Global Crossing. A brief history/outline. In 2002, a huge corporation filed for Chapter 11 bankruptcy, despite announcing continual huge company growth the prior year. The company, who was audited by Arthur Anderson, is in the process of denying accounting irregularities. The company fat cats or executives have made a fortune despite the recent bankruptcy and the invested employees/shareholders have suffered major financial losses. Who is the company?
You would not be alone in immediately thinking of Enron and the scandal that involved Key Lay, also in 2002. However, the correct answer would be Global Crossing, a 5 year old company founded by Gary Winnick in 1997. The Rise of Global Crossing. As mentioned in the introduction of this paper, from the outside facts of the downfall of Global Crossing, you could confuse the case involving Enron with Global Crossing, but why? At their peaks both Lay and Winnick were apart of corporations who were the bar setters in their respective industries.
They used their millions for their own lavish lifestyles, for charities and for infamous investing in political campaigns, only to see their nest eggs fall out of the tree quicker than you can say ‘Houston, we have a problem. ‘ We all know the rise and fall story of Enron, but little media spotlight has been put onto the lesser known rise and fall of Global Crossing, so I present to you, my paper. The year is 1997 and furniture salesman Gary Winnick, a former Drexel Burnham employee, has just been offered a project by AT&T to construct and maintain a new undersea cable that shall link the U.
S and Europe more than ever. The catch being that Winnick had to raise $750 million by him. AT&T would construct the cable and become a client to Winnick. Such a task would faze more than the average man but Winnick came up with the $750 million in just 90 days, $15 million financed by him and so Global Crossing was born. We fast forward two years to 1999. In between the years of Global Crossing’s birth and 1999, Global Crossing has gone public with a starting price of $9. 50 a share, sounds like nothing out of the ordinary.
That is until you come to realise that such a starting price has exploded to $60 per share, boosting Winnick’s personal fortune of over $1 billion in a mere 18 months, which is faster than even Bill Gates. The year 2000 was a show of growing financial strength for Global Crossing and Winnick. The most publicized showing was Winnick’s decision to move operations to the Beverly Hills offices, in which Winnick remodelled the building insides to represent an Italian Villa, as well as Winnick replicating the Oval Office at the White House for his own personal office.
More in terms of direct business operations and in a bid to interact with customers on a more global scale, Global Crossing moved to acquire IXnet and IPC. The following year Global Crossing again appeared to be on the up in what would be arguably their most successful year of them all. The company claimed to be fully an operational network that spanned around the world in 27 countries and their aim of becoming a fully global network was seen to be becoming a reality.
Their local exchange carrier was sold for $3 billion and merger talks were emerging between Global Crossing’s Asian counterparts, which would in theory create ‘a nearly seamless network throughout the world,’ sounds like a plan doesn’t it. The Fall of Global Crossing’s. The date is January 2002 and Global Crossing has filed for Chapter 11 Bankruptcy, with debt of $12. 5 billion dollars. The obvious question is, how? The true reason for such a downfall to me is somewhat unclear to pin point, but from my research I have been able to narrow down what I think were the 3 leading causes of Global Crossing’s financial problems.
The first is one that actually affected the Telecom industry as a whole, and that was the rapid change in technology that occurred early in the new millennium. This meant that for those companies within the telecom industry who did not react quickly to the ever changing environment they would suffer the financial consequences with loss of consumer/business interest. Global Crossing was guilty of such slow adaptation. Secondly and most relevant to this Auditing class was Global Crossing’s behaviour towards accounting principles.
Such behaviour is said to have involved misrepresenting the amount of assets and liabilities the company actually had in order to hide losses and seem more profitable. Furthermore and most investigated by the SEC, was Global Crossing’s practice of overstating revenue by ‘swapping fibre optic network capacity with phone carriers, including Qwest Communications International Inc. ’ Also in terms of fraudulent activities, the policies the company had in regards to executive pay were also attributed to their downward spiral.
Finally, the most logical and major financial crisis for Global Crossing came from overestimating just how much people wanted their services. Global Crossing at the height of their power had one of the largest and most in demand networks in the world, but with the economy issues around the time of 9/11 people had less spending power, and so people and businesses were not in the market for such services. Therefore, with such downturn in revenue from businesses and loss of demand from people for their networks, they could not upkeep the maintenance payments on such a large network.
