Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 1 of 86
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO
Civil Case No. 04-cv-0782-REB-CBS
TEACHERS' RETIREMENT SYSTEM OF LOUISIANA, the Retirement System for Teachers employed by the State of Louisiana, Plaintiff, v. QWEST COMMUNICATIONS INTERNATIONAL INC., a Delaware Corporation having its principal office and place of business in Denver, et al., Defendants.
RICHARD L. WESTON'S ANSWER TO PLAINTIFF'S AMENDED COMPLAINT
Richard L. Weston ("Mr. Weston" or "Defendant") respectfully submits the following Answer to Plaintiff's Amended Complaint ("Complaint"), filed July 26, 2004. PRELIMINARY STATEMENT Many allegations are poorly defined and only generally dated or are lifted from various sources without attribution. Moreover, numerous paragraphs contain unintelligible statements that do not appear to be allegations of fact, or impermissibly contain conclusions of law to which no response is required. As a result, it is difficult to understand many of the allegations in the Complaint with sufficient clarity to allow a precise answer. Although Mr. Weston has attempted to identify and respond to specific allegations in cases where they can be understood sufficiently to permit an answer, Mr. Weston is not certain that he can understand the exact nature of
744615_1.DOC
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 2 of 86
Plaintiff's allegations even in some of these instances. In addition, for documents that the Plaintiff does cite, Mr. Weston respectfully refers the Court to the full document for a complete understanding of its content, while noting that many of the documents Plaintiff cites constitute inadmissible hearsay and do not offer competent evidence of any of the purported statements of fact they may contain. In addition to its numbered paragraphs, the Complaint contains various headings. No response is required to these conclusory statements. To the extent a response is required, Mr. Weston specifically denies the truth of each statement in the opening statement, as well as each statement contained in the headings. Finally, all allegations that are not expressly admitted are denied, and Mr. Weston reserves the right to withdraw, amend, or modify his answers to the Complaint as later circumstances may warrant. ANSWER ALLEGATIONS COMMON TO ALL COUNTS OF THE AMENDED COMPLAINT 1. Plaintiff, for its Amended Complaint against the defendants herein, respectfully
shows to this court and alleges the facts which support its claims on information and belief except as to the facts relating to its purchases and sales of the securities of QWEST COMMUNICATIONS INTERNATIONAL, INC. which are based upon the business records of the plaintiff.
-2-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 3 of 86
ANSWER No response is required to the statements in paragraph 1 as they are not factual allegations. To the extent a response is required, Defendant denies the statements. 2. This Amended Complaint is filed as of course pursuant to Rule 15(a) of the
Federal Rules of Civil Procedure. ANSWER No response is required to the statement in paragraph 2 as it is not a factual allegation. Except as specifically admitted above, Defendant denies the allegations in paragraph 2. 3. There has been no responsive pleading filed to this Complaint by any defendant
heretofore served with process in this action nor has any such defendant filed a Motion for Summary Judgment in this action. ANSWER Defendant denies the allegations in paragraph 3. THE PARTIES TO THIS ACTION 4. Plaintiff is a State Pension Fund of the State of Louisiana having its principal
office and principal place of business at 8401 United Plaza Boulevard, Baton Rouge, Louisiana 70804. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 4 to admit or deny them, and on that basis denies them.
-3-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 4 of 86
5.
Plaintiff is a "State Pension Fund" as defined in 15 USC 78bb and is entitled to
bring any and all State Law Claims involving any of the issues set forth in this Complaint. ANSWER No response is required to the allegations in paragraph 5 as they constitute legal conclusions. To the extent a response is required, Defendant notes that Plaintiff appears to quote from a United States Statute. Defendant respectfully refers the Court to the entire provision for a complete understanding of its contents and any attempt to characterize it is denied. Except as specifically admitted above, Defendant denies the allegations in paragraph 5. 6. The plaintiff is considered to be a citizen of the State of Louisiana by reason of its
principal place of business being located in the State of Louisiana. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 6 to admit or deny them, and on that basis denies them. 7. Defendant QWEST COMMUNICATIONS INTERNATIONAL, INC.,
hereinafter termed QWEST, is a corporation duly organized and existing under the laws of the State of Delaware. It has its principal office and place of business at 1801 California Street, Denver Colorado 80202. This defendant is also considered to be a citizen and resident of the State of Colorado under Federal Law. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 7 to admit or deny them, and on that basis denies them.
-4-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 5 of 86
8.
QWEST CAPITAL FUNDING INC. is a wholly owned subsidiary of the
defendant QWEST and was an authorized agent of the defendant QWEST in issuing various bonds for the benefit of QWEST. QWEST is responsible for the bond claims herein since it was the principal of an authorized agent and also personally participated in the wrongs involved. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 8 to admit or deny them, and on that basis denies them. 9. Defendant JOEL M. ARNOLD, hereinafter termed ARNOLD, is presently a
resident of LOS GATOS CALIFORNIA. He committed acts of wrongdoing affecting the State of Colorado during his period of employment with the defendant QWEST. A number of these wrongful acts took place within the State of Colorado and affected citizens and residents of the State of Colorado. This defendant was originally hired in 1998 and thereafter promoted to Senior Vice President of QWEST's GLOBAL BUSINESS UNIT in June 1999. In May 2001 he was promoted to Executive Vice President of QWEST'S GLOBAL BUSINESS UNIT. He resigned from QWEST in December 2001. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 9 to admit or deny them, and on that basis denies them. 10. Defendant WILLIAM L. EVELETH, hereinafter termed EVELETH, is a resident
of Evergreen Colorado. He commenced working for QWEST in 1997. In July 2000 he became Vice-president and Chief Financial Officer of a division of QWEST. He is now Senior Vicepresident, finance, and Chief Financial Officer of Corporate Planning and finance.
