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Global Crossing Under Fire

A raft of class-action lawsuits, an SEC probe, reports of an FBI investigation, and an internal audit -- that's what's going on with Global Crossing Ltd. (NYSE: GX)

Anything else? Given the long and complicated search into the bankruptcy of fiber services providers, stay tuned.

The complex nature of the company is likely to lead investigators and lawyers down several paths. Global Crossing is made up of several subsidiaries, and its ownership is spread through a number of related corporations controlled by chairman and major shareholder Gary Winnick, along with other corporate officers. The company also carries large amounts of debt and has been involved in a number of related-party transactions.

Today, Global Crossing acknowledged an investigation by the Securities and Exchange Commission (see SEC Investigates GX). On Monday it had announced that it will be setting up an internal audit panel to be overseen by the board of directors. A company spokesperson said that the procedure for the internal audit has not been set and that the panel has not yet been named.

This morning, Reuters reported that a government source said an investigation by the Federal Bureau of Investigation (FBI) was underway.

At least four class-action lawsuits were filed against the company this week (for one example, see Global Crossing Sued). Several of the lawsuits are focusing on the way the company accounted for the revenue it booked with business partners.

In the past, questions have come up over Global Crossing’s treatment of deferred revenue, in which the company received cash up front for services and booked the transaction as deferred revenue that was realized at a later time.

Some analysts continue to defend the company, though they note it has been dogged by accounting questions in the past.

"There was deferred revenue, but everybody knew they were getting cash up front and booking it as deferred revenue,” says Patrick Comack, an analyst with investment banking firm Guzman & Company. Comack notes that the company filings followed its own definition of EBITDA earnings as well as results filed according to generally accepted accounting principles (GAAP). “I don’t think there were accounting irregularities,” he says.

But Comack points out that in 1999, Global Crossing changed its accounting practices because of concerns about the way it was booking revenue and cash flow statements. “The SEC is investigating. Who knows what they will find?” he asks. "Everybody knows this was a risky company -- that was no secret.”

In addition to focusing on accounting practices, investigations are likely to put the spotlight on Winnick, who, besides being the chairman and major shareholder of Global Crossing, also controlled Pacific Capital Group, a company based in Beverly Hills, Calif., that owned a large share of Global Crossing's stock.

Calls to Winnick's spokesperson were not returned at press time.

Though full insider sales filings for Global Crossing were not accessible, Light Reading confirmed through several filings that Mr. Winnick has sold at least $120 million in Global Crossing stock over the years, though he controlled substantially more. Some published reports have put his stock sales at over $500 million.

— R. Scott Raynovich, US Editor, Light Reading
http://www.lightreading.com
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