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Global Crossing's Winnick Knew About Swap Deals, Company Documents Show

Oct 1, 2002 | The Wall Street Journal Former Global Crossing Ltd. Chairman Gary Winnick knew about the capacity swaps that helped sink the company, and even volunteered to use his personal influence to help close the deals, Tuesday's Wall Street Journal reported, citing internal company documents.

Mr. Winnick will appear today before a House panel investigating the company's collapse, and the disclosure is sure to increase the legal and political pressure on him as he confronts inquiries into Global Crossing's dealings. He is also the subject of a Securities and Exchange Commission probe into whether he sold $135 million of shares last year with the knowledge that the transactions were of questionable legality. At today's congressional hearing, he is likely to testify.

The new documents could complicate matters for Mr. Winnick by showing that he knew about the swaps and was eager to bring more of the deals to the company -- a more active role than he has so far acknowledged. Prosecutors would still need to prove that he knew the transactions were improper and used them mainly as a way of enriching himself by boosting the company's stock price artificially.

The documents also illustrate the difficulties the former chairmen of companies such as Global Crossing, WorldCom Inc. and Enron Corp. face as they try to avoid responsibility for the accounting irregularities and insider sales allegations that helped sink the three companies. Mr. Winnick, WorldCom's Bernard J. Ebbers and Enron's Kenneth Lay have argued that as corporate chairmen they focused on big-picture strategic thinking and left day-to-day operations to their chief executive officers. As a result, the men have said, they were unaware of the alleged misdeeds committed at the companies and shouldn't be held responsible.

The confidential memo reviewed by The Wall Street Journal undercuts Mr. Winnick's claims that he hadn't known about the company's increasing reliance on swaps as a way of making its numbers on Wall Street. Using swaps, which were technically known as "indefeasible rights of use," or IRUs. Global Crossing bought about $1.2 billion in telecom capacity from customers in 2001 that it treated as a capital expense and sold about $1 billion in capacity to the same companies, booking the proceeds as revenue. Smaller dollar amounts of swaps were also used in 2000.

The document, a July 19, 2001, memo from Jim Gorton, the company's general counsel shows that Mr. Winnick asked to be given detailed information about potential swap transactions, and that he volunteered to work with other board members to cement the deals.

"Gary, we have asked Patrick Joggerst to get us a list of target customers for our Board members to help us on (at your suggestion)," Mr. Gorton wrote, referring to the company's then-head of carrier sales.

Mr. Gorton asked Mr. Winnick to review an enclosed spreadsheet of potential swap deals that the company had begun negotiating but had not yet closed. The spreadsheet, called the "2Q01 IRU Big Deal Funnel," outlined an array of proposed transactions with other carriers that had a potential value of more than $730 million. Several of the deals, including proposed swaps with Net2Phone Inc. and Paetec Communications, listed "support requirements" that called for Mr. Winnick to talk to senior executives at the other companies to help finalize the transactions.

"The chart is constantly updated, so it is probably wise to check in with Patrick or [former president and chief operating officer David] Walsh before a call is actually made," Mr. Gorton wrote.

Representatives for Mr. Winnick declined to comment. Paetec Chief Financial Officer Keith Wilson said the company never ultimately entered into a swap arrangement with Global Crossing.

The memo was in keeping with what current and former employees describe as Mr. Winnick's active role in plotting the company's strategic direction and helping to close large deals such as a March 2001 swap transaction with 360Networks Inc., another telecom carrier, that increased Global Crossing's cash revenue by $150 million. 360Networks later filed for Chapter 11 bankruptcy protection, as did Global Crossing.

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