February 11, 2002, 9:48 AM — A wailing chorus of investors have joined a former Global Crossing Holdings Ltd. financial vice president in criticism of the accounting practices of this provider of telecommunication services. Together, the picture they paint portrays the company's executives as negligent at best, and purveyors of fraud at worst.
In a press release issued Monday, Roy Olofson, former vice president of finance for Global Crossing, accused company executives of improperly describing the company's revenue to the public. Olofson, through his attorneys at Los Angeles law firm O'Neill, Lysaght & Sun LLP, said Global Crossing improperly recorded long-term sales immediately rather than over the term of the contract, that the company improperly booked swaps of capacity with other carriers as cash transactions, and that Global Crossing fired him when he blew the whistle.
His attorney said all Olofson wanted to do at first was fix the books. Now he wants restitution for his lost job, but he is unlikely to get it from Global Crossing itself -- which is under bankruptcy protection. Olofson isn't suing anybody yet, but he's thinking about it.
In a separate action, the Los Angeles law firm of Weiss & Yourman LLP filed a class-action lawsuit on Monday against five of the company's top executives. The suit charges them with violating federal securities laws by participating "in a fraudulent scheme and course of business .... by disseminating materially false and misleading statements and/or concealing material adverse facts."
Because Global Crossing is under bankruptcy protection, Olofson cannot sue without the court's permission. Class-action lawsuits against the company require permission as well. That is why the class-action suit targets the executives themselves. If he files suit, Olofson would likewise sue company executives.
Other class-action lawsuits over Global Crossing's meltdown are also in the works.
Global Crossing said in response to Olofson's public statements that it reviewed Olofson's accusations and found them without merit. The company has reported its financial results in accordance with the law and is cooperating with a U.S. Securities and Exchange Commission (SEC) probe triggered by Olofson's allegations and the bankruptcy filing, a spokeswoman said.
She would not comment on a Friday report from USA Today which said the U.S. Federal Bureau of Investigation is also probing Global Crossing's accounting practices, nor would she comment beyond the company's press releases.
Global Crossing's bankruptcy, declared in January, is the largest of any telecommunication company to date, and the fourth-largest in U.S. history. The US$22.4 billion claimed in liabilities in its bankruptcy filings in the U.S. Bankruptcy Court for the Southern District of New York and the Supreme Court of Bermuda dwarf the debts of high-profile meltdowns in the previous year like those from NorthPoint Communications Group Inc., Rhythms NetConnections Inc., and PSINet Inc.
Global Crossing's investors face the loss of substantially all of their investment in the proposed bankruptcy restructuring.
Hutchison Whampoa Ltd. and Singapore Technologies Telemedia Pte. Ltd. said in January that they would bail out Global Crossing with an investment totalling $750 million. In exchange they will become the new owners of the company, if the courts agree to the terms.
Existing common equity and preferred shareholders receive nothing for their investment if the Hutchison and Singapore Technologies deal goes through. The deal would leave the company comparatively debt-free, wiping away most of its liabilities. Bondholders would share in a combination of cash, new debt, and new equity in the restructured company.
Global Crossing took on about $7.2 billion in debt over three years until 2000 to build 1.7 million miles of fiber-optic cable. With Internet use exploding, the company wanted to build an Internet protocol-based network to open the most narrow bottlenecks connecting transoceanic regions. The company completed its international network of fiber-optic data transport capacity in June 2001 with the connection of Lima, Peru, to the company's South American cross-connection. Their network today spans 27 countries and 200 major cities.
With a market capitalization of more than $40 billion and a share price of about $50 in 1999, the company's billions of dollars of debt looked manageable. But as other carriers began to enter the market and the economy foundered, demand for Global Crossing's capacity waned.
Company executives began to play games with the books in 2001 in order to keep meeting the company's performance goals as stated to the financial markets, according to both the class-action suit and to a statement Olofson issued through his attorneys.
