Founder Escapes Charges in Global Crossing Failure
Global Crossing Ltd. founder Gary Winnick will be absolved by federal regulators for his role at the company that made him one of the richest men in Los Angeles -- and one of the most vilified executives in corporate America.
An attorney for the Beverly Hills financier said Monday that the Securities and Exchange Commission would not file charges against Winnick after a three-year investigation into the telecommunications provider’s accounting practices. Winnick was chairman of the company when it made controversial deals with other telecom providers in an effort to boost sales figures.
“We always believed that the evidence demonstrated that Gary Winnick acted lawfully and properly in connection with Global Crossing,” said his attorney, Gary Naftalis. Winnick, who is running a private investment firm, declined through a spokesman to comment.
SEC Chairman William H. Donaldson joined two fellow commissioners in overruling the agency’s staff and deciding not to charge Winnick, according to people familiar with the matter. The SEC declined to comment.
The SEC’s action means that Winnick has cleared the last significant hurdle related to his troubled tenure at Global Crossing. His formal involvement with the company ended when he resigned two years ago, just before it was rescued from bankruptcy proceedings by Asian investors.
Winnick, who sold ski equipment and furniture before peddling junk bonds alongside Michael Milken, had little experience in the telecom business when he dreamed up an audacious plan to build a global communications network. He raised nearly $20 billion to finance the laying of more than 100,000 miles of fiber optic cables across continents and beneath oceans. The goal: to zap voice and data around the world at the speed of light.
At its height, Global Crossing’s stock-market value reached $54.5 billion even though the company had never turned a profit.
No one benefited more than Winnick. In 1999, when his stock holdings were worth $6 billion, the Los Angeles Business Journal named him the richest person in a city of ostentatious wealth. His 64-room mansion overlooking the Bel-Air Country Club set him back $94 million; then he spent millions more on painstaking renovations.
Winnick was also generous. He lavished Rolls-Royces and Aston Martins on executives and directors and donated heavily to charitable causes. The Winnick family name adorns the children’s wing of the Los Angeles Zoo, a section of the Los Angeles Central Library, a hall at the Skirball Cultural Center and a cafeteria at his alma mater, Long Island University.
After the telecom bubble burst, Winnick enlisted lawyers to get his name removed from a place of more dubious distinction. In a deck of “Shareholder’s Most Wanted” playing cards issued by a novelty company, Winnick was the ace of hearts.
Corporate governance activists criticized Winnick because he sold more than $700 million in stock before the company entered Bankruptcy Court in 2002. Cutthroat price competition and slower-than-expected demand for its high-speed networks combined to crush Global Crossing under $12.4 billion in debt.
Hundreds of employees lost their jobs and pensions. Furious investors held Winnick up beside WorldCom Inc.'s Bernard J. Ebbers and John Rigas of Adelphia Communications Corp. as symbols of corporate greed in the telecom industry.
Meanwhile, federal regulators began to scrutinize Global Crossing’s unorthodox accounting methods.
The Justice Department decided late in 2002 not to press criminal fraud charges against Winnick or any other Global Crossing executive. This summer, the Labor Department brokered a $79-million settlement between Global Crossing executives and former employees who lost their pensions, including $25 million from Winnick himself.
Until last week, the SEC appeared on track to file civil securities charges against Winnick and fine him $1 million, which he had agreed to pay, over his alleged failure to fully disclose the company’s financial transactions, according to sources. The SEC staff zeroed in the company’s accounting for deals to swap network capacity with other telecom carriers in violation of accounting rules.
But in a surprise move last Thursday, SEC Chairman Donaldson opposed the settlement plan, the sources said.
In an animated closed-door meeting, Donaldson, a Republican, expressed qualms about sanctioning Winnick and sided with fellow Republican commissioners Paul S. Atkins and Cynthia A. Glassman in rejecting the plan. They argued that Winnick, as non-executive chairman, was not involved with the company’s day-to-day operations and had not signed off on inadequate financial disclosures. Democratic commissioners Harvey J. Goldschmid and Roel C. Campos wanted to sanction Winnick. The vote was first reported by the Wall Street Journal.
The SEC majority may have decided that Winnick has already paid enough in restitution, said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. In addition to his $25-million payment to pension holders, Winnick contributed $55 million to a $324-million settlement with shareholders and former employees who sued Global Crossing executives and directors for securities fraud.
“The pound of flesh was taken by the plaintiffs’ lawyers,” Elson said. “It’s not as though he walks from this scot-free.”
Corporate watchdog Nell Minow called Global Crossing “one of the most atrocious of all the corporate failures of 2002.” But she said much of the blame lay with the investors who kept tossing money at the company despite its mounting losses.
“There was an element of the investors getting what they deserved,” she said.
Bermuda-based Global Crossing’s executive headquarters are now in Florham Park, N.J. Winnick’s office remains in Beverly Hills, where he continues to run his investment firm, Pacific Capital Group.
The fact that Winnick escaped a $1-million fine gnaws at Irene DiNolfo, a former Global Crossing director of marketing communications in Rochester, N.Y., whose severance and retirement were wiped out.
“What’s $1 million to that guy?” said DiNolfo. “It would be like a $100 fine to me. And still, he gets out of that.”
Global Crossing’s collapse cost Janet Mahoney, a former call center director, about $35,000 in severance pay and $45,000 in retirement funds that were in company stock. Settlements in the civil cases are bringing in a few thousand dollars in dribs and drabs, she said.
“Meantime, he walks away with $738 million,” she said. “Justice is ridiculous.”
Gaither reported from San Francisco, Peterson from Washington and Colker from Los Angeles. Times staff writers James S. Granelli and Elizabeth Douglass contributed to this report.