-5-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 6 of 86
ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 10 to admit or deny them, and on that basis denies them. 11. Defendant GRANT P. GRAHAM, hereinafter termed GRAHAM, is presently a
resident of Evergreen Colorado. He was a Senior Vice-president and Chief Financial Officer of QWEST's GLOBAL BUSINESS UNIT during 2000 and 2001. He was terminated in 2002. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 11 to admit or deny them, and on that basis denies them. 12. Defendant DOUGLAS K. HUTCHINS, hereinafter termed HUTCHINS, is a
resident of Denver Colorado. This defendant was director of finance for the GLOBAL BUSINESS UNIT of QWEST and reported to defendant GRAHAM from January 2001 until February 2002. He was then promoted to Senior Director of Quality. He resigned in October 2002. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 12 to admit or deny them, and on that basis denies them. 13. Defendant THOMAS W. HALL, hereinafter termed HALL, was hired in August
2000. He was a Senior Vice President of a division of the GLOBAL BUSINESS SYSTEMS UNIT of QWEST until October 2001. He then became Senior Vice President-Chief Quality Officer. His employment was terminated in June 2002.
-6-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 7 of 86
ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 13 to admit or deny them, and on that basis denies them. 14. Defendant BRYAN K. TREADWAY, hereinafter termed TREADWAY, is a
resident of Atlanta, Georgia. He was hired in April 2001 as an assistant controller and promoted to controller in January 2002. He resigned in May 2002. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 14 to admit or deny them, and on that basis denies them. 15. Defendant JOHN M. WALKER, hereinafter termed WALKER, is a resident of
Highland Ranch Colorado. He was hired by QWEST in February 1998 and promoted to VicePresident Sales for a division of QWEST in November of 2000. He no longer is employed by QWEST. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 15 to admit or deny them, and on that basis denies them. 16. Defendant RICHARD L. WESTON, hereinafter termed WESTON, is a resident
of Lone Tree Colorado. He was hired by QWEST in June 1997. In September 1999 he was promoted to Senior Vice-president of Product Development of the Internet Solutions Division of QWEST. In September 2001 he became Senior Vice-president of Strategic Sales of QWEST. He left QWEST in May 2002.
-7-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 8 of 86
ANSWER Defendant admits that he is a resident of Lone Tree, Colorado and that his employment with Qwest began in June 1997. Defendant further admits that in September 1999, he became Senior Vice President, Qwest Internet Solutions and that he was employed in this position until May 31, 2002. 17. The defendants "DOES numbers 1 to 10" are those officers, directors, controlling
persons and/or senior managers of the defendant QWEST whose insistence on unreasonable purported earnings directly caused the acts of wrongdoing involved herein. These parties are presently not presently properly identified for the purpose of suit against them but will be specifically named when so identified after full discovery is had in this action. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 17 to admit or deny them, and on that basis denies them. JURISDICTION AND VENUE 18. The jurisdiction and venue allegations are different with respect to the various
Counts of this Complaint and will be set forth separately and subsequently in each of the Counts of this Complaint. ANSWER No response is required to the statements in paragraph 18 are not factual allegations. To the extent a response is required, Defendant denies the statements in paragraph 18.
-8-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 9 of 86
GENERAL DESCRIPTION OF THIS ACTION 19. This action is a personal, non class suit brought by a State Pension Fund which is
based on claimed violations of the Federal Securities Laws, the Colorado State Securities Laws, the Colorado State Laws relating to Negligent Misrepresentation, and the Colorado State Common Law relating to common law fraud and deceit and any other unlawful conduct that will be discovered by appropriate pretrial proceedings to be conducted in this action. ANSWER Defendant denies the allegations in paragraph 19. 20. As a State Pension Fund the plaintiff is not affected by the provisions of 15 USC
78bb relating to federal preemption of certain State Securities Class Claims. ANSWER No response is required to the statements in paragraph 20 as they constitute legal conclusions. To the extent a response is required, Defendant notes that Plaintiff appears to quote from a United States Statute. Defendant respectfully refers the Court to the entire provision for a complete understanding of its contents and any attempt to characterize it is denied. Except as specifically admitted above, Defendant denies the statements in paragraph 20. 21. This action is brought against the defendants, jointly and severally, because of
wrongdoing connected with the false and misleading financial information relating to the defendant QWEST. This financial information included the dissemination of false and misleading financial reports of the defendant QWEST which were participated in by the individual defendants in the scope of their employment. The said false and misleading financial
-9-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 10 of 86
information. including the reports involved, were disseminated to actual and potential public stockholders and bondholders of QWEST. ANSWER Defendant denies the allegations in paragraph 21. 22. These reports were disseminated through press releases and other means and
certain of the reports involved were filed with the United States Securities and Exchange Commission during a period of time commencing approximately in April 2000 and continuing at least until February 2003 and possibly for an additional period of time thereafter which has not yet been definitively determined. ANSWER Defendant admits that Qwest filed periodic public reports, issued press releases, and engaged in other public communications, but states affirmatively that Defendant had no role in their preparation or dissemination. Except as specifically admitted above, Defendant denies the allegations in paragraph 22. 23. The wrongful acts alleged in this Complaint on the part of the individual
defendants herein, were performed within the scope of their employment thus making the defendant QWEST also liable therefore. ANSWER Defendant denies the allegations in paragraph 23. 24. The wrongful acts involved herein were deliberately and wrongfully concealed by
the defendants and as yet have not been completely discovered. The earliest date when the wrongful acts involved herein could have been even partially discovered by the exercise of
-10-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 11 of 86
reasonable diligence was February 2003 when the United States Securities and Exchange Commission filed its Complaint against certain of the defendants herein. ANSWER Defendant denies the allegations in paragraph 24. 25. The wrongful acts on the part of the defendant also consisted of a series of
wrongful acts committed over an extensive period of time and thus represented a "continuing violation" causing the relevant Statutes of Limitation to be "tolled" until the wrongful acts involved have been terminated. ANSWER Defendant denies the allegations in paragraph 25. 26. Many of the relevant Statutes of Limitation involved herein also do not
commence to run until the wrongful acts involved have been discovered or could have been discovered by the exercise of reasonable diligence. The discovery must be sufficient to permit the filing of a legally sufficient complaint which will not be subject to dismissal for insufficiency. ANSWER No response is required to the allegations in paragraph 26 as they constitute legal conclusions. To the extent a response is required, Defendant denies the allegations in paragraph 26.
