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Good
morning Mr. Chairman, Ranking Member Deutsch and the other members of the
Subcommittee on Oversight and Investigations. I come here today to assist
the Subcommittee in its investigation of Global Crossing. But, I also come
here today for another very important reason. I come here to begin the
process of clearing my name. It is very difficult for me and my family to
pick up the newspaper day after day and read how Global Crossing and its P.R.
machine have accused me of being a disgruntled employee. It is also very
difficult to live a normal life when television crews lurk at our front door.
And it is very difficult to find out from friends at Global Crossing that after
spending over three years with the company, its Chairman of the Board, Gary
Winnick, has the audacity to stand up in front of the entire office and call me
an extortionist. So I am here today not merely to help you in the
discovery of the truth, I am also here to help me and my family get our lives
back.
As
the members of the Committee may know, I began my career working as a CPA for
Price Waterhouse. I then became the Vice President of Finance for Carter
Hawley Hale Stores, where I was responsible for accounting, internal auditing,
all financial reporting and various treasury activities including supervising
all public and private debt and equity offerings. After twelve years at
Carter Hawler Hale, I left to become Chief Financial Officer of Fedco, Inc.
which was a large membership-owned mass-merchandise retail company. By the
time I departed Fedco fourteen years later, I had risen to the title of interim
Chief Executive Officer. In 1998, after a brief stint as CFO of PIA
Merchandise Services, Inc. -- a company for which I was responsible for all
financial reporting to investors and the SEC -- I was hired as the 40th employee
of Global Crossing.
When
I was first hired at Global, I was responsible for the company=s accounting and
financial reporting functions, including preparation of budgets, consolidated
financial statements and filings with the SEC. I reported directly to the
CFO and I built a staff of 15-20 people. This was an incredibly exciting
time for the company and we all felt very positive about its long term
potential. At the time our primary product was the sale of capacity known
as IRUs and we worked closely with both the SEC and the FASB to properly
understand and account for these transactions. We also had substantial
assistance from Arthur Andersen and, in particular, its partner, Joseph Perrone,
with whom I worked closely on many issues.
In
May 2000, Global Crossing hired Joe Perrone as its Senior Vice President of
Finance. Immediately, he took over the accounting and financial reporting
functions. Most of the people who previously reported to me began to
report directly to him. My responsibilities changed so that I was now
focusing on streamlining and integrating the operations of what now had become
an extremely large company, particularly after the merger with Frontier
Telecommunications in September of 1999.
In
January 2001, I was diagnosed with lung cancer. Shortly thereafter, I took
a medical leave of absence to allow me time for surgery and rehabilitation.
While I was on leave, I learned that Global was having a very difficult time
meeting its first quarter revenue projections. I also learned that Global
ultimately was able to meet its numbers in part due to some large, last-minute
transactions where Global swapped IRU capacity with other carriers.
I
returned to work in early May 2001 and began the process of getting up to speed
on what had happened at the company during my absence. One of the things I
did was to listen to Global=s quarterly conference call with financial analysts
and the public regarding its financial results for the first quarter ended March
31, 2001. During the call, one of the analysts asked management whether
there had been any capacity swaps in the quarter. I was very surprised to
hear Global=s CEO, Tom Casey, unequivocally state that Athere were no swaps in
the quarter.@
Both
before and after this conference call, I spoke with some of the financial
analysts in the company. I began to learn that there was a general sense
of uneasiness about these swap transactions and in particular about a
transaction with 360 Networks. Through discussions with various people, I
learned that 360 Networks and Global Crossing had entered into a last-minute
transaction wherein Global booked $150 million in Cash Revenues even though it
had not received a penny in cash. While the transaction originally called
for Global Crossing to pay $200 million to 360 Networks and then for 360
Networks to pay Global Crossing $150 million, I was told only the net amount of
$50 million changed hands. It was rumored that the gross amount of cash
did not actually change hands because Global Crossing was concerned that 360
Networks was about to file bankruptcy and that, if it sent the additional $150
million, 360 Networks might declare bankruptcy in the interim and would
therefore not be able to return the $150 million to Global Crossing.
At
about this same time, I was speaking with Dan Cohrs about my responsibilities
within the company. He told me that the company needed someone to manage
its working capital and that might be an appropriate role for me. He asked
me to speak with Joe Perrone who was scheduled to be in town May 31 and June 1.
I met with Joe on both days. During those meetings, Joe suggested several
new responsibilities that I might assume for the company. As these
responsibilities would require me to spend significant time at Global=s offices
in New Jersey, we discussed travel and housing allowances and related issues.
At the end of our meeting on the second day, we were at a restaurant after which
Mr. Perrone was scheduled to go to the airport to catch a plane back to New
Jersey, which was where he was based. Near the end of our meeting, the
subject of the conversation changed to the financial condition of the company.
