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Global Crossing Scandal Case Study

Telecom: The fiber-optic network company denies accusations that it inflated its numbers.

Andersen spokesman David Tabolt said the accounting firm doesn't yet have enough information to comment on the letter. "We just found out about this [late Tuesday], and we are looking into it," he said.

Olofson couldn't be reached, but his attorney, Brian C. Lysaght of O'Neill Lysaght & Sun in Santa Monica, confirmed the existence of the letter obtained by The Times. However, he declined to comment on its contents.

Global Crossing general counsel Jim Gorton left the company within days of receiving Olofson's letter. He could not be reached Tuesday, but Casey Cogut, another attorney working for Global Crossing, said Gorton's departure "had nothing to do with the letter." Olofson was laid off three months later.

In the letter, Olofson asked Gorton to investigate the company's accounting practices and urged him not to involve Global Chief Financial Officer Dan Cohrs or Joe Perrone, Olofson's boss and a recent recruit from the now-beleaguered Andersen accounting firm. Perrone had supervised Global Crossing's initial public stock offering and then served as the company's lead auditor at Andersen.

Still, Olofson's letter outlines issues similar to those at the heart of the current scandal at Enron, the Texas energy firm that collapsed amid allegations that company executives used, and Andersen auditors blessed, misleading accounting to hide the firm's mounting losses. Andersen is accused of overlooking the accounting sleight of hand to maintain good relations with Enron, which was a major customer of Andersen's consulting business.

In addition, Enron executives allegedly sold millions of dollars in company shares before the accounting troubles were uncovered.

In Global Crossing's case, some industry analysts were already wary of the company's accounting methods--which are standard in the telecommunications industry--but most ordinary investors were not.

Olofson, of La Canada Flintridge, is one of the many lesser-known executives who have flowed through Global Crossing in recent years. In 1996 and 1997, he was the chief financial officer at PIA Merchandising Services Inc., an Irvine company that specialized in tracking the distribution and marketing of branded goods sold in grocery stores. Before that, he spent more than 13 years at Santa Fe Springs-based Fedco, where he eventually became chief executive.

Previous jobs included stints as treasurer at retailing conglomerate Carter Hawley Hale Stores, and the accounting firm Price Waterhouse.

His Global Crossing letter takes aim at a little-known accounting policy embraced by Global Crossing and other major communications network operators known as "indefeasible rights of use," or IRUs. These instruments are used to sell bandwidth on Global Crossing's fiber-optic network typically for 25 years.

Global Crossing and its competitors frequently bought space on one another's networks in areas not covered by their own systems to offer corporate customers a more complete data system.

But analysts have grown wary of the excessive use of IRUs and the way Global Crossing and others were registering their sales on financial reports. In some cases, Global Crossing would buy an IRU and book the price as a capital expense, which would spread the expense over a number of future years. It would then resell that capacity and book the proceeds as revenue, leaving some investors to see the increase in revenue, but not the expense, said Susan Kalla, a telecommunications analyst at Friedman, Billings Ramsey.

A finance executive at ailing Global Crossing Ltd. warned the firm's top attorney in August that the company's financial condition was being enhanced with misleading accounting techniques, according to a letter obtained by the Los Angeles Times.

The five-page letter, written by Roy Olofson, former vice president of finance, contains a detailed analysis of what he called deceptive accounting practices involving Global Crossing, its sister firm Asia Global Crossing and its auditor, Andersen. These included inflated revenue and cash-flow figures, numbers that may have helped convince investors and analysts that Global Crossing was healthier than it actually was, Olofson wrote.

The contents of the letter came to light one day after Global Crossing, a Beverly Hills telecommunications company, filed for Chapter 11 bankruptcy protection, listing debts of $12.3 billion and assets of $22.4 billion. It is the fifth-largest bankruptcy case in U.S. history.

The company vehemently denied Olofson's accusations.

"This is a situation we are very familiar with, has thoroughly been investigated both internally and externally, and is without merit," the company said in a statement. "Mr. Olofson is a former employee who is trying to draw parallels to the Enron situation for his own personal gain. The company believes that Mr. Olofson's threat to take this issue public through the filing of a lawsuit unless he was paid a substantial amount of money speaks for itself." A spokesman would not elaborate.

Despite investigations by the Securities and Exchange Commission and the F.B.I., so far Global Crossing executives have not been accused of wrongdoing. Even so, in the view of one analyst, the outcome raises serious questions about corporate management.

''What they did is not a crime, but it so thoroughly favors corporate insiders,'' said Nell Minow, the editor of the Corporate Library, a corporate watchdog Web site, who first raised questions about Global Crossing's management practices two years ago. ''I have no objection when shareholders make money, too,'' she said, ''but this turns investment in a public company into a shell game.''

