News from February 21-25, 2003

Former Qwest Officers Indicted

2/25. A grand jury of the U.S. District Court (DColo) returned an indictment [29 pages in PDF] charging four former Qwest Communications officers with with conspiracy, securities fraud, filing false reports with the Securities and Exchange Commission (SEC), making false statements to accountants, and wire fraud.

The indictment charges Grant Graham (former Chief Financial Officer for Qwest's Global Business Unit), Thomas Hall (former Senior Vice President in the Government and Educational Solutions Group within Qwest's Global Business Unit), John Walker (former Vice President in the Government and Educational Solutions Group), and Bryan Treadway (former Assistant Controller at Qwest).

The U.S. Attorneys Office for the District of Colorado stated in a release that "The indictment alleges that the defendants devised a scheme to falsely recognize more than $33 million of additional revenue for the 2quarter of 2001 -- a quarter for which Qwest was experiencing weak sales. The defendants allegedly sought to fill a gap in revenue by the company's Global Business Unit by immediately reporting millions of dollars from a purchase order with the Arizona School Facilities Board -- in violation of Securities and Exchange Commission rules. The indictment also alleges that the defendants sought to hide their actions by falsifying documents and engaging in securities and mail fraud." See also, substantially similar DOJ release,

The indictment begins with the allegation that "Beginning on or about March 2001 and continuing until on or about January 30, 2002, in the State and District of Colorado and elsewhere, the Defendants, Grant Graham, Thomas Hall, John Walker, Bryan Treadway and others known and unknown to the Grand Jury did knowingly and willfully agree, conspire and combine to commit the offenses alleged in Counts 2-12 against the United States, namely, filing and causing to be filed a false form 10Q with the Securities Exchange Commission (``SEC´´) in violation of 15 U.S.C. §78ff(a), maintaining and causing to be maintained false books and records in violation of 15 U.S.C. §78ff, 15 U.S.C. §78m, and SEC Rule 13b2-1, making and causing to be made false statements to accountants in violation of 15 U.S.C. §78ff and SEC Rule 13b2-2, committing securities fraud in violation of 15 U.S.C. §78j and SEC Rule 10b-5, making and causing to be made false statements to the SEC in violation of 18 U.S.C. §1001 and committing wire fraud in violation of 18 U.S.C. §1343 and §1346 ..."

Attorney General John Ashcroft lauded the work of the Corporate Fraud Task, which President Bush created last year. See, prepared statement.

SEC Sues Former Qwest Officers

2/25. The Securities and Exchange Commission (SEC) filed a civil complaint in U.S. District Court (DColo) against eight current and former officers of Qwest Communications alleging violations of federal securities laws in connection with fraudulently inflating the company's revenues.

Like the criminal indictment [29 pages in PDF] obtained by the Department of Justice (DOJ), this civil complaint alleges violations relating to the Arizona School Facilities Board. However, the SEC complaint, in addition, alleges a second fraudulent scheme involving sales to Genuity.

The complaint alleges that "In June 2000, Genuity Inc., an internet service provider, and Qwest, began negotiation of a proposed agreement in which Qwest would provide Genuity with internet services using equipment owned and operated by Qwest."

It continues that Qwest officers "participated in a scheme in which Qwest artificially split the agreement into two separate contracts. In the first contract Qwest purported to sell equipment to Genuity at an inflated price. In a second contract Qwest agreed to provide services to Genuity at a loss to Qwest and reassumed all risk of loss and obsolescence on the equipment purportedly sold pursuant to the first contract. There was no business purpose for separating the original agreement between Qwest and Genuity."

Rather, the complaint alleges, Qwest officers "used the separation of the contracts solely to justify the fraudulent immediate recognition of revenue." And, "As a result of the fraudulent transaction, Qwest recognized improperly $100 million in revenue and claimed $80 million in earnings before interest, taxes, depreciation, and amortization (``EBITDA´´) in its quarter ended September 30, 2000. Additionally, for the quarters ended September 30, 2000, December 31, 2000, March 31, 2001 and June 30, 2001 Qwest fraudulently recognized revenue of approximately $10.6 million despite the fact that Qwest had not begun providing any services." Consequently, various Qwest filings with the SEC "were all materially false and misleading."

