The Association of U S West Retirees



Qwest settlement bill may go up
Some shareholder groups opt out of class-action case
By Jeff Smith
Rocky Mountain News
Friday, May 5, 2006

Qwest Communications may have to cough up hundreds of millions of dollars more to settle civil securities fraud allegations stemming from the Joe Nacchio era.  Shareholder groups alleging investment losses of $2.8 billion from 1999 to 2002 have opted out of a proposed $400 million class-action settlement, according to a regulatory filing Wednesday.

Most made their decision in recent weeks, and many are pursuing separate lawsuits against Qwest and its former executives.

While eventual settlements still are likely to be a fraction of the total investment loss, a wild card is what damages a jury might decide to award if any of the cases go to trial.

Simon Flannery, a telecommunications analyst at the New York investment banking firm of Morgan Stanley, wrote in a report Thursday that the "significant numbers" of shareholders deciding to exclude themselves from the class-action settlement causes concern.

"This raises the risk of higher legal expenses and settlements, and could even threaten the proposed class-action settlement," Flannery wrote.

Flannery and another Morgan Stanley analyst were the first to question Qwest's accounting during Nacchio's regime in 2001.

Qwest Chief Executive Dick Notebaert said in a telephone interview Wednesday that "obviously" the Denver telco would like every plaintiff to stay in the class-action settlement.  But he added it's almost become the norm for some investors to opt out.

"Assuming everything is approved (on the proposed class-action settlement), a majority of the litigation is done," Notebaert stressed.

Kathleen Walsh, spokeswoman for Lerach Coughlin, the lead law firm for the class-action plaintiffs, said in response to the Flannery report that the law firm doesn't comment on speculation.

The next hearing on the proposed class-action settlement is scheduled for May 19 in U.S. District Court in Denver.

Qwest may be a victim of its own success, with institutional investors more aggressive now that the company is on firmer financial footing.

But Donna Jaegers, a telecommunications analyst at Janco Partners in Greenwood Village, sees something else at play:  the recent indictment of former Qwest CEO Nacchio on 42 counts of insider trading.

"If he goes to trial and he's shown to be guilty of manipulating the numbers, then that strengthens the hands of these other lawsuits against Qwest," Jaegers said.

The proposed class-action settlement actually is $650 million because it includes the $250 million Qwest agreed to pay to settle fraud allegations made by the Securities and Exchange Commission.

Qwest already had put $750 million into a reserve to cover litigation, which would be down to around $100 million after paying off the class-action claims.  But the company has not made any adjustments to its reserves.

Qwest reiterated in a quarterly filing Wednesday that the reserve is the best estimate of its minimum liability.

"The ultimate outcomes of these matters are still uncertain and the amount of loss we may ultimately incur could be substantially more than the reserves we have provided," it added.

Curtis Kennedy, attorney for the Association of U S West Retirees, said the opt-outs play to the advantage of the little investors such as individual retirees.

"When the institutions pull out, a bigger piece of pie is left to be shared by everyone who's left."

Cracks in Qwest's proposed class-action settlement?

  Investors that recently opted out:  New York State Common Retirement Fund, San Francisco Employees Retirement System, Fire and Police Pension Association of Colorado, Pennsylvania Public School Employees' Retirement System and a number of undisclosed groups.

  Total alleged investment losses:  $1.9 billion

  Groups that opted out before the proposed class-action settlement was announced last year:  State of New Jersey, California State Teachers' Retirement System, State Universities Retirement System of Illinois, Stichting Pensioenfonds, New York City pension funds, Shriners Hospital for Children, Teachers' Retirement System of Louisiana

  Total alleged investment losses:  $900 million

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