-11-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 12 of 86
OTHER RELATED PENDING LITIGATION 27. There are a number of pending actions in this Court and elsewhere which may be
related in part to the claims set forth in this Complaint and these actions are as follows insofar as the plaintiff is presently aware. ANSWER Defendant admits that there are other actions pending against Qwest in various courts. Except as specifically admitted above, Defendant denies the allegations in paragraph 27. 28. There are a number of purported Federal class actions against the defendant
QWEST are pending in this Court commencing in February 2002. These purported class actions were consolidated into a single action in this Court. These purported class actions were based on violations of the Federal Securities Laws. ANSWER Defendant lacks sufficient knowledge or information regarding the allegations in paragraph 28 to admit or deny them, and on that basis denies them. 29. There are also a number of other actions also pending in various Courts relating to
possible issues set forth in this Complaint as follows: ANSWER Defendant admits that there are other actions pending against Qwest in various courts. Except as specifically admitted above, Defendant denies the allegations in paragraph 29.
-12-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 13 of 86
30.
There also is a purported Colorado State Court Securities class action originally
brought in the Colorado State District Court for Boulder Colorado and removed to the United States District Court for the District of Colorado. An application for remand of this action has been made and is pending undetermined in the United States District Court for the District of Colorado. ANSWER Defendant lacks sufficient knowledge or information regarding the allegations in paragraph 30 to admit or deny them, and on that basis denies them. 31. A personal non class action has been brought against QWEST by Dutch investors
and is pending in this Court. ANSWER Defendant lacks sufficient knowledge or information regarding the allegations in paragraph 31 to admit or deny them, and on that basis denies them. 32. There is a personal non class action based upon the State Securities Laws of the
State of Illinois is pending in the Illinois State Courts. ANSWER Defendant lacks sufficient knowledge or information regarding the allegations in paragraph 32 to admit or deny them, and on that basis denies them. 33. There has been a purported Stockholder's Derivative action has been heretofore
filed in a Colorado State Court and a proposed settlement was before that Court for approval on June 15th, 2004. Counsel for the plaintiff has been advised that the proposed settlement has been
-13-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 14 of 86
approved by the Court. The plaintiff's counsel is not aware of whether an appeal has been filed from the Court Order of approval by any of the objectors thereto. ANSWER Defendant lacks sufficient knowledge or information regarding the allegations in paragraph 33 to admit or deny them, and on that basis denies them. 34. There is also an action pending in this Court brought by the United States
Securities and Exchange Commission in February 2003 against the defendants in this litigation. ANSWER Defendant admits that the Securities and Exchange Commission filed a complaint against Messrs. Arnold, Eveleth, Graham, Hall, Hutchins, Treadway, Walker and Weston, and that this action is still pending against certain individuals. Except as specifically admitted above, Defendant denies the allegations in paragraph 34. 35. The plaintiff's counsel has also been advised of the pendency of criminal
proceeding brought by the United States Attorney against certain of the defendants herein. This action has been tried and some of the defendants have been acquitted. The trial jury disagreed on certain other of the defendants. These defendants will probably be re-tried and a guilty plea has been received from one of the defendants upon whom the trial jury previously disagreed. ANSWER Defendant lacks sufficient knowledge or information regarding the allegations in paragraph 35.
-14-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 15 of 86
THE DATES OF WRONGDOING ON THE PART OF THE DEFENDANTS AND THE PLAINTIFF'S DISCOVERY THEREOF 36. The acts of wrongdoing set forth in this Complaint as known to the plaintiff at the
time of the commencement of this action commenced on or about April 19, 2000. They were concealed by the defendants at the time of the wrongdoing involved and have not yet been completely disclosed. ANSWER Defendant denies the allegations in paragraph 36. 37. Prior to the date of the filing of this action there was a general report of
questionable financial accounting on the part of QWEST by means of the publication of an article in the Wall Street Journal setting forth a claimed number of questioned practices in QWEST's accounting. This disclosure did not specifically relate to the issues set forth in this Complaint and, in any event, was not sufficient to constitute any required notice to the plaintiff of the acts of wrongdoing set forth in this Complaint. ANSWER Defendant lacks sufficient knowledge or information regarding the allegations in paragraph 37 to admit or deny them, and on that basis denies them. 38. The publication of this article caused an initial decline in the public market price
of QWEST common stock. ANSWER Defendant lacks sufficient knowledge or information regarding the allegations in paragraph 37 to admit or deny them, and on that basis denies them.
-15-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 16 of 86
39.
There was a further indication of possible wrongdoing by reason of the filing of
the SEC's Complaint in February 2003. However a full disclosure of the acts of wrongdoing involved has not yet been made and it is believed that further investigations of the facts and circumstances of this matter are now continuing. ANSWER Defendant admits that on February 25, 2003, the Securities and Exchange Commission filed a complaint against Messrs. Arnold, Eveleth, Graham, Hall, Hutchins, Treadway, Walker and Weston. Defendant respectfully refers the Court to the complete document for a proper understanding of its contents and any attempt to characterize it is denied. Defendant notes that the remaining allegations in paragraph 39 are vague and ambiguous and Defendant denies them on that basis. Except as specifically admitted above, Defendant denies the allegations in paragraph 39. THE LOSSES SUSTAINED BY THE PLAINTIFF 40. During the period of wrongdoing, whose duration has not yet been determined,
and from April 11, 2000 to June 1, 2004 the plaintiff sustained losses in connection with its transactions relating to QWEST securities including common stock and bonds which were unlawfully inflated during this period. The details of these losses are set forth in EXHIBIT A annexed to this Complaint. ANSWER Defendant denies the allegations in the first sentence of paragraph 40. Defendant lacks sufficient knowledge or information of the allegations in the second sentence of paragraph 40 to admit or deny them, and on that basis denies them.
-16-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 17 of 86
41.
EXHIBIT A shows the dates of purchase or sale of the QWEST securities, the
identification of the securities, the prices paid or received for the securities, and the investment adviser of the plaintiff who purchased or sold the security on the plaintiff's behalf. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 41 to admit or deny them, and on that basis denies them. 42. The time period of the transactions made by the plaintiff in the securities of
QWEST and shown in EXHIBIT A herein commenced on April 11th. 2000 and terminated on June 1, 2004. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 42 to admit or deny them, and on that basis denies them. 43. The transactions in the common stock of the defendant QWEST by the plaintiff
during the period of wrongdoing were made through the following investment advisers who had discretionary power to make the transactions involved. NAME OF INVESTMENT ADVISER 1. 2. 3. 4. 5. 6. Harbor Capital J & W Seligman & Co. Large Capital Fund LSV Capital Management Large Capital Fund Mellon Equity Associates Rhumbline Mid-Cap Growth Index Fund Rhumbline Mid-CAP Value Index Fund
-17-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 18 of 86
7. 8. 9.
