Risk & Compliance

Shareholders Abandon Qwest Settlement

The telecom company could come within $100 million of draining its litigation reserves.
Stephen TaubMay 5, 2006

The life may be draining out of the Qwest Communications class-action settlement. According to company regulatory filings, many shareholders have backed out of the proposed $400 million settlement, which could mean Qwest is on the hook for a lot more money than it anticipated when it agreed to settle.

Seven parties that had previously filed individual suits against the telecom company have chosen to opt out of the settlement. In addition, some of the parties that have more recently requested to be excluded from the deal have “asserted claims against us,” the company added.

The group of investors that doesn’t want to settle says it lost roughly $2.8 billion from 1999 to 2002, according to The Rocky Mountain News. “This raises the risk of higher legal expenses and settlements, and could even threaten the proposed class-action settlement,” the paper quoted Simon Flannery, a telecommunications analyst at Morgan Stanley, as saying.

Qwest chief executive Dick Notebaert told the News that he would prefer all investors to remain in the class-action settlement, but that “assuming everything is approved [on the proposed settlement], a majority of the litigation is done.” Yet the company’s filings declared that “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.”

Although the proposed settlement is for $400 million, the company has already agreed to pay the Securities and Exchange Commission $250 million to settle fraud allegations. That puts the combined settlements within $100 million of the current reserve Qwest has set aside to cover litigation, which is reported to be nearly $750 million.

The amount reserved is “the lowest end of the possible range of loss,” said the Qwest filing. So the company warned that if the recorded reserve is insufficient, it will need to book additional charges in future periods.

Until recently, it was unusual for large numbers of shareholders to opt out of class-action lawsuits. Last year, Bill Lerach, a partner at Lerach, Coughlin, Stoia, Geller, Rudman, and Robbins, announced a settlement agreement with WorldCom on behalf of shareholders who had opted out of the class-action lawsuit. In his press release announcing the deal, Lerach asserted: “Our clients’ net recoveries on their WorldCom bond losses are substantially higher than the estimated recovery for the same bond losses in the WorldCom class action.”

The tables have turned on Lerach in the Qwest case, however. This time, Lerach, Coughlin is the lead law firm for the class-action plaintiffs.

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

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