Justice Department to investigate federal telecom contractor

Qwest Communications, a local phone and data service provider and a major player in the federal telecommunications market, announced Tuesday that the U.S. attorney's office in Denver has begun a criminal investigation of the company. Qwest spokesman Steve Hammack said the company contacted Justice Department officials after news reports last week said the company was under investigation. Justice confirmed the reports, but hasn't told Qwest about the subject of the investigation, Hammack said.

Jeff Dorschner, a spokesman for the U.S. attorney's office in Denver, confirmed that the government is investigating Qwest, but said he was unable to provide any details on the matter, including the scope and nature of the inquiry or when it might end.

Qwest provides local telephone service for federal agencies through a series of contracts with the General Services Administration. The company also supports the Energy Department's Energy Sciences Network. Staff at Lawrence Berkeley National Laboratory in California manage and operate the network, and Qwest provides the Internet connection for more than 30 Energy sites that use it. The company also supplies broadband services and Web hosting for the Treasury Department's communication system.

Qwest's accounting practices are currently being investigated by the Securities and Exchange Commission. Regulators and lawmakers have recently questioned the firm's leasing of space on its fiber optic network to other telecom companies, and whether those transactions were inappropriately counted as revenue. Other telecom firms, including Global Crossing and WorldCom, have also recently suffered intense regulatory and congressional inspection of their network leases, often called "hollow swaps," because two companies exchange equal amounts of space and count the transaction as revenue, even though it produces no actual income. The Justice Department investigation signals that Qwest is another company in an increasingly long line of federal contractors who have come under investigation for their accounting practices. Enron, the auditing firm Arthur Andersen, Global Crossing and WorldCom are some of the contractors that have been investigated, indicted or convicted of criminal charges in recent months. Enron, Global Crossing and telecom contractor Winstar have filed for Chapter 11 bankruptcy protection. The government has temporarily suspended Enron and Andersen from doing future business with agencies. GSA is also considering whether to prohibit WorldCom from future work, and telecom industry observers expect the Defense Department will soon rescind a prized $450 million high-speed network contract that it awarded to WorldCom in April. Qwest competed for that contract. Qwest is now saddled with about $26 billion in debt.