J.C. Van Apeldoorn and E.T. Meijer, In Their Capacity as Trustees in Bankruptcy for KPNQwest N.V., et al. v. Qwest Communications International, Inc. (“Qwest”), et al.
Analysis Group and Academic Affiliate Professor Ray Ball were retained in this matter by the bankruptcy trustees for KPNQwest, a joint venture between U.S. company Qwest Communications International and the Dutch telecommunications firm KPN. While the Trustees initially filed suit in the U.S., the case was ultimately moved to the Netherlands, where it became the subject of an investigation by the Enterprise Chamber of the Amsterdam Court of Appeal (“Dutch Enterprise Chamber”), as well as a second lawsuit, also filed by the trustees.
KPNQwest was formed in April 1999 to build a fiber optic “Eurorings” network in Europe and sell value-added Internet and data-based communication services. KPNQwest conducted an initial public offering (IPO) in November 1999 and declared bankruptcy just two and a half years later in May 2002. Both the U.S. and Dutch lawsuits alleged that, following the IPO, Qwest and several of its former executives engaged in “fraud, deceit, corporate mismanagement and other misconduct,” including accounting fraud designed to overstate KPNQwest's revenues and assets, thereby contributing to the firm's bankruptcy and/or the severity of its economic losses. An Analysis Group case team, led by Managing Principal R. Jeffrey Malinak, supported Professor Ray Ball in developing several reports on appropriate accounting under U.S. Generally Accepted Accounting Principles (GAAP). A key accounting issue addressed in these reports was the proper way to recognize revenue for alleged sales of Indefeasible Rights of Use (IRUs) of KPNQwest's fiber optic communications network. Professor Ball's reports concluded that, under U.S. GAAP, the revenue from KPNQwest's IRU transactions should have been recognized ratably over the life of the contract, rather than on the up-front, lump-sum basis used by KPNQwest. As a result, Professor Ball concluded that KPNQwest's revenues were overstated under U.S. GAAP.
In addition to developing several reports, Mr. Malinak and Professor Ball presented their findings to a team of investigators of the Dutch Enterprise Chamber in Amsterdam. The case was settled favorably for the estate of KPNQwest.