How did Mr. Winnick and others close to him fare so well from a company that has never turned a profit?

During the Internet boom, Global Crossing, which operates a global fiber-optic network for the transmission of phone calls and Internet data, was a Wall Street favorite. Mr. Winnick's first windfall came in June 1999, after U S West, a regional Bell company had agreed to be acquired by Global Crossing.

After receiving a rival offer from Qwest Communications, U S West backed out of the Global Crossing deal. As a penalty, U S West was required to buy 10 percent of Global Crossing's shares at a slight premium to the market price. Mr. Winnick, who held 100 million shares, options and warrants at the time, sold 5.6 percent of his stake at U S West's offered price of $62.75 a share, netting him $350 million.

Global Crossing's ambition -- to build a 100,000-mile fiber-optic network linking 27 countries -- was an expensive proposition. By the spring of 2000, with the air already escaping from the Internet bubble, Global Crossing's shares were trading in the low 30's. As the company sought to raise additional money in April 2000 through a secondary stock offering, Mr. Winnick sold 8.1 million shares for $261 million.

Mr. Winnick, though, did not make money only by selling stock. He also received stock options, a salary and a bonus as the company's chairman, during a mercurial reign in which he hired and fired five chief executives in five years.

In 2000, Mr. Winnick drew a salary of $785,833, a bonus of $1.03 million and other payments of $57,000. That same year Mr. Winnick, or companies he controlled, owned 78.9 million shares of Global Crossing stock as well as 8.56 million options, totaling 9.78 percent of the company, according to its S.E.C. filings.

''His pay was not egregiously high by American corporate standards,'' said Graef Crystal, the well-known compensation expert.

But Ms. Minow, of the Corporate Library, argues that Mr. Winnick's huge stake of stock ownership should have been incentive enough for him to run the company, with no need for additional compensation. She also criticized Global Crossing's practice of leasing offices and airplanes from companies that were managed or controlled by Mr. Winnick.

Through a spokesman, Mr. Winnick said that the deals were the result of arms-length negotiations.

''They had very short arms,'' Ms. Minow said, when told of the comment. ''In fact, it sounds more like a bear hug to me. It is just more reaching into the cookie jar.''

''It perpetuates an atmosphere of cronyism and clubbishness,'' she said, ''that makes it easy for board members to forget that they are there on behalf of shareholders.''

And it did not require being in the club for long to reap the benefits. Robert Annunziata became chief executive in 1999 and lasted only a year, but his employment contract indicates that it was a lucrative stint.

Mr. Annunziata received a signing bonus of $10 million and two million options, with a strike price $10 below where the stock was trading at the time. In arranging the deal, Ms. Minow said, Mr. Annunziata was ''saying that he thinks the stock will decline and so he doesn't want to be hurt as badly as everybody else.''

Others who benefited were former associates of Mr. Winnick's from his days in the 1980's as a former sales executive at Drexel Burnham Lambert under Michael R. Milken. Jay R. Bloom, Andrew R. Heyer and Dean Kehler, all former Drexel bankers, were instrumental in providing Global Crossing with $35 million in financing before the company went public, after they moved to the Canadian Imperial Bank of Commerce.

C.I.B.C., based in Toronto, made roughly $2 billion on the investment, making it one of the most profitable bets by a financial institution in the 1990's. The investment is also thought to have generated millions of dollars for Mr. Bloom, Mr. Heyer and Mr. Kehler, who came to C.I.B.C. after it acquired their investment firm, the Argosy Group, in 1995.

For Mr. Winnick personally, even as the stock was falling last year, was able to lock in profits -- as he did in May with a deal to sell 10 million shares to Goldman, Sachs at $12 each, even if the price went lower. At the same time, David A. Walsh, the president and chief operating officer of Global Crossing, sold over 670,000 shares in May for $8.7 million.

And last October, when the stock first dipped below $1 a share, the company agreed to forgive two-thirds of a $15 million loan to its current chief executive John Legere, documents filed with the S.E.C. showed.

As the S.E.C. and the Federal Bureau of Investigation explore whether Global Crossing artificially inflated its revenue -- and thus its stock price -- during the boom times, the fortunes of its top executives and financiers stand in contrast to many Global Crossing employees who have seen their savings evaporate. Just last month, as the company filed for bankruptcy protection, employees who were laid off were told that they would receive no additional payments from their severance packages, and that they would have to stand in line behind other creditors.

Many current and former employees have lost much of the value of their 401(k) investments because ''the company matched the amount workers put in with Global Crossing stock, and it could not be sold for five years,'' said Linda McGrath, president of Local 1170, the Communications Workers of America. ''A lot of workers made their contribution in stock, because they had faith in their employer.''

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