- The Washington Times - Sunday, February 24, 2002

''I invested in many companies," Democratic National Committee Chairman Terry McAuliffe recently told Fox News Channel, "and I am happy [the Global Crossing investment] worked out." Well, at least the Global Crossing investment worked out for Mr. McAuliffe and Global Crossing Chairman Gary Winnick, both of whom were able to cash out ground-floor investments for substantial profits while the once-high-flying stock was soaring. However, the thousands of Global Crossing employees whose 401(k) retirement accounts were decimated by the firm's recent bankruptcy are anything but "happy" about how their investments "worked out." Nor are the tens of thousands of other equally unfortunate investors, whose Global Crossing shares are now worthless.
As Mr. McAuliffe explained, "This is capitalism. You invest in stock. It goes up. It goes down." True enough, to a point. Indeed, in the overwhelming majority of cases under America's system of democratic capitalism, entrepreneurs who earn vast fortunes do so because they have, as the saying goes, invented a better mousetrap, for which the public has beaten a path to their doors. However, in other cases fortunately, relatively few vast fortunes have been made through fraud and misrepresentation, which have effectively caused a firm's stock price to skyrocket, permitting early investors to exit with substantial, but undeserved, profits.
At the moment, nobody knows if Global Crossing is an example of the latter case. The FBI and the Security and Exchange Commission (SEC) are, however, actively investigating possible wrongdoing at Global Crossing, a Bermuda-based corporation run out of Beverly Hills by Mr. Winnick.
Roy Olofson is a former vice president of finance at Global Crossing who has turned into a whistleblower. In a letter last August to the firm's chief ethics officer, Mr. Olofson, who was fired in December, charged that Global Crossing and its auditor, Arthur Andersen, engaged in deceptive accounting practices. These practices drastically inflated the firm's revenue, thereby serving as the catalyst to its soaring stock price.
Devised in 1997, Global Crossing's better mousetrap was a 100,000-mile fiber-optic network traversing the Atlantic Ocean and covering more than 25 countries, to which it intended to profitably transmit phone calls and Internet data. The problem was that other entrepreneurs had the same idea. They, too, built vast fiber-optic networks, much of whose capacity has never even been activated because of a massive overinvestment campaign throughout the telecommunications industry.
With Global Crossing stock trading below $30 per share in February 1999, Andersen's lead auditor, Joseph Perrone, submitted a memo to Global Crossing outlining a plan to give aggressive accounting treatment to communications swaps, which were reciprocal deals between telecoms, in which they traded capacity with each other. The capacity exchanges often extended for 15 to 25 years. In the informal financial statements, the firm would record the entire value of a 25-year exchange agreement as if all the "revenue" were received in the year the contract was signed. The effect was to present the appearance of a firm generating huge quantities of cash flow, which lifted Global Crossing's stock price.
As it happened, these agreements were little more than asset swaps. Sometimes, cash never even exchanged hands, and never would. And sometimes, as Mr. Perrone recommended, checks in equal amounts were exchanged, carefully spaced 60 days apart "apparently to avoid suspicion that the deals were reached merely to help each party meet its quarterly financial objectives, and to require each party to submit separate cash payments, apparently to create the look of a valid deal," the New York Times recently reported.
On June 5, 2000, shortly after Mr. Perrone left Andersen to become Global Crossing's executive vice president for finance, the SEC began an inquiry into Global Crossing's treatment of its communications swaps. Conveniently, after Mr. Perrone who 16 months earlier designed the questionable accounting treatment being investigated had come on board, Global Crossing explained to the SEC on July 20 that Arthur Andersen, its external auditor, had certified the way it treated its swaps.
Global Crossing insists it has broken no laws. The latest SEC and FBI probes, which are in their early stages, may confirm that position. What is clear, however, is that Global Crossing's stock soared on the heels of highly favorable, extremely self-serving "cash revenue" statements that it issued based on "revenue" that either never existed or was little more than an accounting illusion. It is also known that a principal catalyst for the firm's soaring stock price was the accounting treatment designed by Mr. Perrone. And it is known that Mr. McAuliffe's initial $100,000 investment mushroomed into an estimated $18 million, while Mr. Winnick's stock sales totaled nearly three quarters of a billion dollars before Global Crossing filed for bankruptcy.
Mr. McAuliffe who self-righteously infers that all sorts of nefarious motives are behind the Bush administration's relationship with Enron Corp. denies any wrongdoing or inappropriate behavior on his own part. (He arranged for Mr. Winnick to play golf with then-President Bill Clinton, though he denies any connection between that priceless introduction and the windfall he received.) Nevertheless, the circumstances underlying the FBI and SEC investigations give cause for concern, as no less than Democratic consultant James Carville himself acknowledges. While we have no illusions that Mr. McAuliffe would welcome advice from the editorial page of The Washington Times, perhaps he ought to consider advice from Mr. Carville. "What Terry ought to do, and I'm sure he will," Mr. Carville told Bill O'Reilly of the Fox News Channel earlier this month, "is release his trading records." So, how about it, Mr. McAuliffe? Show the world how such a brilliant venture capitalist turned $100,000 into $18 million not long before the whole house of Global Crossing cards collapsed. Show us your mousetrap, Mr. McAuliffe.


Copyright © 2018 The Washington Times, LLC. Click here for reprint permission.

The Washington Times Comment Policy

The Washington Times welcomes your comments on Spot.im, our third-party provider. Please read our Comment Policy before commenting.

 

Click to Read More and View Comments

Click to Hide