The committee has also subpoenaed Global Crossing’s former general counsel, Jim Gorton, as well as Greg Casey, a former executive vice president of Qwest. The three men have reportedly previously refused to be interviewed by committee investigators. Qwest’s former CEO Joseph Nacchio and former CFO Robin Szeliga have also reportedly agreed to be interviewed by the committee next week.
The hearing, which will be held on September 24, is expected to delve into whether the two companies improperly accounted for a number of Indefeasible Rights of Use (IRUs), or so-called capacity swap deals, thus boosting their revenues and allowing several executives to rake in a lot of money on sales of their company stock (see Global Crossing: More Questions). Winnick, for instance, who sold more $500 million in stock before his company filed for bankruptcy in January, made $123.5 million on stock sales in May 2001 alone. Last month, Hutchison Whampoa Ltd. and Singapore Technologies Telemedia Pte. Ltd. (STT) only paid $250 million for a little more than 60 percent of the company (see Global Crossing Finally Sold).
Nacchio also made money off of his company’s puffed-up stock. The former CEO, who was ousted from Qwest in June, made more than $200 million selling his company stock over the period during which Qwest admitted to inflating its profit numbers through improper accounting methods (see Notebaert Takes Out Nacchio and Qwest: Ciao Nacchio?).
“All the deals stink, no matter how much you cut them up and cover them in oil,” says Craig Johnson, an independent analyst based in Portland, Ore., “but were they illegal?”
Two emails released by the committee yesterday indicate that they might have been. “I have some information about violations that Qwest committed in the area of accounting,” an email from a former Qwest manager to a former Qwest executive threatens (the names have been crossed out). “…The resulting fallout from these ‘smoking guns’ will likely cost Qwest more than it could save by reducing managers' salaries.”
The second email, from Global Crossing saleswoman Robin Wright and dated June 2001, also indicates the company could run into some problems over its revenue recognition for the deals.
“There is absolutely not a shred of evidence that Gary Winnick has done anything improper,” Winnick’s attorney, Gary Naftalis said in a statement. “All records and reports demonstrate that Gary acted at all times legally, ethically, and honorably.”
News reports today, however, indicate that the committee suspects Winnick was more involved than he has previously admitted in the day-to-day running of Global Crossing during the time when the deals were made.
More than for Global Crossing, which has already started its upward crawl out of bankruptcy, the expanded committee investigations could be bad news for Qwest. The struggling carrier has already admitted that it has overstated its revenues by at least $1.1 billion over the past several years (see Qwest Backtracks Fast). If the committee does find the two companies cushioned their earnings by using misleading accounting of their IRU deals, Qwest may be forced to increase the amount of revenues it has to restate.
“We continue to cooperate with the committee to answer any questions they might have about the transactions,” says Qwest spokesperson Tyler Gronback. He wouldn’t comment on whether Qwest was surprised that the committee had included it in its investigation of Global Crossing, only saying, “We’ve been talking to the committee.”
Whether it’s this investigation or one of several other federal and state investigations into Qwest that turns up more accounting irregularities, i2 Partners LLC analyst Andrei Jezierski says he expects the company will have to restate more of its revenues. “I think there’s at least a 50 percent chance of that happening,” he says.
But while observers won't be surprised if more accounting discrepancies are found, they also say they don’t expect the findings to greatly affect investor confidence in the companies. “We’ve really already dealt with most of this,” Jezierski says, pointing out that the shock-factor is no longer there. “I doubt whether we’ll find anything new that would change investors’ minds.”
The House Energy and Commerce Committee could not be reached for comment by press time.
Both Global Crossing and Qwest are also being investigated by the Securities and Exchange Commission (SEC), the Antitrust Division of the U.S. Department of Justice, and the House Committee on Financial Services.
— Eugénie Larson, Reporter, Light Reading