The new SEC Chairman, William Donaldson, stated that "These defendants were part of a corporate culture that placed meeting Wall Street expectations above the duty to serve shareholders and above respect for the law. Today's action marks the beginning of our public efforts to hold accountable those at Qwest who abused the public trust. This case is the latest example, but by no means the last, of the aggressive action that we at the SEC are committed to take in our pursuit of corporate wrongdoers." See, prepared statement. See also, SEC release.

Qwest released a statement: "Qwest continues in its efforts to cooperate with the government in connection with the investigations. Fundamental to the Spirit of Service is complete integrity in all we do. As a company and as individual employees, we hold ourselves to the highest ethical standards as we conduct our business."

Rep. Rohrabacher Introduces Bill to End USPTO Fee Diversion

2/25. Rep. Dana Rohrabacher (R-CA) introduced HR 909, an untitled bill that would amend 35 U.S.C. § 42 regarding fees collected by the U.S. Patent and Trademark Office (USPTO). It provides that fees collected should equal funds appropriated. Currently, some fees are diverted to fund other government programs.

The bill would add a new subsection f to Section 42: "Notwithstanding the fees prescribed under subsections (a), (b), and (d) of section 41, and notwithstanding section 41(f) of this title and section 31 of the Trademark Act of 1946, the Director shall adjust the fees charged by the Office in each fiscal year so that the amount of fees collected by the Office in that fiscal year will equal, to the greatest extent practicable, the amount of funds appropriated to the Office for that fiscal year."

The bill was referred to the House Judiciary Committee. Rep. Rohrabacher is not a member.

Senators Release Report on FISA Implementation

2/25. Sen. Charles Grassley (R-IA), Sen. Patrick Leahy (D-VT), and Sen. Arlen Specter (R-PA) released a report [40 page PDF scan] titled "FBI Oversight in the 107th Congress by the Senate Judiciary Committee: FISA Implementation Failures: An Interim Report by Senators Patrick Leahy, Charles Grassley, & Arlen Specter".

The report focuses on the DOJ's implementation of Foreign Intelligence Surveillance Act of 1978 prior to, and following the terrorist attacks of September 11. It states that "In the immediate aftermath of the attacks, the Congress and, in particular, the Senate Judiciary Committee responded to demands by the Department of Justice (DOJ) and the FBI for greater powers to meet the security challenges posed by international terrorism. We worked together to craft the USA PATRIOT Act to provide such powers. With those enhanced powers comes an increased potential for abuse and the necessity of enhanced congressional oversight."

The report continues that "Unfortunately, however, at times the DOJ and FBI have either delayed answering or refused to answer fully legitimate oversight questions. Such reticence only further underscores the need for continued aggressive congressional oversight."

The report states that "The FISA provides a statutory framework for electronic and other forms of surveillance in the context of foreign intelligence gathering. These types of investigations give rise to a tension between the government's legitimate national security interests, on the one hand, and, on the other hand, constitutional safeguards against unreasonable government searches and seizures and excessive government intrusion into the exercise of free speech, associational, and privacy rights."

The report "uncovered a number of problems in the FISA process: a misunderstanding of the rules governing the application procedure, varying interpretations of the law among key participants, and a break-down of communication among all those involved in the FISA application process. Most disturbing is the lack of accountability that has permeated the entire application procedure."

The report also found that "The FBI's information technology was, and remains, inadequate to meet the challenges facing the FBI, and FBI personnel are not adequately trained to use the technology that they do possess." See also, report at pages 35-6.

The report follows the FBI's failed investigation of Zacarias Moussaoui. The FBI's Minneapolis field agents, including Coleen Rowley, had requested a FISA warrant to search Moussaoui's property prior to the attacks of September 11, but were denied by FBI headquarters. Recently, the FBI gave an award to its top FISA lawyer, Marion "Spike" Bowman.

