Global Chairman Defends Sale of Stock
Global Crossing Ltd. Chairman Gary Winnick told a congressional panel Tuesday that he was unaware his company was in dire financial straits when he pocketed nearly $124 million by selling company stock last year, and he sought to make amends by pledging $25 million of his own money to compensate workers whose retirement savings dissipated as the share price slumped to mere pennies.
But members of the House subcommittee on oversight and investigations disputed Winnick’s portrayal of himself as a detached leader who was not active in the company’s day-to-day affairs. Instead, they said Winnick was “well aware” of the telecommunications upstart’s controversial practice of swapping transmission capacity on its network with other firms to boost revenue.
Winnick’s testimony and financial offer were aimed at dispelling growing legal and political pressure on the Los Angeles telecom mogul, whose company filed for Chapter 11 bankruptcy protection in January amid an industrywide meltdown.
It was the first time Winnick has spoken publicly about Global since the bankruptcy filing. He was subpoenaed by the committee.
Global Crossing’s business maneuvers and Winnick’s stock trades are being examined by the House investigations subcommittee, the House Financial Services Committee, the Justice Department and the Securities and Exchange Commission.
Winnick and other executives at Global Crossing and Qwest Communications International Inc. have been accused of doing swap deals to fool Wall Street. Subcommittee investigators describe the deals as “sham transactions” because they allegedly involved an equal exchange of assets. That allowed each company to book revenue right away and hide the corresponding purchase price as a long-term expense.
Under repeated questioning by members of the subcommittee, Winnick said he was unaware of the telecommunications company’s deteriorating financial condition before he sold nearly $124 million worth of Global stock on May 23, 2001.
Winnick blamed his company’s financial fall on an industry meltdown triggered by a global economic slump and massive overbuilding in the telecom industry. This year, Global Crossing agreed to be sold to two Asian companies for $250 million.
“Global Crossing’s bankruptcy, based on the facts known to me, is a result not of any fraud, but of a catastrophe that befell an entire industry sector,” Winnick said.
But documents released by the subcommittee this week suggest that Winnick took a far more active role in trying to burnish the financial image of his faltering company.
Winnick acknowledged that his efforts included meeting with an executive of energy trader Enron Corp., which also swapped transmission capacity with phone companies.
And Rep. James C. Greenwood (R-Pa.), chairman of the investigations subcommittee, said other documents and interviews his panel has conducted with Global Crossing employees indicate that Winnick was “well aware of Global Crossing’s strategy to use an ever increasing number of swaps to meet Wall Street’s revenue expectations.”
Greenwood got Winnick to admit that he talked daily with former company Chief Executive Tom Casey and that Casey had expressed concern about Global’s financial condition weeks before Winnick’s May stock sale.
Greenwood read from the minutes of an April 16, 2001, Global Crossing management committee meeting in which Casey warned panel members, “We do not have room for more reciprocal deals. The company
But Winnick denied that Casey painted such a dire financial picture of Global Crossing at the time.
“I don’t come out with the same interpretation as you, Mr. Chairman,” Winnick said.
The subcommittee also released documents that showed a former Global Crossing executive was so concerned about the company’s future that he suggested shopping the company to a buyer to rescue it.
“The stock market can be fooled, but not forever, and it is fundamentally insightful and always unforgiving of being misled,” wrote Leo Hindery, who briefly served as Global Crossing’s chief executive.
Winnick described the June 2000 memo as a “cover your booty” document, meant to provide an explanation for what he described as Hindery’s unauthorized overtures to an investment banking firm on behalf of Global Crossing.
Winnick, who founded Global Crossing in 1997, was one of five current and former company executives who testified Tuesday. The panel also heard from four officials from Qwest, including Chief Operating Officer Afshin Mohebbi and Joseph Nacchio, who resigned as chief executive in June amid an SEC investigation but remains a consultant with the company.
In defending his use of swaps, Nacchio said he backed the move after input from his top executives and Qwest’s outside auditor, Arthur Andersen.
“At the time, we had no reason to doubt Arthur Andersen’s advice, then one of the country’s leading accounting firms,” Nacchio said.
Winnick told the panel that he would donate $25 million to a fund to help former Global Crossing workers. The money reflects the amount of cash that workers put into their 401(k) plans after the 1999 merger of Global Crossing and Frontier Corp., a local phone company based in Rochester, N.Y.
“I let them down, not because we engaged in fraud or insider trading but because we ran into a very difficult economic period” as a company, Winnick said.
When asked by Rep. Diana DeGette (D-Colo.) whether he would make a similar gesture, Nacchio demurred.
“Qwest is not bankrupt” like Global Crossing, Nacchio said. “It has a pension plan.”Before Winnick and Nacchio spoke, the subcommittee heard from two women who worked for Qwest and Global Crossing. They blasted company management, saying executives left the lives of thousands of workers in ruins.
“Our leaders were men of gluttonous greed who told shareholders to hold on while they were unloading their stock options and bailing out fast,” said Lenette Crumpler, who worked at Frontier.
“So many middle-class American dreams have been shattered.”
