (attached as Exhibit D), which includes fees to handle claims for those investors who opt out of the Consolidated Class Action settlement. 13. If this Court approves the proposed Distribution Plan, Gilardi will mail a Notice

to Possible SEC Fair Fund Claimants (substantially in the form attached as Exhibit E) to all possible class action claimants. Shareholders eligible to share in the Distribution Fund will follow the same instructions and complete the same Proof of Claim Form as shareholders who want to share in the Consolidated Class Action settlement. Moreover, the Notice to Possible

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SEC Fair Fund Claimants makes it clear that shareholders who elect not to participate in the Consolidated Class Action settlement are still eligible to share in the Distribution Fund. Shareholders eligible to make a claim against the Distribution Fund need not release any of the Consolidated Class Action defendants to do so. These opt-out Consolidated Class Action plaintiffs will receive a separate Proof of Claim Form from Gilardi. Gilardi has agreed to allocate the Distribution Fund proportionally to these claimants in accordance with the proposed Consolidated Class Action plan of allocation. 14. Funds from the Distribution Fund will be distributed on the same timetable as the

Consolidated Class Action settlement. Specifically, after Proof of Claim Forms are returned by eligible claimants seeking to share in the Distribution Fund, deficiency notices will be sent by Gilardi to those persons and entities that have not completed the Proof of Claim Form correctly. After all of the deficiency notices are satisfactorily resolved, the Distribution Fund would be distributed by Gilardi to eligible claimants pro rata less any associated cost and included in the same check as the Consolidated Class Action settlement proceeds. 15. To effectuate the distribution, the Distribution Fund will be deposited into an

account maintained by Gilardi. At the time of distribution, the Consolidated Class Action settlement amount also will be transferred to an account maintained by Gilardi. The combined settlement proceeds will then be transferred to authorized claimants. Gilardi has agreed that, without additional charge, it will allocate the Distribution Fund proportionally in accordance with the proposed Consolidated Class Action plan of allocation. Gilardi will print and mail all checks in accordance with the proposed Consolidated Class Action settlement; provide the Commission with appropriate status reports; and to the extent there are any funds remaining from

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the Commission portion of the combined settlement fund, Gilardi will promptly transfer those unclaimed or unallocated monies to the Commission, which in turn will pay those funds to the U.S. Treasury. Statement Regarding Conferring with Counsel 16. Pursuant to Rule 7.1 of the Local Rules, the Commission has provided copies of

this Motion and proposed Order to counsel for all defendants who have paid monies into the Distribution Fund. The Commission asked counsel for those defendants to communicate any objection to this Motion to the Commission's undersigned counsel. At the time of filing this Motion, counsel for the Commission has not received any objections to its request to distribute funds and appoint a distribution agent. Conclusion 17. The most efficient way to fairly distribute the Distribution Fund to injured

investors is to use the proposed Consolidated Class Action's distribution plan and procedures. The Court and Commission will conserve substantial time and resources by not independently having to hire a claims agent, locate and notify potential injured investors, and process claims. Moreover, this approach has been approved in other actions where the Commission has distributed Fair Fund monies through class action settlements. See, e.g., SEC v. Lucent Technologies, Inc., Civil Action No. 04-CV-2315 (WHW) (motion granted Mar. 9, 2005) (D. N.J.); SEC v. Del Global Technologies Corp., Civil Action No. 04-CV-4092 (CM/GAY) (S.D. N.Y.) (motion granted Jan. 11, 2005); and SEC v. TALX Corporation, Civil Action No. 4:05CV00368-HEA (E.D. Missouri) (motion granted May 18, 2005) (where the use of the class

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action distribution mechanism presents a fair and reasonable way to distribute funds recovered in related Commission enforcement actions). WHEREFORE, the Commission requests that the Court enter the proposed Order filed herewith which: (1) approves the Commission's plan to distribute the Distribution Fund (the

"Distribution Plan"), which adopts and uses the distribution plan currently being considered by the United States District Court for the District of Colorado in the Consolidated Class Action; (2) appoints the Consolidated Class Action's claims administrator, Gilardi & Co.,

LLC, as Distribution Agent for the Distribution Fund; (3) (4) approves the Notice to Possible SEC Fair Fund Claimants; and directs the Clerk of Court to transfer the Distribution Fund, including all post-

judgment interest earned on the account, less taxes, registry fees, fees paid to the Tax Administrator, and other expenses authorized by this Court, to the Distribution Agent for distribution to injured investors pursuant to the Distribution Plan. Respectfully submitted, /s/ Mary S. Brady_____________ Mary S. Brady U.S. Securities and Exchange Commission Central Regional Office 1801 California St. Suite 1500 Denver, CO 80202 Phone: (303) 844-1000 Fax: (303) 844-1010 E-mail: [email protected] Attorney for Plaintiff U.S. Securities and Exchange Commission Dated: February ____, 2006

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