On February 24, the three Senators wrote a letter to Robert Mueller, Director of the FBI,  regarding Robert Jordan, the Assistant Director of the FBI's Office of Professional Responsibility. Also, on February 25, Sen. Grassley wrote another letter to Mueller complaining about the award given to Spike Bowman.

Senators Introduce Domestic Surveillance Oversight Act

2/25. Sen. Charles Grassley (R-IA), Sen. Patrick Leahy (D-VT), and Sen. Arlen Specter (R-PA) introduced a bill [7 pages in PDF] titled the "Domestic Surveillance Oversight Act of 2003". The bill would increase the public reporting requirements of the Department of Justice (DOJ) regarding its implementation of the Foreign Intelligence Surveillance Act (FISA).

For example, the bill would require that "the Attorney General shall issue a public report setting forth with respect to the preceding calendar year (1) the aggregate number of United States persons targeted for orders issued under this Act, including those targeted for ... electronic surveillance ..." and "pen registers".

The bill would also require public reporting of the number of times that information acquired through FISA orders is authorized for use by the Attorney General in criminal proceedings.

Sen. Charles GrassleySen. Grassley (at right) stated in a release that "If we shine some sunlight into the secretive FISA process, maybe things will shape up ... The Congress and the public have to know how the FBI and Justice Department use their powers."

Sen. Leahy stated in a release that "Taken together, the bipartisan report and bill emphasize the importance of congressional oversight in making sure that the FBI and Justice Department are working effectively to protect both the security and the liberty of all Americans ... Before we give the government more power to conduct surveillance on its own citizens, we must look at how it is using the power that it already has. We must answer two questions: Is that power being used effectively, so that our citizens not only feel safer, but are in fact safer? Is that power being used appropriately, so that our liberties are not sacrificed?"

Senators Grassley, Leahy and Specter are all senior members of the Senate Judiciary Committee.


2/25. On February 20, the The U.S. Court of Appeals (3rdCir) issued its opinion [PDF] in Dluhos v. Strasberg, a case involving judicial review of a Uniform Domain Name Dispute Resolution Policy (UDRP) arbitration award. On February 24, the TLJ Daily E-Mail Alert (No. 610) included a story about this case titled "Third Circuit Reverses in Domain Name Arbitration Case". On February 25, the Court of Appeals issued an Order Amending Slip Opinion [2 pages in PDF] which changed language that was quoted in the TLJ article. This change is as follows: "On page 12, delete ``a UDRP proceeding settles a disputed proceeding only to the extent that a season-finale cliffhanger resolves a sitcom's storyline -- that is, it doesn't.´´ Substitute in its place ``a UDRP proceeding settles a domain-name dispute only to the extent that a season-finale cliffhanger resolves a sitcom's storyline -- that is, it doesn't.´´"

More News

2/25. The Department of Commerce (DOC) announced that it is organizing an "Information and Communications Technologies Business Development Mission" to Northern Ireland and the Republic of Ireland on April 6-11, 2003. The deadline to apply to join the mission is March 12, 2003. The DOC stated that this mission will offer "Numerous opportunities for trade and partnership in e-commerce, telecommunications, electronics, and software. Also opportunities for partnership in R&D in lab and university and cross-border initiatives." See, notice and application form [PDF].

2/25. Robert Sachs, P/CEO of the National Cable and Telecommunications Association (NCTA) gave a speech titled "The Anytime, Anywhere Principle of Cable Broadband". He spoke at a meeting of the National Association of Regulatory Utility Commissioners (NARUC) in Washington DC.

2/25. Federal Communications Commission (FCC) Commissioner Jonathan Adelstein gave a speech [MS Word] to the National Association of Regulatory Utility Commissioners (NARUC). He addressed the FCC's Triennial Review order and universal service.

2/25. The U.S. District Court (SDFl) sentenced Mark Cecil Thurman to eight years imprisonment and ordered him to pay more than $4.2 Million in restitution to his victims. He previously plead guilty to conspiracy to commit securities fraud, counterfeit securities violations, money laundering, and wire fraud in connection with his his sale of stock in Families On Line, his filtered internet service provider, and then misappropriating those funds. This is D.C. No. 01-6044-CR See. Securities and Exchange Commission (SEC) release.

