What Was The Global Crossing Scandal?
Global Crossing was a telecommunications company founded in 1997 by Gary Winnick.
The company’s initial focus was on building an advanced fiber-optic telecommunications network that would span the globe. The company’s goal was to provide businesses with a high-speed, reliable means of communicating and transmitting data across borders.
The company began its operations by acquiring existing telecommunications companies and building new fiber-optic networks in various countries. In 2000, Global Crossing completed its $11 billion network, which connected 27 countries and more than 200 major cities. This made Global Crossing the first company to have a truly global network, and it quickly became a major player in the telecommunications industry.
According to the New York Times:
“Global Crossing’s ambition — to build a 100,000-mile fiber-optic network linking 27 countries — was an expensive proposition.”
The company spent billions of dollars laying cables along every ocean floor and was acquiring everything in sight.
Winnick was a former Drexel Burnham/Michael Milken junk bond banker from the 1980’s. Making deals was in his blood.
Michael Milken in 2006. Drexel’s head of high-yield securities
In May of ‘99, an attempt to buyout US Wes as Qwest outbid them. But this failure seemed to only stoke the need for Winnick and Global Crossing to pay ever higher multiples.
In July 1999, the company acquired Global Marine Systems, the undersea cable maintenance arm of Cable & Wireless, for $885 million. Global Marine was well-known for being the first, in 1992, to lay continuous unarmoured cable over 1,000 km in between Brunei and Singapore. Then in September 1999, the company acquired New England telephone and cable operator Frontier Communications for $9.9 billion. Sporting the new name Global Crossing North America. Fyi, today, Frontier is only worth $7.5 billion, 24 years later.
Then just a few weeks later Global Crossing acquired 49% of SB Submarine Systems and as a result formed Asia Global Crossing, a $1.3 billion joint venture with SoftBank Group and Microsoft to build a fiber-optic network in Asia. Then to finish off ‘99 Racal Telecom was taken over for $1.65 billion.
In 1999 Global Crossing & Winnick saw their market value balloon to $47 billion, despite of course never booking one profitable year.
This success became short-lived as the dot-com bubble burst in 2001, which caused a decline in demand for Global Crossing’s services. Additionally, the company was hit by a series of scandals, including accounting fraud, insider trading, and the sale of underperforming assets. These factors led to the company filing for bankruptcy in 2002.
After the bankruptcy, the company was bought by Singapore Technologies Telemedia, which rebranded the company as Global Crossing Ltd.
The new company focused on providing telecommunications services to businesses in Latin America and Asia. In 2011, the company became acquired by Level 3 Communications. Which continues to operate the company under the Global Crossing brand.
The fraud at Global Crossing was a complex scheme involving the manipulation of the company’s financial statements to inflate revenue and assets. The scheme involved the use of accounting tricks such as “round-tripping” and “swaps” to artificially boost revenue and assets, and conceal the company’s true financial condition.
Round-tripping involved Global Crossing selling its network capacity to other companies at inflated prices and then buying it back at the same inflated prices. Allowed the company to record the sales as revenue. And the purchases as assets. As a result, artificially boosting both figures on its financial statements.
Swaps were another accounting method Global Crossing relied on to paint a better financial picture.
The company would enter into agreements with other companies to exchange network capacity at inflated prices. These agreements became recorded as revenue and assets. However, they had no real economic value.
The company’s top executives, including CEO Gary Winnick and CFO Robert Annunziata, were aware of the accounting fraud and benefited from it, through insider trading and other means. They sold millions of dollars worth of company stock before the fraud was uncovered, reaping large profits while the company’s shareholders lost money.
The accounting fraud finally became uncovered by the Securities and Exchange Commission (SEC) in 2002. Global Crossing would receive corporate charges of fraud. And the company’s top executives saw insider trading and other related charges. As a result, the company restated its financial statements and filed for bankruptcy.
We spoke with one former hedge fund manager who owned Global Crossing and stock and we asked what they remembered about the firm:
“A freight train powered by a lot of smooth talking.”
According to a New York Times article, Winnick “sold shares worth $734 million before the company collapsed.” And, “The Global Crossing saga resembles another corporate collapse — Enron — in that executives did well while many employees and small investors did not.”
For further reading on Enron, see our piece: What Exactly Did Enron Do?
Linda McGrath, president of Local 1170, the Communications Workers of America. The union that represented the Global Crossing employees said:
”the company matched the amount workers put in with Global Crossing stock, and it could not be sold for five years… A lot of workers made their contribution in stock, because they had faith in their employer.”
In conclusion, like Enron, Global Crossing would see rank and file 401k’s destroyed while the top brass flew off on NetJets.