Rhumbline-Russell 1000 Value Index Fund Smith Group Asset Management Goldman Asset Management
ANSWER Defendant denies the allegations in the first sentence of paragraph 43. Defendant lacks sufficient knowledge or information of the allegations in the list in paragraph 43 to admit or deny them, and on that basis denies them. 44. The transactions in the bonds of the defendant QWEST and/or subsidiaries
thereof were made by the plaintiff through the following investment advisers who had discretionary power to make the transactions.
-18-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 19 of 86
NAME OF INVESTMENT ADVISER 1. Back Bay Advisers LP 2. Back Bay Advisers LP 3. Back Bay Advisers LP 4. Back Bay Advisers LP 6. Mackay Shields 7. Mackay Shields 9. Mackay Shields 10. Mackay Shields 11. Mackay Shields 12. Mackay Shields 13. Mackay Shields 14. Wellington Management Group 15. Wellington Management Group 16. Shenkman Capital Management 17. Shenkman Capital Management 19. Shenkman Capital Management 19. Shenkman Capital Management
IDENTIFICATION OF THE BOND QWEST Capital Funding Inc. QWEST CAPITAL Series 144A QWEST Capital Funding Inc. QWEST CAPITAL 5.875% QWEST Capital Funding Inc. QWEST CAPITAL 7.25% QWEST Capital Funding Inc. 7.75% QWEST Capital FDG INC. QWEST CAPITAL 7.75% QWEST Capital FDG INC. 7.90%% QWEST Capital FDG INC. QWEST CAPITAL 5.875%5% QWEST Capital FDG INC. 7.625% QWEST CORP due 8/9/2003 QWEST 7.625% QWEST CORP due 3/15/2012 8.875%5% QWEST SERVICES CORP. 14.0% QWEST CAPITAL FUNDING 7.90% QWEST CAPITAL FUNDING 7.25% QWEST CAPITAL FUNDING 7.250% QWEST CAPITAL FUNDING 7.750% QWEST CAPITAL FUNDING 5.875% QWEST CAPITAL FUNDING 7.625%
ISSUER OF THE BOND QWEST CAPITAL QWEST CAPITAL QWEST CAPITAL QWEST CAPITAL QWEST CAPITAL QWEST CAPITAL QWEST CAPITAL QWEST CAPITAL QWEST CORP QWEST CORP QWEST SERVICES CORP. QWEST CAPITAL QWEST CAPITAL QWEST CAPITAL QWEST CAPITAL QWEST CAPITAL QWEST CAPITAL
-19-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 20 of 86
NAME OF INVESTMENT ADVISER 20. Shenkman Capital Management 21. Shenkman Capital Management 22. SEIX INVESTMENT ADVISERS 23. SEIX INVESTMENT ADVISERS 24. Fountain Capital Management 25. Nicholas Appelgate 26. Banc One Investment Advisers
IDENTIFICATION OF THE BOND QWEST CORP 7.625% due 6/09/2003 7.250% QWEST COMMUNICATIONS INTERNATIONAL SENIOR 144A QWEST CORP 8.875% due 3/15/2002 QWEST CORP 144A QWEST CORP 144A QWEST CAPITAL FUNDING NT QWEST CAPITAL FUNDING 7.000%
ISSUER OF THE BOND QWEST CORP QWEST COMMUNICATIONS INTERNATIONAL QWEST CORP QWEST CORP QWEST CORP QWEST CAPITAL FUNDING QWEST CAPITAL FUNDING
ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 44 to admit or deny them, and on that basis denies them. 45. The losses of the plaintiff during the period of wrongdoing involved relating to
the plaintiff's transactions in the securities of QWEST involving both its common stock and bonds amounted to Twenty-Two Million Nine Hundred Three Thousand Three Hundred FortySeven Dollars and Sixty Cents ($22,903,347.60) plus appropriate interest and possible punitive damages and attorneys' fees provided for under State Laws involved. ANSWER Defendant denies the allegations in paragraph 45.
-20-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 21 of 86
SPECIFIC ALLEGATION OF WRONGDOING ON THE PART OF THE DEFENDANTS 46. The wrongs, involved were also caused by the policy of the controlling parties of
QWEST to require their subordinates to report specific amounts and/or percentages of revenue growth to be reported. ANSWER Defendant denies the allegations in paragraph 46. 47. The bonuses and other perquisites of those subordinate employees were
dependent upon whether the financial reports made by said subordinated employers met the previously directed targets of revenues and revenue growth. ANSWER Defendant denies the allegations in paragraph 47. 48. Furthermore supervisory management of QWEST informed the said subordinate
employees that if their financial reports of those employees did not meet such targets said employees could face dismissal. ANSWER Defendant denies the allegations in paragraph 48. 49. In connection with the purchase of the common stock and bonds of QWEST
during the period of wrongdoing set forth in this complaint, the defendants, jointly and severally, issued false and/or misleading financial information which was generated within the State of Colorado, as will be detailed subsequently in this complaint. Said information falsely inflated the revenue of QWEST and thus inflated the public market price of QWEST common stock and bonds.
-21-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 22 of 86
ANSWER Defendant denies the allegations in paragraph 49. 50. The wrongs involved were willfully, deliberately, negligently, or grossly
negligently performed by management personnel of QWEST acting within the scope of their employment. ANSWER Defendant denies the allegations in paragraph 50. 51. Plaintiff purchased the said QWEST common stock and bonds during the said
period of wrongdoing without knowledge on its part or on the part of its investment advisers of the false and/or misleading nature of the public information supplied by QWEST. ANSWER Defendant denies the allegations in paragraph 51. 52. As detailed subsequently in this complaint because the defendant QWEST,
through its senior management acting within the scope of their employment, made false and misleading public information, the said individual defendants are jointly and severally liable, in addition to the actual damages sustained by the plaintiff, for additional punitive damages as may be fixed by the trial jury in this action. Plaintiff suggests a punitive damage award of an appropriate multiple of the specific losses actually sustained by the plaintiff in this case. ANSWER Defendant denies the allegations in paragraph 52.
-22-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 23 of 86
53.
