The federal investigation into alleged accounting irregularities at Global Crossing Ltd. (NYSE: GX) widened yesterday when the Securities and Exchange Commission (SEC) subpoenaed the second telecommunications company in as many weeks.
360networks Inc. (Toronto: TSX) announced yesterday that it had received a third-party subpoena from the SEC seeking documents connected to its dealings with Global Crossing (see 360networks Set to Squeal).
Last week, Telecom provider Qwest Communications International Inc. (NYSE: Q) received an SEC subpoena to hand over documents relating to Global Crossing (see Qwest Called on Global Crossing ). In a statement, Qwest asserted that it is not the subject of the inquiry and is only providing documents to aid the SEC’s inquiry into Global Crossing. It has, however, been revealed that Qwest and Global Crossing exchanged leases on each other’s networks, recording the transactions as incoming cash revenue and outgoing capex, thereby optimizing the positive impact on their balance sheets.
U.S. accounting rules do not allow companies to book capacity sales as revenue if they involve straight swaps with no clear business purpose. But such swaps may have helped Global Crossing, and perhaps others, to boost reported revenues (see Global Crossing: More Questions, Global Crossing Under Fire, and Global Crossing: Telecom's Enron?).
Indeed, the two subpoenas issued to 360networks and Qwest may be an indication of what is to come. Observers say Williams Communications Group (NYSE: WCG), FLAG Telecom (Nasdaq: FTHL; LSE: FTL), Broadwing Inc. (NYSE: BRW), and Level 3 Communications Inc. (Nasdaq: LVLT) may also get summoned.
360networks, which filed for bankruptcy protection last June, says it intends to cooperate fully with the SEC’s request for the documents.
“We have accounted for transactions with 360networks and others in accordance with GAAP [generally accepted accounting practices],” says Tisha Kresler, a spokesperson for Global Crossing, “and we've made all of the required disclosures in our press releases and with the SEC.”
Guzman & Company analyst Patrick Comack sees nothing amiss: “I don’t think there’s anything criminal here. This is not an Enron. This was very risky business from the beginning, and very transparent. Global Crossing offered GAAP income statements for the last two years.”
Companies that receive subpoenas are not being accused of participating in shady deals, says Comack. He points out that lots of SEC investigations, like the one into Tyco International Ltd. (NYSE: TYC; London: TYI) last year, end up going nowhere. “This is not an implication of guilt by any means,” he says.
A spokesperson for the SEC would not comment on the subpoenas or the investigation.
The SEC’s probe into Global Crossing started after the telecommunications company filed for Chapter 11 bankruptcy protection last month (see Global Crossing Falls Overboard), followed by claims from a former VP of finance at the company, Roy Olofson, that the company and its auditor, Arthur Andersen LLP, engaged in improper accounting.
The FBI is also investigating Global Crossing but will not comment on what the investigation entails.
“The fact is that all we can do at this point is to acknowledge that there is an investigation going on,” says Matthew McLaughlin, a spokesperson for the Los Angeles FBI office. “We can’t lead people through an investigation day by day. It’s best for all parties not to reveal anything until we know more.”
Comack doesn’t think Global Crossing should be worried about either investigation. “I think [Global Crossing] will probably get off the hook,” he says. “They might have been trying to inflate revenue, but it’s kind of ridiculous to think that you can prove that. They might have been planning to use the capacity later.”
— Eugénie Larson, Reporter, Light Reading