CalSTRS Sues Qwest, Its Officers and Directors and Financial Services Companies; Alleged Securities Fraud Cost California Teachers' Fund $150 million.

News Editors

SACRAMENTO, Calif.--(BUSINESS WIRE)--Dec. 11, 2002

Qwest Communications and several of the nation's top banking and financial service companies were named as defendants Tuesday in a lawsuit filed by the California State Teachers' Retirement System in the financial collapse of Qwest.

The complaint alleges Qwest and the companies engaged in fraudulent schemes that cost the California teachers fund millions of dollars when the truth about Qwest's faltering financial condition was first disclosed.

The complaint, filed in San Francisco Superior Court, also named Salomon Smith Barney Inc., Citigroup Inc., Lehman Brothers Inc., Bank of America Corporation, Banc of America Securities LLC, JP Morgan Chase & Co., JP Morgan Chase Securities and Merrill Lynch & Co.

The case was filed on behalf of CalSTRS by the law firms of Cotchett, Pitre, Simon & McCarthy of Burlingame, California and Girard, Gibbs & DeBartolomeo LLP of San Francisco.

The complaint states that the teachers' pension fund lost about $150 million it had invested in Qwest securities offered by the banking and financial firms, which sold the debt and equity securities while at the same time "creating and financing many of the transactions" that were used to create the illusion that Qwest was a successful company.

"CalSTRS is actively pursuing this court action and others to call attention to fraudulent financial practices that seem to have infected what we hope is only a small part of Wall Street," said Jack Ehnes, CalSTRS Chief Executive Officer. "We took this action to protect our member teachers and at the same time attempt to establish higher levels of corporate responsibility in the nation's financial markets."

The complaint also named several Qwest officers and directors, including founder Philip F. Anschutz and former CEO Joseph Nacchio. They and other officers were accused of falsely representing that Qwest was one of the highest revenue producing telecommunication companies in the world to ensure that it met its quarterly Wall Street projections.

The complaint alleges that during its inflated financial run, Anschutz took more than $1.9 billion out of the Denver, Colorado-based company in insider trading, and Nacchio $228 million.

The Qwest house of cards folded on July 28, 2002 when the company disclosed that for the years 1999-2001, it had improperly accounted for about 220 transactions worth about $1.6 billion. On October 28, 2002, Qwest also disclosed it would defer $531 million of previously recognized revenue because of improper accounting.

The complaint states that the named financial companies, based on their due diligence, knew that their statements in registering the Qwest notes "were not true, that they omitted material facts, and were materially misleading. They knew that investors would be misled when they purchased Qwest notes and stock, but nevertheless made the misrepresentations to sell the notes and stock."

The firms took this action because "they knew that the only way that they would be repaid the loans (they made earlier to Qwest) and continue to receive millions in investment and advisory fees was if Qwest continued to be perceived as a successful company."

CalSTRS is the third largest public pension fund in the U.S., with a $94 billion investment portfolio. The pension system serves approximately 715,000 members and benefit recipients by providing retirement, disability and survivor benefits to California's public school educators in grades kindergarten through community college. Those benefits are guaranteed by law and are not affected by changes in the investment portfolio.

Editor: Note the complaint may be viewed on the CalSTRS Web site at http://www.calstrs.ca.gov/whatsnew/qwestlawsuit.pdf.