The plaintiff through its investment advisers, directly or constructively relied
upon the said false and misleading representations in purchasing the securities of QWEST during the period of wrongdoing set forth in this Complaint. ANSWER Defendant denies the allegations in paragraph 53. 54. The defendant QWEST through its senior management personnel acting within
the scope of their employment, knew, should have known, negligently, grossly negligently or recklessly failed to discover that said representations were false and misleading. ANSWER Defendant denies the allegations in paragraph 54. 55. ANSWER Defendant denies the allegations in paragraph 55. 56. Plaintiff purchased the securities of QWEST on a public stock market during the By reason of the foregoing plaintiff has suffered the damages set forth above.
period of wrongdoing set forth in this complaint. ANSWER Defendant denies the allegations in paragraph 56. 57. The public stock market upon which the common stock of QWEST is publicly
traded is an efficient public market wherein the reported market value thereof is determined by the public reports and press releases issued by companies listed on the said public stock exchange.
-23-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 24 of 86
ANSWER Defendant notes that the allegation that the Company's securities are traded in an "efficient public market" is a legal conclusion to which no response is required. To the extent a response is required, Defendant denies the allegations in paragraph 57. 58. Significant components of the public determination of the market value of such
publicly traded common stock listed upon the said public stock exchange are the reported revenue, earnings, and revenue and earnings growth set forth in the information issued by such listed companies. ANSWER Defendant notes that the statements in paragraph 58 are so vague and ambiguous that Defendant is unable to ascertain the intended meaning and denies them on that basis. 59. Also significant are the projections of the future earnings and revenues of such
listed companies. ANSWER Defendant notes that the statements in paragraph 59 are so vague and ambiguous that Defendant is unable to ascertain the intended meaning and denies them on that basis. 60. The public market value of QWEST common stock and bonds was thus inflated
by the issuance of the aforesaid false and/or misleading public information by the defendant QWEST through senior management personnel acting within the scope of their employment. ANSWER Defendant denies the allegations in paragraph 60.
-24-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 25 of 86
61. customers. ANSWER
The defendant QWEST provides telecommunications and internet services to its
The allegations contained in paragraph 61 are not directed to Defendant and thus no response is required. To the extent a response is deemed required, the allegations in paragraph 61 are denied. 62. On July 18, 1999 the corporation forming one component of the company now
known as QWEST entered into a merger agreement with US West, Inc. one of the local telephone companies divested from AT & T. The merger agreement was completed on June 30, 2000. US West was the surviving Company after the merger and changed its name to QWEST. The other component of the merger involved became a public company by an initial public offering of June 23, 1997. ANSWER The allegations contained in paragraph 62 are not directed to Defendant and thus no response is required. To the extent a response is deemed required, the allegations in paragraph 62 are denied. 63. QWEST has a component unit known as GLOBAL BUSINESS MARKETS
which in turn has a wholly owned subsidiary known as GOVERNMENT AND EDUCATIONAL SOLUTIONS. These units purported financial results were included in the public reports of QWEST.
-25-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 26 of 86
ANSWER The allegations contained in paragraph 61 are not directed to Defendant and thus no response is required. To the extent a response is deemed required, the allegations in paragraph 61 are denied. 64. The acts of wrongdoing commenced with the filing by the defendant QWEST of a
press release on April 19, 2000 Qwest setting forth the company's purported financial results for the first quarter of 2000. The information set forth in the said press release was then contained in a 10-Q report filed with the United States Securities and Exchange Commission, hereinafter termed the SEC, on May 12, 2000. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements or press releases and thus lacks sufficient knowledge or information of the statements in paragraph 64 to admit or deny them, and on that basis denies them. 65. In the above documents QWEST reported record revenue of 1.22 billion dollars.
The reported revenue was false and misleading as will be set forth hereinafter in this Complaint. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements or press releases and thus lacks sufficient knowledge or information of the statements in paragraph 65 to admit or deny them, and on that basis denies them. 66. The press release and 10-Q report set forth purported revenues for the second
quarter of 2000 of 1.28 billion dollars.
-26-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 27 of 86
ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements or press releases and thus lacks sufficient knowledge or information of the statements in paragraph 66 to admit or deny them, and on that basis denies them. 67. The acts of wrongdoing continued with the filing by the defendant QWEST of a
press release on October 24, 2000 setting forth the purported financial results of the Company for the third quarter of 2000 and the nine months of 2000. The information contained in the said press release was confirmed in a 10-Q report filed with the SEC on November 18, 2000. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements or press releases and thus lacks sufficient knowledge or information of the statements in paragraph 67 to admit or deny them, and on that basis denies them. 68. The press release and the 10-Q report set forth purported revenues of 3.46 billion
dollars for the past nine months of 2000. The reported revenue was false and misleading as will be set forth hereinafter in this Complaint. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements or press releases and thus lacks sufficient knowledge or information of the statements in paragraph 68 to admit or deny them, and on that basis denies them. 69. The acts of wrongdoing continued with the filing by the defendant QWEST of a
press release on January 24, 2001 setting forth the purported financial results of the Company for
-27-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 28 of 86
the fourth quarter and the year of 2000. The information contained in the said press release was confirmed in a 10-K report filed with the SEC on March 6, 2001. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements or press releases and thus lacks sufficient knowledge or information of the statements in paragraph 69 to admit or deny them, and on that basis denies them. 70. The 10-K report set forth record revenues of 5.02 billion dollars. The reported
revenue was false and misleading as will be set forth hereinafter in this Complaint. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements or press releases and thus lacks sufficient knowledge or information of the statements in paragraph 70 to admit or deny them, and on that basis denies them. 71. The acts of wrongdoing continued with the filing by the defendant QWEST of a
press release on April 24, 2001 setting forth the purported financial results of the Company for the first quarter of 2001. The information contained in the said press release was confirmed in a 10-Q report filed with the SEC on May 15,2001. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements or press releases and thus lacks sufficient knowledge or information of the statements in paragraph 71 to admit or deny them, and on that basis denies them. 72. The purported revenues set forth in the aforesaid press release and 10-Q report
were false and misleading as will be set forth hereinafter in this Complaint.