People and Appointments

2/25. President Bush announced his intent to appoint 26 persons to the President's Export Council. The list includes Michael Armstrong, Michael Dell, James Morgan (Ch/CEO of Applied Materials, which manufactures systems for processing silicon wafers), Raymond Gilmartin (Ch/P/CEO of Merck & Co, and member of the board of Microsoft), and Solomon Trujillo (former Chairman of US West and Qwest). See, White House release.

2/25. Richard Burk, P/CEO of nii Communications, was re-elected as Chairman of the Competitive Telecommunications Association (CompTel). Jerry James, President of Grande Communications, was re-elected as Vice Chairman. Joseph Ambersley, EVP of Business Development for PaeTec, was re-elected as Vice Chairman/Treasurer. See, CompTel release.

Senate Passes PROTECT Act

2/24. The Senate passed S 151, the PROTECT Act, by a vote of 84-0. See, Roll Call No. 35. The full title of this bill is the Prosecutorial Remedies and Tools Against the Exploitation of Children Today Act of 2003. It contains provisions pertaining to computer generated images.

Sen. Orrin Hatch (R-UT) and Sen. Patrick Leahy (D-VT), the Chairman and ranking Democrat on the Senate Judiciary Committee, introduced this bill on January 13, 2003. The Committee amended and approved the bill on January 30. See, February 24 statement by Sen. Leahy summarizing the content of S 151.

Sen. Leahy stated that this bill "it is a good faith effort to provide powerful tools for prosecutors to deal with the problem of child pormography within constitutional limits."

This bill is a reaction to the Supreme Court's April 16, 2002, opinion [PDF] in Ashcroft v. Free Speech Coalition, in which the Court held unconstitutional on First Amendment and overbreadth grounds provisions of the Child Pormography Prevention Act of 1996 (CPPA) banning computer generated images depicting minors engaging in sezually explicit conduct.

The CPPA expanded the federal prohibition on child pormography to encompass new technologies. 18 U.S.C. § 2256, the section containing definitions, was amended to provide that child pormography means "any visual depiction, including any photograph, film, video, picture, or computer or computer-generated image or picture, whether made or produced by electronic, mechanical, or other means, of sezually explicit conduct, where (A) the production of such visual depiction involves the use of a minor engaging in sezually explicit conduct; (B) such visual depiction is, or appears to be, of a minor engaging in sezually explicit conduct; (C) such visual depiction has been created, adapted, or modified to appear that an identifiable minor is engaging in sezually explicit conduct; or (D) such visual depiction is advertised, promoted, presented, described, or distributed in such a manner that conveys the impression that the material is or contains a visual depiction of a minor engaging in sezually explicit conduct;"

The PROTECT Act's list of findings states "Since the Supreme Court's decision in Free Speech Coalition, defendants in child pornography cases have almost universally raised the contention that the images in question could be virtual, thereby requiring the government, in nearly every child pornography prosecution, to find proof that the child is real. Some of these defense efforts have already been successful."

The House passed a different bill in the 107th Congress, HR 4623. It has not yet enacted legislation in the current, 108th, Congress.

See also, TLJ stories on computer generated images and the Ashcroft v. Free Speech Coalition: "House Subcommittee Holds Hearing on Computer Generated Porm", in No. 423, May 2, 2002; "House Judiciary Committee Supports Ban on Computer Generated Child Porm", in No. 454, June 19, 2002; and "Bush Advocates Senate Passage of Bill Regarding Computer Generated Images", in No. 534, October 24, 2002.

Valenti Addresses Morality of Copyright Infringement

2/24. Jack Valenti, Ch/CEO of the Motion Picture Association of America (MPAA), gave a speech at Duke University about the immorality of stealing movies.

He began by stating that "No free, democratic nation can lay claim to greatness unless it has constructed a platform from which springs a moral compact that guides the daily conduct of the society and inspires the society to believe in civic trust."

