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Tuesday February 12, 9:49 am Eastern Time
BusinessWeek Online
DAILY BRIEFING -- Is Global Crossing Double-Crossing Investors?
Daily Briefing: NEWS ANALYSIS
By Christopher Palmeri in Los Angeles
It sounds like Enron all over again. Global Crossing Holdings, the onetime high-flying telecommunications company now in bankruptcy, has a whistleblower who alleges accounting improprieties. Shareholder suits claim that executives made tens of millions of dollars in profits from stock sales while the alleged hanky-panky went on. Employees were locked out of selling their shares for a four-week period, which ended on Jan. 18. The Securities & Exchange Commission and the FBI are both investigating Global Crossing. And the company allegedly loosened terms on multimillion-dollar loans to former and current executives shortly before going belly up. Global Crossing's auditor? None other than Arthur Andersen. [Global Crossing declined to comment on these issues.]
There the similarities end. Representatives of several large Global Crossing (OTC BB:GBLXQ) investors say they're less concerned about allegations of accounting chicanery than they are with the terms of the company's recently announced reorganization plan. ``Accounting isn't black or white, its gray,'' says David Mersereau, an investment adviser representing more than 50 Global Crossing investors with nearly 600,000 shares. ``The problem starts with management's selling $22 billion in assets for $750 million. Shareholders are getting shafted.''
CHARGE AND COUNTERCHARGE. Global Crossing became the largest telecom in U.S. history to seek bankruptcy-court protection when it filed on Jan. 28. As part of a reorganization plan announced the same day, the company agreed to sell 79% of its shares to two Asian outfits, Hutchinson Whampoa and Singapore Technologies Telemedia, for $750 million in cash. Under the plan, the banks, bondholders, and trade creditors that are owed nearly $8 billion would get $300 million in cash, $800 million in new debt, and the remaining 21% of the company. Global Crossing's current shareholders would get nothing.
The day after the bankruptcy filing, the Los Angeles Times reported the existence of a whistleblower letter from Roy Olofson, a former finance executive at Global Crossing. Olofson accuses the company of inflating its revenues and profits by swapping capacity on its network with other carriers in transactions that produced no real cash [see ``Level 3's CEO Talks Telecom''].
Global Crossing says Olofson's accusations are without merit and that he tried to extract a financial settlement from the company in exchange for dropping a threatened wrongful-termination suit. Olofson's lawyer, Brian C. Lysaght, says the company is engaging in a ``smear campaign'' against his client. Global Crossing confirms that the SEC has requested copies of documents relating to Olofson's complaints.
``SHUT OUT.'' While Olofson and his former employer square off, investors claim that their suffering is being ignored. Newsletter publisher and Global Crossing investor Michael Murphy has asked subscribers of his California Technology Stock Letter to write to U.S. Bankruptcy Court Judge Stuart M. Bernstein to complain about the company's reorganization plan. ``I'm not completely sure about the accounting issues,'' Murphy says. ``But I know the price is too low and that shareholders have been totally shut out of the process.''
San Francisco attorney Robert A. Jigarjian has sued Global Crossing's senior management on behalf of three shareholders, saying the executives ``breached fiduciary duties'' by not seeking alternatives that would have resulted in more money for investors. Seven other class actions against management either raise the same accounting issues as Olofson or allege that executives profited from stock sales stock while misleading investors about the company's health. Jigarjian distances his suit from those, however. ``We are not complaining of an open-market fraud,'' he says. ``We are complaining that the shareholders are getting nothing.''
Bondholders, too, are unhappy with the reorganization plan. Edward Weisfelner, a New York City attorney representing a number of Global Crossing bondholders says his group will ask for a larger payout in bankruptcy court. ``It's fair to say we were disappointed that the company didn't get a dialog going with us before they declared bankruptcy,'' he says.
COVAD'S EXAMPLE? Chanin Capital Partners' Russell Belinsky, a financial adviser hired to represent Global Crossing bondholders in negotiations, says it's possible for investors to get more money. In the case of McLeodUSA, another bankrupt telecom, bondholders who were originally offered $560 million in cash and 14% of the company's stock successfully negotiated a package that brought them $670 million in cash, $175 million in preferred stock, and warrants to buy an additional 6% of the company. In the case of Covad Communications, yet another bankrupt telecom, common shareholders got more than 80% of the stock in the reorganized company.
Global Crossing defends its plan: ``Global Crossing is obligated to consider alternative offers from other investors. Any final agreement would take place after additional negotiations and after approval by the court and all appropriate regulatory bodies.'' Sounds like the company may be readying to take a more conciliatory stance with investors. |
