Gary Winnick and other former executives and directors of Global Crossing Ltd. agreed Friday to pay $324 million to settle lawsuits filed by investors and former employees who lost billions when the telecommunications firm fell into bankruptcy.
Winnick will provide $55 million for the settlement himself. The Beverly Hills billionaire, who founded Global Crossing in 1997, briefly became the richest person in Los Angeles when his company stock boosted his net worth to $6 billion. He pocketed $575 million selling Global Crossing shares during the fiber optic network builder’s heyday in the late 1990s.
“We did not want to settle this without a contribution from Winnick,” said Jay Eisenhofer, the lead plaintiffs’ attorney. “Our clients felt he had a degree of culpability. He made a lot of money from this, and he should be held accountable.”
The deal, which covers more than 50 lawsuits, is expected to be approved by U.S. District Judge Gerard Lynch in New York within 120 days. Shareholders still have cases pending against Global Crossing’s former accountant, the now-defunct Arthur Andersen, and seven securities firms that underwrote the company’s shares.
Global Crossing, which emerged from bankruptcy protection in December, emphasized that none of the settlement money would come from its coffers. The bulk of the funds for the shareholders’ suit -- $195 million -- will be supplied by firms that insured Global Crossing’s 38 top executives and directors against lawsuits. An additional $19.5 million will be paid by the company’s former lawyers, Simpson Thacher & Bartlett in New York.
“We hope final settlement will provide some closure to those affected by the company’s bankruptcy,” the company said.
Investors, whose $40 billion worth of stock became worthless with the bankruptcy filing, will receive $245 million to settle charges that Global Crossing and its executives committed securities fraud by using improper accounting to inflate the company’s revenue. Using so-called capacity swaps, Global Crossing would lease space on its network to a competitor while renting capacity from that rival. It would book the lease as an immediate revenue gain but log the rent as a capital expenditure that could be paid off over a long period.
The proposed settlement would be the eighth largest of its kind since the passage of the Private Securities Litigation Act of 1995, according to the Ohio attorney general’s office, a plaintiff in the case. Even so, investors will receive less than a penny for each dollar lost.
In addition, former Global Crossing employees would receive $79 million to recover losses resulting from company stock they had purchased for their pension and retirement plans, according to the Ohio attorney general’s office. Lynn Sarko, the attorney representing the former employees, did not return calls seeking comment. It was not clear where the money would come from.
Former Global Crossing employee and plaintiff Janet Mahoney said the settlement wasn’t even a symbolic victory.
“This is not justice. What this man did to the company left whole families devastated,” said Mahoney, who had been the director of strategic and technology planning for Global Crossing in Rochester, N.Y. She said she lost $40,000 in severance pay and her 401(k) plan -- at one time worth a “healthy six figures” -- when Global Crossing filed for bankruptcy protection.
“I really feel he should be in a cell with much stronger bars than Martha might get.”
Winnick had already set aside $25 million to reimburse employees for company stock they bought for their pension plan that became worthless when Global Crossing filed for Chapter 11 bankruptcy protection. He has agreed to pay another $30 million to shareholders to bring the cases to an end.
Winnick declined to be interviewed, but his spokesman said the $55 million would be paid in good faith.
“Clearly, he does feel badly about all those who were hurt by Global Crossing’s collapse,” said spokesman Howard Rubenstein. “I certainly haven’t seen anyone else voluntarily pony up $55 million of his own money to help people who were hurt when the telecommunications bubble burst.”
Attorney Ronald Stevens, who defends large companies against investors’ suits, said the amount coming out of Winnick’s pocket was unusually large.
“I think you have to go back to the junk bond days to find an individual paying out that much money,” he said.
But he said Winnick’s contribution was probably needed.
“Insurance policies taken out on behalf of the directors and officers would have never been enough to pay $325 million,” said Stevens. “The rest has to come from somewhere.”
Winnick, a feisty former bond trader who worked for Michael Milken in the 1980s, raised nearly $20 billion from investors to build a fiber-optic telecommunications network that spanned 100,000 miles in 27 countries. Fueled by that cash and a soaring stock price, Global Crossing became the first company to build a vast undersea fiber optic network without government subsidies or the use of giant quasi-governmental consortia.
Singapore Technologies Telemedia now owns 61.5% of the company after paying $450 million in a bankruptcy auction last year. Creditors own the rest. The company, which once occupied lavish headquarters in Beverly Hills, is based in Hamilton, Bermuda, and run from Florham Park, N.J.
Times staff writer James S. Granelli contributed to this report, and Bloomberg News was used in compiling it.