He said that this "moral compact" has been violated by corporate executives who "were cheating and stealing from employees and stockholder". He added that "because it was easy to do, because they had the power to do it, they did it." Similarly, said Valenti, university networks provide an "opportunity for some students to take creative property that does not belong to them with effortless ease and speed. And because they have the power to do it, many, but not all of them, do it."

Valenti asserted that there is a "collision of values". He elaborated that "One value says, ``Digital technology gives me power to roam the Internet, therefore whatever is available, I can take, no matter who owns it.´´ The other value says, ``The fact that digital technology gives me power to use, doesn't make it right for me to use it wrongly.´´ That is where the collision of values takes place."

Valenti, of course, argued for adherence to the second value. He continued, "But there is a larger, darker issue here. Students would never enter a Blockbuster store and with furtive glance stuff a DVD inside their jacket and walk out without paying. They know that's shoplifting, they know that's stealing. They know they can find themselves in big-ass trouble if they're caught. That's why they don't do it. Then why would those same young leaders-to-be walk off the Internet with a movie inside their digital jacket? Why? Is it because digital shoplifting is at this moment a 'no risk' activity? If that is so, why is it so? Is it because Ambrose Bierce's definition of Conscience as ``Something you refer to when you are about to get caught´´ is an unwanted truth? Are the words ``ethics´´ – ``morality´´ – ``principle´´ -- alien words, exiled from the student lexicon? It's a sizeable question."

Valenti also reminded the students of Duke that they will be in leadership roles in the future, and will have to deal with employees who steal. "As the leader of the enterprise, how will you come to grips with that? You'll be face-to-face with the breakage of the moral compact and, guess what; it's on your dime."

People and Appointments

2/24. Maureen Del Duca was named Chief of the Federal Communications Commission's (FCC) Enforcement Bureau's (EB) Investigations and Hearings Division. She was previously Deputy Chief of the Division. Before joining the FCC in October 2001, she was a partner at Jenner & Block. See, FCC release.

2/24. William Freedman was named Deputy Chief of the FCC's Enforcement Bureau's Investigations and Hearings Division. He was previously a partner at the law firm of Morrison & Foerster. See, FCC release.

2/24. Mark Stone was named Legal Advisor to the Chief of the FCC's Enforcement Bureau on common carrier issues. See, FCC release.

2/24. Rebecca Dorch was named Regional Director of the FCC's Enforcement Bureau, Western Region. See, FCC release.

More News

2/24. The Supreme Court denied certiorari in BellSouth Advertising and Publishing Corporation v. Tennessee Regulatory Authority, No. 02-783, a case regarding telephone books. See, Order List [32 pages in PDF], at page 5. See also, February 7, 2002 opinion [20 pages in PDF] of the Tennessee Supreme Court.

Bush Criticizes Democratic Filibuster of Estrada

2/22. President Bush devoted his weekly radio address to judicial nominations, and particularly, the nomination of Miguel Estrada to be a judge of the U.S. Court of Appeals (DCCir). Senate Democrats are filibustering. Bush said that "We face a vacancy crisis in the federal courts, made worse by senators who block votes on qualified nominees. These delays endanger American justice. Vacant federal benches lead to crowded court dockets, overworked judges and longer waits for Americans who want their cases heard."

He elaborated that "Regional appeals courts have a 15 percent vacancy rate, and filings in those courts reached an all-time high again last year. Since taking office, I have sent to the Senate 34 qualified, mainstream nominees for the federal courts of appeals. To date, only half of them have received a vote in the Senate, and 12 of the remaining 17 nominees have been waiting more than a year for a floor vote."

Bush said that "a handful of Democratic senators, for partisan reasons, are attempting to prevent any vote at all on highly qualified nominees. One of these nominees is Miguel Estrada, my selection for the D.C. Court of Appeals. I submitted his nomination in May of 2001, and Miguel Estrada has been waiting ever since. That's almost two years, and that's a disgrace.

