Global Crossing

1
Global Crossing

• Mark Russell
• Shaun Tilley
• Stephen Sutton
• Chris Sears

2
History

• Global Crossing, founded in 1997 by Gary Winnick
• Telecommunications firm headquartered in Bermuda,
  but operates primarily in the United States
• The company's network operates in 27 countries
  and in more than 200 worldwide cities

3
History (continued)

• Created one of the largest fiber optic networks
  in the world
• Services on their network include internet access
  and other data offerings to businesses, along
  with voice and managed network services for
  multinational corporations, service providers,
  and telecom carriers.

4
The Scandal

• There were two issues that led to the downfall of
  Global Crossing
• Their use of Swap Transactions
• Insider Trading

5
The Swap Transactions

• These deals sold IRUs or Indefeasible Rights of
  Use for telecom network capacity to network
  companies to help them meet their network
  capacity demands.

6
The Swap Transactions

• Basically, Global Crossing would sell bandwidth
  to another telecom company while simultaneously
  purchasing a relatively equal amount of bandwidth
  from them.
• They would then book the revenue from the sale
  immediately and capitalize the purchase.

7
The Swap Effect

• In 2001, 20 of Global Crossings 3.2 billion
  revenues came from such swap transactions.
• Stephen Ryan, an accounting professor at NYU,
  said it best.
• If you are capitalizing the expense, then you
  should treat the revenue as deferred and
  recognize it over the life of the lease.

8
Roy Olofson, Whistle Blower

• Although swaps were common practice in the
  telecom industry, Global Crossings accounting
  for them was not.
• Roy Olofson, a former vice president for finance
  brought this issue to Global Crossings attention
  in an August 2001 letter, made public in February
  2002.

9
The Swap Problems

• Mr. Olofson claimed that these deals always
  occurred at or near quarterly reporting dates in
  order to boost earnings for Wall Street.
• The result would elevate Global Crossings
  income.
• This worked well until the year 2001 when the
  market for these swap transactions began to dry
  up, and Global Crossing could no longer
  artificial inflate their revenues.

10
Stock Aftermath

• Global Crossings inability to maintain debt
  covenants, partly due to the lack of available
  swap transactions, forced the company into
  Chapter 11 bankruptcy on January 29, 2002.
• This announcement and the preceding speculation
  of the bankruptcy caused Global Crossings stock
  price to fall from 55 per share in April 1999 to
  .07 per share in February 2002.

11
Financial Aftermath

• In October of 2002 Global Crossing announced that
  is would restate their financial reports for a
  nine month period in 2001 that would wipe out 19
  million in revenue related to their swap
  transactions

12
Insider Trading

• During the swap scandals and just prior to the
  bankruptcy filing 14 Global Crossing insiders
  sold over 800 million in shares.
• Biggest winner was Garry Winnick who pocketed
  735 million in the year prior to the bankruptcy.
• Currently these trades are still under
  investigation by the SEC.