Tom Casey, Global Crossing Inc.’s (GBLXQ) former chief executive, misled financial analysts about the company’s controversial “swaps” of fiber-optic capacity, an ex-employee told a House panel in prepared testimony Tuesday.
Global Crossing’s former vice president of finance, Roy Olofson, said he knew that the company was only able to make its revenue projections for the first quarter of 2001 “due in part to some large, last-minute transactions where Global swapped IRU capacity with other carriers.” IRU is a contractual term for swaps, standing for “indefeasible rights of use.”
But during a conference call on March 31, 2001, an analyst asked Global Crossing management if there had been any swaps during the quarter.
“I was very surprised to hear Global’s CEO, Tom Casey, unequivocally state that ‘there were no swaps in the quarter,'” Mr. Olofson said.
Tuesday was the first of two hearings scheduled by the committee meant to determine whether capacity swaps between Global, Qwest Communications International Inc. (NYSE: Q) and other firms were legitimate business transactions or a way to artificially boost revenue. Tuesday’s witnesses are largely midlevel executives involved in negotiating swaps.
Their testimony will lay the foundation for a second hearing, where Global founder Gary Winnick and former Qwest Chief Executive Joseph Nacchio have been asked to testify.
Panel Chairman Rep. James Greenwood (R., Pa.) said the tactics of both Qwest and Global Crossing were suspect, as they bought and swapped capacity even as markets were shrinking.
“Were these capacity swap transactions undertaken to respond to new business opportunities, or were they merely designed to provide the appearance of expanding business and growing revenues?” he asked. “Evidence uncovered by this committee’s investigation suggests that the latter is true.”
Confronted with shrinking markets, executives swapped capacity “to conceal slowing growth by booking fictitious revenue,” Mr. Greenwood said.
Rep. Dianna DeGette, a Democrat from Qwest’s home state of Colorado, said that Qwest’s new management team “is trying to do the right thing.” She said it’s critical for the company’s employees and retirees that confidence be restored in Qwest.
But Rep. Billy Tauzin (R., La.) said restoring public trust requires shining the light on deceptive behavior. Rep. Tauzin compared the Qwest-Global transactions to those of Enron Corp. (ENRNQ).
“Enron executives’ central deception was to engage in transactions designed to push debt off Enron’s books to hide from Wall Street the company’s true financial position — all in an effort to prop up its stock price,” Mr. Tauzin said. By comparison, Qwest and Global executives “pursued sham transactions to put revenue on the books, to mislead investors, and to prevent further drops in their stock prices,” he said.