The collapse of the world’s largest energy giant has been the single hottest business news over the past few months, but the scandals surrounding Enron Corp. have deflected public attention from Global Crossing Ltd.
Yet had it not been for the biggest bankruptcy in U.S. history, Global Crossing’s failure would have garnered far more media scrutiny and outraged the public for almost all the same reasons the energy giant’s collapse has.
“I am deeply troubled by Global Crossing,” said Rep. Felix Grucci, D-N.Y., on the first hearing by the House Financial Services Committee Thursday, adding that the company had been driven by “absolute, unfettered greed” to deliberately talk up their financial position.
Grucci added he thought it was futile to ask any questions to the assembled executives of Global Crossing and senior officials from several other telecommunications companies, stating that they would “not tell the truth, when asked … and feel no shame or sense of guilt.”
Like Enron, Global Crossing has been accused of manipulating its accounting books to claim the company was safely in the black while actually hemorrhaging heavily, and the two companies both used Arthur Andersen LLP as their accountant as well as using their management consulting services.
The company filed for Chapter 11 bankruptcy in January, listing assets of $22.4 billion and liabilities of $12.4 billion, making it the fourth largest bankruptcy in U.S. history. But critics have noted that most assets were worthless as a result of Global Crossing over-paying for its many acquisitions over the past few years, including Rochester, N.Y.-based phone company Frontier. At the same time, demand for voice and data transmissions on Global Crossing’s network linking 200 cities in 27 countries had been waning steadily.
Global Crossing Chief Executive Officer John Legere has, however, strongly denied any parallels between his company and the energy giant.
“Global Crossing is no Enron…(its fiber optic network) is a very real asset, the value and significance of which is indisputable,” Legere told the assembled committee members. He added that the company was forced to file for Chapter 11 not because of any deviant accounting practices, but as a result of increased competition within the telecommunications industry, which also coincided with a downturn in the U.S. economy.
But many industry analysts have pointed out that Global Crossing’s collapse stems not from a tougher market, but from the swap of network capacity between network providers. The legitimacy of such a practice is currently being investigated by federal authorities, and testifying before Congress at Monday’s hearing with Global Crossing’s Legere and its Chief Financial Officer Dan Cohrs were Afshin Mohebbi, Qwest Communications International chief operating officer, Michael Salsbury, executive vice president of WorldCom Inc., and Andrew McGrath, Cable and Wireless Global’s president of service providers channel.
The executives were unanimous, however, in stating that sales of the indefeasible right of use, which is the exclusive right to use a specified amount of capacity or wire of underwater cable, made up 5 percent or less of total revenue, and were thus not a problem. They also said that the swaps were accounted for properly and were disclosed.
That, however, contradicts the story told by a whistle-blower within Global Crossing.
According to a letter leaked to the media in January, the company’s former vice president of finance Roy Olofson wrote a five-page note detailing deceptive accounting practices involving Global Crossing, Asia Global Crossing, and Arthur Andersen. Olofson said that the company deliberately inflated revenue and cash flow figures to convince investors and analysts the company was healthier than it actually was.
Global Crossing has denied Olofson’s allegations, but the path that the company allegedly took to mislead investors has an uncanny resemblance to the measures taken by Enron.
“It appears that swaps are being used as a quick and easy way to inflate earnings and make a company look more profitable than it really is,” said Rep. Sue Kelly, R-N.Y., who chaired the hearing.
Indeed, the FBI and the Securities and Exchange Commission have requested information on the swap arrangements not just from Global Crossing, but from Qwest and WorldCom as well.
Global Crossing’s similarities with Enron do no end with malpractice in accounting. The collapse of the telecommunications network has also led to thousands of former employees being out of work, and many losing their retirement savings. Moreover, like Enron, Global Crossing also had a blackout period of one month last October when employees were prevented from selling company shares, while Chairman Gary Winnick made more than $700 million in selling Global Crossing shares over the past two years.
Global Crossing’s collapse, following so quickly in the steps of Enron, has increased public wariness about the reliability of the accounting practices of U.S. corporations in general. As a result, the House Financial Services Committee is in the midst of drafting legislation to establish a new accounting watchdog body that require companies to provide more public information about their financial health in real time.
Global Crossing had the same auditor as Enron, Andersen, and the telecommunications firm said its transactions were done in consultation with the auditor and conformed to generally accepted accounting practices.