-28-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 29 of 86
ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements or press releases and thus lacks sufficient knowledge or information of the statements in paragraph 72 to admit or deny them, and on that basis denies them. 73. The acts of wrongdoing continued with the filing by the defendant QWEST of a
press release on July 24, 2001 setting forth the purported financial results of the Company for the second quarter and six months past of 2001. The information contained in the said press release was confirmed in a 10-Q report thereafter filed with the SEC on August 14, 2001. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements or press releases and thus lacks sufficient knowledge or information of the statements in paragraph 73 to admit or deny them, and on that basis denies them. 74. The said press release and 10-Q report set forth purported revenues for the period
involved. These reported revenues were false and misleading as will be set forth hereinafter in this Complaint. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements or press releases and thus lacks sufficient knowledge or information of the statements in paragraph 74 to admit or deny them, and on that basis denies them. 75. The acts of wrongdoing continued with the filing by the defendant QWEST of a
press release on October 31, 2001 setting forth the purported financial results of the Company for
-29-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 30 of 86
the third quarter and the past nine months of 2001. The information contained in the said press release was confirmed in a 10-Q report thereafter filed with the SEC on November 14, 2001. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements or press releases and thus lacks sufficient knowledge or information of the statements in paragraph 75 to admit or deny them, and on that basis denies them. 76. In the above documents QWEST reported revenues of $15 billion dollars. These
reported revenues were false and misleading as will be subsequently set forth in this Complaint. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements or press releases and thus lacks sufficient knowledge or information of the statements in paragraph 76 to admit or deny them, and on that basis denies them. 77. The acts of wrongdoing continued with the filing by the defendant QWEST of a
press release on January 29, 2002 setting forth the purported financial results of the Company for the fourth quarter and for the year of 2001. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements or press releases and thus lacks sufficient knowledge or information of the statements in paragraph 77 to admit or deny them, and on that basis denies them. 78. The press release of January 24, 2002 set forth year end revenues of QWEST of
19.74 billion dollars. These reports of revenues were false and misleading as will be set forth hereinafter in this Complaint.
-30-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 31 of 86
ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 78 to admit or deny them, and on that basis denies them. 79. On February 13, 2002 the Wall Street Journal claimed revelation that various
mechanisms were used to improperly enhance QWEST's financial results. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 79 to admit or deny them, and on that basis denies them. 80. As a result of the Wall Street Journal disclosures the market value of QWEST
common stock took a precipitous drop and the SEC commenced an investigation which culminated in the filing of an SEC complaint in February 2003. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 80 to admit or deny them, and on that basis denies them. 81. QWEST is liable to the plaintiff pursuant to the allegations of this Complaint
because it issued and disseminated false and misleading financial reports upon which the plaintiff directly or constructively relied in order to purchase the common stock of QWEST which was purchased at inflated values. Any wrongful acts committed by the individual defendants were committed within the scope of their employment. ANSWER Defendant denies the allegations in paragraph 81 to the extent they are directed to Defendant.
-31-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 32 of 86
82.
The individual defendants are liable to the plaintiff because they committed
wrongful acts which were committed within the scope of their employment. ANSWER Defendant denies the allegations in paragraph 82. 83. The common stock of QWEST is publicly traded on a public stock exchange. The
market value of publicly traded stock is primarily determined by the reported earnings of the stock issuer involved. This is particularly true when the stock is that of a "public utility" type of issuer such as QWEST where a major portion of its revenues comes from local telephone service users. ANSWER Defendant admits that Qwest's common stock is traded on the New York Stock Exchange. Defendant lacks sufficient knowledge or information as to the remainder of the allegations in paragraph 83 to admit or deny them, and on that basis denies them. 84. Another factor influencing the pubic market value of common stocks are
purported "earnings growth". ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 84 to admit or deny them, and on that basis denies them. 85. Beginning in 1999 and continuing after the merger with US West, Senior
management of QWEST, who are named as "JOHN DOE" defendants in this Complaint, made excessive and unreasonable earnings growth projections for QWEST.
-32-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 33 of 86
ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 85 to admit or deny them, and on that basis denies them. 86. In order to meet the unreasonable and excessive earnings growth projections the
Senior Management of QWEST required their subordinates to follow rigid and inflexible revenue objectives. ANSWER Defendant denies the allegations in paragraph 86. 87. The senior management of QWEST exerted extreme pressure on their
subordinates to meet or exceed these above revenue projections at all costs. ANSWER Defendant denies the allegations in paragraph 87. 88. In addition, management and employee bonuses were dependent upon such
parties meeting or exceeding the revenue growth projections made by senior management and further that failure to meet such revenue projections could lead to dismissal of the executive or employee involved. ANSWER Defendant denies the allegations in paragraph 88. THE GENUITY SALES AND SERVICE CONTRACT 89. The fraudulent transactions involving the above matters resulted in the improper
recordation of approximately $100,000,000 in revenue by QWEST in the third quarter of 2000 as follows:
-33-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 34 of 86
ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements or press releases and thus lacks sufficient knowledge or information of the statements in paragraph 89 to admit or deny them, and on that basis denies them. 90. In September 22, 2000 QWEST and GENUITY entered into a sales and service
contract wherein QWEST was to supply certain equipment and internet services to GENUITY. ANSWER Defendant admits that during the third quarter of 2000, Qwest entered into a contract with Genuity in which it sold certain equipment to Genuity and that Qwest agreed to provide services to Genuity. Except as specifically admitted above, Defendant denies the allegations in paragraph 90. 91. ANSWER No response is required to the incomplete statement in paragraph 91. To the extent a response is required, Defendant denies the statement in paragraph 91. 92. Prior to the merger between the prior public company and US West, Genuity had The genesis of this contract was the following:
previously contracted to secure network services from US West but had sought a lower price for these services. ANSWER Defendant admits that prior to the merger between Qwest and US WEST, Genuity had a contract with US WEST and that, at some point during the pendency of contract,
-34-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 35 of 86
Genuity sought to obtain lower pricing on some of the services it was receiving. Except as specifically admitted above, Defendant denies the allegations in paragraph 92. 93. ANSWER Defendant notes that the allegations in paragraph 93 are vague and ambiguous, but Defendant admits that at times in the past, Qwest conducted negotiations with Genuity. Except as specifically admitted above, Defendant denies the allegations in paragraph 93. 94. During these negotiations between QWEST and Genuity it was contemplated Negotiations then ensued between Genuity and QWEST for a new contract.
initially that QWEST would own and operate the equipment to supply the services since Genuity did not wish to own or operate the equipment. ANSWER Defendant notes that the allegations in paragraph 94 are so vague and ambiguous that Defendant is unable to ascertain their intended meaning, and denies them on that basis. 95. However the negotiators of QWEST who were defendants ARNOLD and
WESTON made it clear to the GENUITY team that it was necessary to have a "sale" provision in the final agreement because it was necessary to generate $100,000,000 in revenue with respect thereto. ANSWER Defendant denies the allegations in paragraph 95. 96. It was then decided to split the final agreement into two parts with one part to be a
purported "sale" agreement and the other part to be a purported "service" agreement.