All the above being said, what I find most interesting is how much less media attention the Global Crossing scandal got compared to Enron, and there has been some strong opinions in the media recently about this. The most interesting I found was from Tom Barrett, the editor of Conservative Truth. Barrett begins by outlining the facts, how Global Crossing was the fourth largest bankruptcy in American history and how far more people were affected by Global Crossing’s demise, when compared to Enron. Logically you would think this alone would be enough to get the attention of the public, especially the media and so Barrett asks why it didn’t.
A point he makes involves Terry McAuliffe, who was apart of the Clinton Presidency. McAuliffe made $18 million in two years from Global Crossing by just investing $100,000 their in stock. The question asked by Barrett is how comes there has been a lack of investigation into the legality of this profit gain? Why has nobody from the media looked into possible insider trading charges? I think the point of this example is Barrett trying to question why is it that Global Crossing, a company who has made Democrats rich, has not been brutalised by the media for their billions of cost to tax payers.
Enron on the other hand who were just as guilty as Global Crossing’s, were slated day after day by the media. Could it be to do with 92% of the media being Democrats? This Democratic Party who have invested in Global Crossing in the past and made a bucket load of money? This former Democratic President who was given a $1 million donation from Global Crossing for the Clinton Presidential Library. One has to wonder why no media attention was brought to the fact that this money was actually a slush fund, which means the President could use the money in any way he wanted. Wrapping it Up: The Outcome and Conclusion.
Aside from the political issues and the theories of what may or may not have happened, I feel it would be appropriate to conclude this paper by outlining what happened to first Global Crossing and then finally to Gary Winnick, the man who was there at the beginning and there when the company scandalously hit the iceberg and sank. So we begin with Global Crossing as a whole, which took 3 years of investigation by the SEC. The SEC concluded that on charges of ‘reciprocal purchases and sales of telecommunications capacity with other carriers,’ no monetary punishment be made against Global Crossing.
This means that the SEC upon investigation were unable to pin any type of fraud against Global Crossing and that they be cleared from financial punishment. That being said, they were guilty but not charged in any monetary form of ‘not complying with certain reporting obligations under the securities laws,’ or in simpler terms, not complying with accounting procedures. Their punishment therefore was to simply stop such practices or risk future punishment from the SEC. The public who were affected by such behaviour from Global Crossing did not only target Global Crossing as a whole in their pursuit for damage claims.
They turned their eyes onto Gary Winnick in a slightly more successful compensation package. Gary Winnick, who is some people’s views and apparently also the SEC’s eyes was just guilty of having a ‘taste for the finer things. ’ He did spend lavish on office space and invest highly with the ambition to create a global dominating Telecommunications corporation, which he did, but the SEC rejected to say he was guilty of any real fraudulent activity. Therefore in 2004, Gary Winnick was cleared from any punitive action or fines.
I am happy to finish this paper with a very slight positive note, slight being the best way to describe such a small win for the investors. In the lawsuit from employees who lost out from the bankruptcy of Global Crossing, a settlement was made for $325 million, $30 million of which Winnick agreed to pay. This was in addition to a further $25 million fund he ‘generously’ set up in 2001 for such victims. I say this was a very slight positive because when you look at the outside facts of the Global Crossing aftermath, this settlement covered only a fraction to what investors and former employees actually lost in retirement plans, 401Ks, etc.
To say that the people walked away with any sort of victory I hope would be ratified from your mind when you read the closing sentences of my paper. Gary Winnick made $734 million before the total collapse of Global Crossing by selling his shares at the last minute. His $55 million contribution doesn’t seem so generous now does it? Web References: “Case on Global Crossing. ” Oak home page. 19 Apr. 2009 . “Global Crossing -. ” Wikipedia, the free encyclopedia. 20 Apr. 2009 . “SEC Drops Winnick Charges From Global Crossing Pact, People Say -. ” Bloomberg. com. 17 Apr. 2009 . Columns: Corporate scandal: Same story, different company. ” 14 Apr. 2009 . “House Committees To Investigate Global Crossing – Forbes. com. ” Forbes. com – Business News, Financial News, Stock Market Analysis, Technology & Global Headline News. 12 Apr. 2009 . “ConservativeTruth. org: The Real Scandal Is Global Crossing – Not Enron – Tom Barrett, 3-10-02. ” ConservativeTruth. org – The Antidote to the Liberal News Media. 18 Apr. 2009 . “NOW. Politics & Economy. Corporate Scandals Update |. ” PBS. 17 Apr. 2009 . NewsMax. com: America’s News Page – News Archives. 20 Apr. 2009 .