Bankrupt Global Crossing denies deceptive accounting

By Jim AbramsThe Associated Press
Friday March 22, 2002

WASHINGTON — Officials of the bankrupt fiber optics giant Global Crossing denied Thursday that deceptive accounting practices were part of their company’s financial collapse. “Global Crossing is no Enron,” they told skeptical lawmakers. 

“Some may see superficial similarities between Enron and Global Crossing,” chief executive officer John Legere and chief financial officer Dan Cohrs said in a statement to a House Financial Services Committee panel. 

Indeed, they noted that, like the energy trading corporation, Global Crossing had seen a collapse in its stock price, had executive stock sales and faced questions about accounting procedures and employee pension plans. The companies also shared the auditor Arthur Andersen. 

But the Global Crossing officials insisted the company’s problems, leading to a decision to file for bankruptcy protection in January, were a result of aggressive expansion, overcapacity in the telecommunications network market and the national economic downturn — not business improprieties. 

Even so, said Rep. John LaFalce of New York, the top Democrat on the committee, “Global Crossing may well have succeeded in keeping its share price inflated much longer than was justified based on its true value.” 

The Securities and Exchange Commission and the Justice Department are investigating the fourth-largest Chapter 11 bankruptcy reorganization case in history. The company listed $12.4 billion in debts. 

Global Crossing was launched in 1997 and spent $15 billion building the world’s most extensive fiber-optic network. But with the economic slowdown, it cut some 9,000 jobs, closed 71 offices and saw its stock fall from a high of more than $60 a share to 30 cents before its bankruptcy filing. 

Much of Thursday’s hearing centered on whether Global Crossing deceived investors and employees about its financial status through the way it accounted for sales and purchases of network capacity known as Indefeasible Rights of Use, or IRUs. Of particular interest was the practice of “swaps,” where a telecommunications company sells capacity to a customer while buying a similar amount on the customer’s network. 

Rep. Sue Kelly, chairwoman of the oversight and investigations panel, said it appears such swaps, and the way revenues and costs are reflected in the books, “are being used as a quick and easy way to inflate earnings and make a company look more profitable than it really is.”  

º Kelly and others are promoting legislation to better ensure the independence and integrity of the accounting industry. 

Cohrs said, “We’re struggling to understand the right way to treat these transactions.” Asked if there was full disclosure of the deals, he responded, “We believe there was.” 

SEC deputy chief accountant John M. Morrissey, also a witness at the hearing, agreed that determining when to recognize revenue in an IRU transaction “can be quite complex.” 

Michael Salsbury, general counsel for the telecommunications company WorldCom, told the hearing that the real problems in the industry were the efforts of the Bell companies to retain their power and the government’s failure to enforce the law. “Those failures have destroyed far more market capitalization and robbed far more value from shareholders’ investments than any accounting issues.” 

But Michael Capuano, D-Mass., said the bookkeeping used by Global Crossing was “nothing more than a much more fancy and much larger Ponzi scheme” in which new investments are used to pay off old investors. 

A former Global Crossing finance executive, Roy Olofson, last August wrote a letter to the company’s general counsel warning about inflating revenues through misleading accounting techniques. But Cohrs and Legere said they had engaged an outside counsel to review the matter and found the allegations to be without merit. 

Also at issue was a company order preventing employees from making changes in their 401(k) pension plans for a month shortly before the company went bankrupt. 

Legere said the “lockdown” was a result of an effort to consolidate different pension plans, that it was announced two months in advance and that Global Crossing’s stock value changed minimally, from 83 cents to 67 cents, in those two months. 


On the Net: 

House Financial Services Committee: http://www.house.gov/financialservices/ 

Global Crossing: http://www.globalcrossing.com