-35-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 36 of 86
ANSWER Defendant denies the allegations in paragraph 96. 97. There was no business purpose to split the Genuity agreement into two parts and
this was done solely to attempt to recognize $100,000,000 of purported revenue in the third quarter of 2000. ANSWER Defendant denies the allegations in paragraph 97. 98. Defendants ARNOLD, EVELETH, GRAHAM, and WESTON received a
September 14, 2000 e-mail from a QWEST financial analyst assigned to the Genuity transaction which acknowledged that $80,000,000 in EBITDA would result from the purported equipment sale to Genuity but also noting that a significant risk existed to the effect that the $100,000,000 of revenue might not be recognized immediately in the transaction. ANSWER Defendant admits that on September 14, 2000, an email appears to have been sent from the account of a Qwest employee to the accounts of other Qwest employees that discusses the Genuity transaction. Defendant respectfully refers the Court to the entire document for a complete understanding of its content and any attempt to characterize it is denied. Except as specifically admitted above, Defendant denies the allegations in paragraph 98. 99. Also in September 2000 a QWEST sales team leader expressed concern to
defendant ARNOLD about the propriety of immediately recognizing the $100,000,000 of purported revenue from the purported equipment sale under the Genuity agreement because
-36-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 37 of 86
under similar agreements entered into by QWEST such revenue was only recognized over the life of the service agreement. Defendant ARNOLD did not consider this concern to be significant. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 99 to admit or deny them, and on that basis denies them. 100. Furthermore defendant ARNOLD stated on at least one occasion that he was not
concerned about any losses that might occur under the service contract since his primary concern was the premature recognition of the $100,000,000 in revenue under the Genuity purported sales agreement. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 100 to admit or deny them, and on that basis denies them. 101. Defendant WESTON in negotiating the agreements involved with Genuity stated
that QWEST needed the $100,000,000 in revenue for the third quarter of 2000 in order to agree to the Genuity agreements. ANSWER Defendant denies the allegations contained in paragraph 101. 102. Also, on several other occasions, defendant WESTON admitted to lower level
employees that QWEST needed $100,000,000 in purported revenue for the third quarter of 2000. ANSWER Defendant denies the allegations contained in paragraph 102.
-37-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 38 of 86
103.
QWEST paid Genuity a $4,000,000 bonus to sign the services agreement before
the end of the third quarter of 2000. Defendants ARNOLD and WESTON were aware of this $4,000,000 payment and the reason that it was made. ANSWER Defendant admits that he was aware that Qwest agreed to pay a $4 million signing premium on or before December 31, 2000, in consideration for Genuity's execution of the agreement during the month of September 2000, but denies the remainder of the allegations contained in paragraph 103 to the extent it alleges that Defendant was aware that any such payment was made for an improper purpose. 104. Defendant EVELETH was asked to approve the structure of the equipment
purchase agreement with Genuity. This defendant knew that contrary to GAAP the services contract placed the risk of the ownership of the equipment with QWEST and not with GENUITY. ANSWER Defendant lacks sufficient knowledge or information regarding the allegations in paragraph 104 to admit or deny them, and on that basis denies them.
105.
In order to recognize purported revenue for the purported "equipment sales"
QWEST would have to deliver the equipment by September 30, 2000. Even though the normal method of shipment of this equipment would be by ground transport defendant WESTON agreed to have the equipment delivered by chartered jet aircraft at a substantially higher cost so that it could be delivered by September 30, 2000.
-38-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 39 of 86
ANSWER Defendant was involved in the decision to ship equipment to Genuity by air freight. Defendant denies the remainder of the allegations contained in paragraph 105. 106. The separation of the sales contract from the service contract was not the usual
practice in the industry. Indeed Genuity's five other vendors at that time owned the equipment upon which service was provided. Even more importantly Genuity itself considered the sales agreement and the purportedly separate service agreement to be a unitary agreement. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 106 to admit or deny them, and on that basis denies them. 107. All of the actions taken by the individual defendants herein as set forth in this
Complaint were performed within the scope of their employment thus making QWEST itself liable therefor. ANSWER No response to the allegations in paragraph 107 as they constitute legal conclusions. To the extent a response is required, Defendant denies the allegations in paragraph 107. 108. GENUITY considered the two purported separate agreements with QWEST to be
a single unitary agreement at a total cost of $260,000,000. GENUITY never expressed or had any need to purchase the equipment involved from QWEST. ANSWER Defendant lacks sufficient knowledge or information of the allegations in paragraph 108 to admit or deny them, and on that basis denies them.
-39-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 40 of 86
109.
It is thus clear that the purported separate sales and service contracts were, in fact,
a single unitary contract, that the contracts were purportedly separated so as to fraudulently recognize purported revenue that had not yet occurred for the purpose of inflating the public market value of the common stock of QWEST in violation of Colorado State Law and that these fraudulent and illegal acts occurred within the State of Colorado. ANSWER Defendant denies the allegations in paragraph 109. 110. However, in an attempt to meet the revenue projections made by senior
management of QWEST and in particular the revenue projections of the Global Business Unit of QWEST the defendants ARNOLD, EVELETH, GRAHAM, and WESTON split the single contract into two contracts with the first contract purporting to be a sale of equipment to Genuity for $100,000,000 and the second contract purporting to be a sale of services to Genuity for $160,000,000 over a five year period. ANSWER Defendant denies the allegations in paragraph 110. 111. By so splitting the contract into two parts QWEST then recognized the
$100,000,000 for the purported sale of equipment as immediate revenue. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements and thus lacks sufficient knowledge or information of the statements in paragraph 111 to admit or deny them, and on that basis denies them.
-40-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 41 of 86
112.
