“It was 10 p.m. on a Friday, 50 hours before Qwest Communications International Inc. was due to close the books on its third quarter of 2001. Chief Operating Officer Afshin Mohebbi sat down in his 52nd floor office at the telephone giant’s Denver headquarters and tapped out a desperate e-mail to his top salesmen,” writes Dennis Berman in today’s Wall Street Journal.

“The subject line: ‘Help!!!!!!!!!’ “

“Mr. Mohebbi was alarmed because a series of sweet deals he urgently needed weren’t working out. The plan was for Qwest to swap connections to its phone network for connections to other companies’ networks. Phone companies had been making trades like that for years, but lately there was a twist: Both companies would book revenue from these transactions — inflating their financial results even though they were actually swapping assets of equal value.”

“But Qwest couldn’t quite make these latest swaps work. It had agreed to buy $231 million in access to telecom networks. But the companies on the other side of the table had committed to spend less than $100 million with Qwest. The company was going to have to squeeze more money out of the deals if it was going to meet the projections it had given Wall Street.”

“‘What happened to the creativity of this company and its employees?’ Mr. Mohebbi wrote in his e-mail. ‘Let’s not have a disaster now.’ “

“In the end, disaster did strike. Ten months later, Qwest’s new chief executive, Richard Notebaert, soberly read a script during a Monday morning conference call with press and stock analysts. He announced that the company’s swaps had violated accounting rules. The company later said it would restate $950 million in revenue, erasing the deals in a stroke from the company’s prior results.”

“When the business history of the past decade is written, perhaps nothing will sum up the outrageous financial scheming of the era as well as the frenzied swapping that marked its final years. Internet companies such as Homestore Inc. milked revenue from complex advertising exchanges with other dot-coms in ultimately worthless deals. In Houston, equal amounts of energy were pushed back and forth between companies. The beauty of the deals, from the perspective of the participants, was that everyone walked away with roughly the same amount of revenue to put on their books.”

“But the swaps rage turned out to be no bargain for investors. The bad deals contributed to an epidemic of artificially inflated revenue. In many cases, swaps slipped through legal loopholes left in place by regulators who had failed to keep pace with the ever-changing dealmaking of ever-changing industries. The unraveling of those back-scratching arrangements helped usher in the market collapse and led to the realization by investors that the highest-flying industries of the boom era — telecom, energy, the Internet — were built in part on a combustible mix of wishful thinking and deceit.”

http://online.wsj.com/article/0,,SB1040606010738807193,00.html