U.S. Launches Criminal Investigation of Qwest

Qwest Communications International Inc., already under investigation for its accounting practices, said Wednesday that federal prosecutors have launched a criminal probe, sending shares diving as investors worry the nation’s fourth-largest local phone company may be headed for bankruptcy.

A spokesman for the U.S. attorney’s office confirmed the investigation but declined to provide details. The dominant local phone company in 14 states from Minnesota to Washington, Qwest said it is cooperating fully.

Qwest, with 57,000 employees and 17.6 million customers, declined to discuss the prospects for a bankruptcy. The Denver-based company has reported eight straight quarterly losses, totaling $5.2 billion.

Qwest has been under pressure for months as it struggles to cope with a cash crunch and $26 billion in debt.

Credit rating agencies have slashed the company’s debt to “junk,” and the Securities and Exchange Commission is probing its accounting.

In March, the SEC began investigating the phone company’s swaps of long-distance network capacity with rivals such as Global Crossing Ltd., also the target of a criminal probe. The swaps may have inflated revenue.

U.S. attorneys typically open investigations after referrals from agencies such as the FBI or the Internal Revenue Service, or at their own initiative, said Martin Pollner, an attorney who has defended companies accused of wrongdoing by federal agencies.

Chief Executive Richard Notebaert, who replaced Joseph Nacchio last month, is trying to sell assets to help pay down debt and avoid a loan default.

Moody’s Investors Service and Fitch Ratings responded Wednesday by cutting Qwest’s senior unsecured debt ratings and warned they could be downgraded again. They said the probe may hurt the company’s ability to attract and retain customers, as well as its efforts to quickly sell several assets.

Qwest’s shares fell as low as $1.52 on the New York Stock Exchange, before finishing down 83 cents, or 32%, at $1.77.