Global Crossing and Qwest Communications are tied together in many ways.
They are fiber-optic carriers. Both were highfliers on Wall Street, viewed as telecom companies of the future.
Today, lawmakers will ask employees from both whether the companies also misled investors.
The House Energy and Commerce Committee wants to know whether Qwest and Global defrauded investors and regulators with a series of swap deals that lawmakers say were ”phony” and meant only to inflate revenue and earnings to please Wall Street.
”The evidence we have leads us to believe that these were simply sham transactions,” committee spokesman Ken Johnson says.
The hearings, scheduled to continue Oct. 1, could help in the formation of tougher laws. And they could aid probes of Qwest and Global by the Securities and Exchange Commission and the Justice Department. ”It could rev them up,” says securities litigator Thomas Ajamie.
The swaps in question are somewhat moot. Carriers largely stopped them last year, and the SEC recently ruled that companies that used swaps to boost revenue might be forced to restate results.
Swaps were once widespread, and often legitimate, as upstarts bought network capacity from each other in order to expand faster without having to build their own networks. At issue, though, is whether some carriers did swaps that had no legitimate business purpose and aimed only to inflate revenue and, thus, stock prices after the telecom industry started sputtering in mid-2000.
Why today’s hearing is unique:
Commoners vs. royalty. The witnesses are largely midlevel sales, finance and legal executives, not the CEOs and founders that are more often called to testify.
Yet, the nine witnesses could give lawmakers ammunition for when Global Chairman Gary Winnick and former Qwest CEO Joseph Nacchio are called to testify, possibly next week. Both have been criticized for cashing in hundreds of millions of dollars in stock while their companies floundered.
Some of those called to testify have stated in e-mails released by investigators and legal documents that the deals were revenue boosters. Other employees balked at their financial treatment.
While the e-mail trail doesn’t extend to the CEO office at Global or Qwest as has been the case with WorldCom witnesses could be asked whether top executives knew of alleged scams.
One of those underlings is Roy Olofson, the former Global executive who was one of the first to publicly question swaps. Olofson, who has been silent in public about Global, sued Global this year, saying top executives got him fired for raising concerns about accounting. He says Global engaged in questionable deals with 13 companies, including Qwest.
Among key witnesses for Qwest is Robin Szeliga, a finance executive who briefly was its CFO. She recently spoke to investigators for eight hours.
* Fraud or mistakes. The hearing could answer a big question: Were swaps bad accounting or fraud? Neither company has answered it, but it’s important.
While accounting errors could spur restatements, fraud charges could bolster shareholder lawsuits. They could also jeopardize Global’s plan to emerge from bankruptcy protection, as well as Qwest’s hope of avoiding a Chapter 11 filing.
Qwest said Sunday that it will erase $950 million in swap revenue from 2000 and 2001 because of bad accounting. On Monday, Qwest law and policy executive Gary Lytle said that no fraud occurred. Later, though, Qwest said it couldn’t say there was no fraud until its probe and others are done.
Global has said less, noting that it, too, awaits the outcome of internal and external investigations.