This immediate recognition of revenue from the purported sales portions of the
September 22, 2000 agreement did not conform to Generally Accepted Accounting Practices, hereinafter GAAP for the following reasons: a. The risk of loss with respect to the equipment purportedly "sold" to Genuity did not transfer to Genuity as is required in a normal sale. b. QWEST did not accomplish all of the terms of the purported sales agreement. c. The revenue purportedly apportioned to the equipment sale did not represent the fair value of the equipment at the time of sale. d. The purported sale of equipment was an integral part of the second purported agreement providing for services to be provided by QWEST to Genuity. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements and thus lacks sufficient knowledge or information of the statements in paragraph 112 to admit or deny them, and on that basis denies them. 113. As a result of the fraudulent and improper splitting of a single agreement into two
parts QWEST was able to recognize revenue of $100,000,000 and $20,500,000 as the cost of goods sold in the third quarter of 2000 thus substantially and fraudulently inflating reported revenues for the said quarter. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements and thus lacks sufficient knowledge or information of the statements in paragraph 113 to admit or deny them, and on that basis denies them.
-41-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 42 of 86
114.
In addition QWEST was able to include EBITDA of approximately $80,000,000
in its third quarter of 2000 earnings press release ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements and thus lacks sufficient knowledge or information of the statements in paragraph 114 to admit or deny them, and on that basis denies them. 115. Furthermore, in the third quarter of 2000 QWEST also began to recognize
revenue in the third quarter of 2000 ratably over the life of the service agreement despite the fact that QWEST had not yet begun to provide services under that agreement. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements and thus lacks sufficient knowledge or information of the statements in paragraph 115 to admit or deny them, and on that basis denies them. 116. This improper recognition of revenue amounted to $2,000,000 in the third quarter
of 2000 and $8,000,000 in the fourth quarter of 2000. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements and thus lacks sufficient knowledge or information of the statements in paragraph 116 to admit or deny them, and on that basis denies them. 117. The above matters caused the QWEST quarterly report for the third quarter of
2000, the QWEST annual report for the year 2000, the QWEST quarterly report for the first quarter of 2001, the QWEST quarterly report for the second quarter of 2001, the QWEST
-42-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 43 of 86
quarterly report for the third quarter of 2001, and the QWEST annual report for the year 2001 to be false and misleading. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements and thus lacks sufficient knowledge or information of the statements in paragraph 117 to admit or deny them, and on that basis denies them. 118. contract. ANSWER Defendant notes that the statement in paragraph 118 is so vague and ambiguous that Defendant is unable to ascertain the intended meaning, and denies the statement on that basis. 119. The splitting of the GENUITY single unitary agreement into two parts having no The splitting of the single service contract into a separate sales and service
business purpose and known to QWEST to be performed for the sole purpose of creating fictitious $100,000,000 of revenue in the third quarter of 2000 and in particular when Genuity considered the agreements to be a single unitary agreement and had no desire to purchase the equipment involved from QWEST was a clear violation of GAAP. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements and thus lacks sufficient knowledge or information of the statements in paragraph 119 to admit or deny them, and on that basis denies them.
-43-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 44 of 86
120.
There was no proper evidence provided of the fair value of the equipment
purportedly sold. ANSWER Defendant denies the allegations in paragraph 120. 121. GAAP requires that any recognition of revenue from equipment sales requires
proof of the fair value of the equipment sold. In the present case there was not only no evidence of the fair value of the equipment purportedly purchased by Genuity but it was also clear that QWEST would lose money on the service agreement. The purported "fair value" was arbitrarily determined by dividing the number of units purportedly sold into the predetermined "revenue" of $100,000,000 creating an arbitrary price of $500.00 per unit which had no independent basis of evaluation. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements and thus lacks sufficient knowledge or information of the statements in paragraph 121 to admit or deny them, and on that basis denies them. 122. Furthermore defendant WESTON knew that QWEST had actually sold similar
equipment to another customer for $250.00 per unit in the first half of 2002. ANSWER Defendant denies the allegations in paragraph 122. 123. The defendants WESTON, ARNOLD, EVELETH and GRAHAM had also
received a communication from a financial analyst questioning the revenue recognition
-44-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 45 of 86
proposed. The financial analyst also questioned the unit price of $500.00 per unit provided in the Genuity sales agreement. ANSWER Defendant denies the allegations in paragraph 123 directed at Defendant. 124. An analysis of the service agreement, standing alone, was negative by
$38,000,000 and this was known to defendant EVELETH. Both defendants ARNOLD and EVELETH knew that it was not normal business practice for QWEST to enter into a contract with such a large negative present value. ANSWER Defendant lacks sufficient knowledge or information regarding the allegations in paragraph 124 to admit or deny them, and on that basis denies them. 125. The cost of goods sold was also fraudulently recorded as relating to the third
quarter of 2000 only after the third quarter of 2000 had ended as follows: ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements and thus lacks sufficient knowledge or information of the statements in paragraph 125 to admit or deny them, and on that basis denies them. 126. A portion of the claimed cost of goods sold in connection with the Genuity
purported sales agreement, to wit, $17,000,000 of the total purported cost of goods of $37,500,000, actually related to goods purchased by QWEST in the fourth quarter of 2000. These goods included $7,000,000 of routers and switches necessary to make the equipment
-45-
Case 1:04-cv-00782-REB-PAC
Document 86
Filed 12/05/2005
Page 46 of 86
involved operational. The additional $10,000,000 involved equipment required to be used in connection with the service agreement with Genuity. ANSWER Defendant had no role in the dissemination, preparation, or filing of any Qwest financial statements and thus lacks sufficient knowledge or information of the statements in paragraph 125 to admit or deny them, and on that basis denies them. 127. Defendants ARNOLD, EVELETH, GRAHAM and WESTON knew that the
purported cost of goods sold in the third quarter of 2000 was understated because they had received an E-mail on September 14, 2000 from a QWEST technical accountant on the Genuity transaction calling attention to the apparent understatement involved. ANSWER Defendant denies the allegations in paragraph 127. 128. Contrary to the requirement of sale that the risk of loss is on the buyer in the
QWEST GENUITY contract the risk of loss was on QWEST. ANSWER Defendant notes that the statement in paragraph 128 is so vague and ambiguous that Defendant is unable to ascertain the intended meaning, and denies the statement on that basis. 129. GAAP