"Miguel Estrada's credentials are impeccable. He has served in the Justice Department under Presidents of both political parties. He has argued 15 cases before the U.S. Supreme Court, and he has earned the American Bar Association's highest mark, a unanimous rating of well qualified", said Bush.

More News

2/21. The Federal Trade Commission (FTC) announced that it will hold two one day workshops on "the role of technology in helping consumers and businesses protect the privacy of personal information, including the steps taken to keep their information secure". The first workshop, titled "The Consumer Experience", will be on May 14. The second, titled "The Business Experience", will be on June 4. See, FTC release.

2/21. Federal Trade Commission (FTC) Chairman Timothy Muris issued a statement regarding passage of HR 395, the Do Not Call Implementation Act. He said that "The President has signed the Omnibus appropriations bill into law, providing funding to allow the Federal Trade Commission to begin to develop a national Do Not Call registry. Additional authorizing legislation for the registry is expected to be signed shortly. I am delighted that the FTC can now respond to consumers' pleas to end unwanted telephone intrusions into their homes, and I appreciate the support and confidence of the Congress and the President and the efforts of my fellow Commissioners to make the Do Not Call registry a reality. During the next few days, the Commission will start building the Do Not Call registry. Consumers will have the opportunity to sign up for the registry sometime this summer, and the registry should be fully functional and available to telemarketers by September. By fall, consumers should begin to notice fewer unwanted telemarketing calls."

2/21. The Department of Justice's (DOJ) Antitrust Division issued its evaluation recommending that the Federal Communications Commission (FCC) approve Qwest Communications' application under Section 271 to provide in region interLATA service in the state of Nevada. See, DOJ release. The DOJ recommended approval of Qwest's long distance application for the states of New Mexico, Oregon, and South Dakota on February 20. See, DOJ release and Qwest release. On October 22, 2002, the DOJ recommended approval for the states of Colorado, Idaho, Iowa, Montana, Nebraska, North Dakota, Utah, Washington, and Wyoming. See, evaluation. The FCC approved that application on December 23, 2002. See, order [PDF]. Also, Qwest has not yet received approval to offer long distance services in the states of Arizona and Minnesota.

Ben Bernanke2/21. Federal Reserve Board (FRB) Governor Ben Bernanke (at right) gave a speech titled "Balance Sheets and the Recovery" at St. Cloud State University, in St. Cloud, Minnesota. He argued that financial institutions affect economic performance, and the current state of U.S. institutions should not prevent a robust economic recovery. However, he also touched on the subject and investment in technology. "Other fundamental factors support the idea that investment will gradually increase this year", said Bernanke. "Ongoing technological changes imply that adding the newest generation of equipment should make possible still greater gains in productivity. Indeed, aggregate investment is currently well below what standard econometric models would predict, an effect that I attribute primarily to an unusually high level of uncertainty about geopolitical events and, to a lesser extent, about the likely near-term evolution of the economy. If that interpretation is correct, then, as uncertainty diminishes, investment should increase.

2/21. Microsoft filed a pleading [51 page PDF scan] titled "Microsoft Corporation's Answer to First Amended Complaint and Counterclaims Against Sun Microsystems, Inc." with the U.S. District Court (DMd) in the case "In Re Microsoft Antitrust Litigation", D.C. No. JFM 02-2739. Microsoft alleges that "For nearly a decade, Sun has instigated lawsuits against and governmental investigations of Microsoft based on alleged violations of antitrust and copyright laws in an effort to impede Microsoft's competition with Sun in the marketplace. Sun has no product strategy to counter Microsoft's investment in creating innovative and useful software, and therefore attempts to obstruct Microsoft through litigation. To this end, Sun attaches antitrust epithets to conduct that promotes competition and is inherently beneficial to consumers." Rather, Sun seeks to "obtain a free ride on Microsoft's success." Microsoft counterclaimed against Sun for breach of contract, declaratory judgment that Microsoft is licensed to incorporate MSJVM in Windows XP, breach of covenant for good faith and fair dealing, and violation of the California Business and Professions Code § 17200.

Go to News from February 16-20, 2003.