SEC to probe Qwest
By Ross Wehner, Staff Writer
Thursday, May 5, 2005
The Securities and Exchange Commission is looking into what it considers suspicious trading of Qwest stock during the bidding war for MCI, sources close to the situation confirmed.
The Denver Post first reported last week that Qwest's stock spiked during the last 15 minutes of trading on the New York Stock Exchange from March 28 to March 30 to close above a critical price threshold known as a "collar."
Had Qwest's stock closed below the collar, investor confidence in Qwest's bid for MCI could have been shaken. Qwest was dueling against Verizon, which this week locked in a merger agreement with MCI.
"There was a lot of incentive to get that Qwest stock up above that collar price," said Brad Lam, a former SEC attorney who now has a private law practice in Denver.
It does not matter to the SEC that Qwest did not win the battle for MCI.
"If the SEC feels that someone was out there trying to manipulate the stock, it doesn't necessarily matter whether they were good enough to profit at it," said Frank Birgfeld, a former National Association of Securities Dealers regulator in Denver. "If I hold up a bank and it turns out it's Saturday and there was no money, they would still like me off the streets."
Manipulating share prices is prohibited by the anti-fraud rule of the Securities Exchange Act of 1934.
Securities law also prohibits companies from trading their own stock in the last 15 minutes of the trading day.
"I would be utterly shocked if anybody affiliated with Qwest had anything to do with this," said independent telecom analyst Tom Friedberg. "But unscrupulous hedge funds certainly would have had an incentive to manipulate Qwest stock."
Qwest declined to comment Wednesday.
During the course of the three-month bidding war for MCI, Qwest chief executive Richard Notebaert rallied support from the hedge funds that control up to 70 percent of MCI stock.
"There was an unholy alliance between Qwest and the hedge funds," Friedberg said. "Qwest desperately wanted to win MCI and the hedge funds wanted to keep Qwest in the game as long as possible to extract the highest price possible."
Maintaining a certain stock price was key to Qwest's offer for MCI, which in late March was $26 a share in cash and stock. Qwest guaranteed the value of its stock within a 10 percent collar above and below $4.15 per share. Below the collar, MCI shareholders would receive less value for their Qwest stock.
"This is the kind of case the SEC could probably make," Lam said. "They could show exactly why the parties would want to make those kind of trades."
Staff writer Ross Wehner can be reached at 303-820-1503 or email@example.com .