I took the opportunity to express my concerns about Tom Casey=s statement in the
quarterly conference call that there had been Ano swaps@ in the first quarter,
when in fact there appeared to have been a significant number and a substantial
dollar amount of swap transactions. I also told him there were a number of
people in the office concerned about the accounting for those swap transactions,
particularly the inclusion of $150 million cash relating to the 360 Networks
transaction in cash revenue and adjusted EBITDA when no cash was received.
Mr.
Perrone attempted to brush off my concerns. He stated that he had added
some language to Global Crossing=s press release regarding purchase commitments
and that he interpreted the question from the analyst to which
Mr.
Casey responded as referring only to transactions called AGlobal Network Offers@
and not to capacity swaps. He also said the company was getting out of the
IRU business. I told Mr. Perrone that I disagreed with this interpretation
and I also told him that the additional language was vague and that analysts and
investors would not understand the ramifications of the brief mention of
purchase commitments.
It
was clear that Mr. Perrone did not appreciate my comments and didn=t want to
talk about it anymore. He was visibly upset. He said he had to leave
to catch his plane. He then turned to me and said that the Executive
Committee was meeting on June 4th and 5th to discuss layoffs of 50 management
personnel and that I should call him on June 6th to learn the results of the
meeting. He said he would have to justify my position. He then
picked up his bag and walked to the waiting limousine without saying another
word.
I
was absolutely shocked. Prior to discussing my concerns, our conversations
regarding my responsibilities within the company were very positive and
constructive. When I went on my medical leave, I received an email from
Tom Casey encouraging me to Ahurry back@ because I was Aa valuable member of the
team@ and that they needed my assistance. It had been rumored that the
company was considering layoffs but I had no idea that it would include me.
In addition, Mr. Perrone=s comments made absolutely no sense to me in light of
the fact that we had just spent two days delineating my future job
responsibilities.
On
June 6, 2001, I called Mr. Perrone as he had instructed but I was told that he
was Aunavailable.@ By June 21, 2001, I still had not heard from
Mr.
Perrone, so I spoke to Dan Cohrs about it. Mr. Cohrs told me that
Mr.
Perrone had been busy but that he would have Mr. Perrone call me. It just
so happened that when I walked into Mr. Cohrs= office, he was working on a press
release. Given that I knew the first quarter had been difficult, I asked
whether the press release was to reduce guidance for the rest of the year.
Dan Cohrs stated, AI would like to, but the Chairman had just sold 10 million
shares of stock.@ Mr. Cohrs added that Global=s management had
advised the Board of Directors earlier that month that Global Crossing was
considering lowering its guidance forecasts for the year but they were still
reviewing the numbers. He also volunteered that the company had recently
decided to indirectly guarantee or Aback-stop@ margin loans to certain officers,
and that he hoped the price of Global=s stock would increase because this would
have to be disclosed in Global=s next proxy statement.
During
June and July, I again began to hear concerns that the company was engaging in
last minute Aswap@ transactions as a means to boost revenues. At one
point, I received a copy of a document known as a Asales funnel@ that indicated
that approximately 13 of the 18 largest IRU transactions completed in the second
quarter were last-minute swaps where identical or substantially identical
amounts of money were being exchanged along with the underlying capacity.
There was one set of columns labeled ACASH IN@ and one labeled ACASH OUT.@
Assuming the swaps of capacity had some business justification, I did not
understand why they weren=t simply accounted for as like-kind exchanges of
assets. If the substance of the transactions were swaps of capacity, I
found it hard to believe that the mere expedient of roundtripping cash would
allow the parties to record revenue.
By
mid to late July, I still had not heard from Mr. Perrone and no one at the
company was communicating with me on any meaningful basis; and I was given
virtually no responsibilities. I believed that this was occurring because
of my conversation with Mr. Perrone back in June. On August 2, 2001,
I listened in to the company=s conference call with financial analysts and the
public regarding the financial results for the second quarter ended June 30,
2001. Again, I heard Tom Casey state that there had been no swaps in that
quarter. I became deeply concerned because I felt that the statement was
inaccurate. Pursuant to the company=s ethics policy, any concerns about
the propriety of the company=s financial reporting was to be directed to the
company=s Chief Ethics Officer, James Gorton. I therefore sent a letter to
Mr. Gorton on August 6th, which outlined my concerns.
Shortly
after I sent this letter to Mr. Gorton, I received a letter from him assuring me
that the matter would be fully investigated and that, as a member of management,
I should keep this matter confidential. We now know that while the company
issued a press release in January 2002 stating that my concerns had been fully
investigated and found to be without merit, at that point in time they had never
given a copy of my letter to Arthur Andersen and had never interviewed me.
This investigation was so inadequate that the company has since opened a second
investigation which has yet to be completed.
I
want to end by stressing two points. First, when I wrote my letter, I did
not know all the facts surrounding these transactions. While I knew what
Global was selling, I had no idea what Global was buying. That is
important because it could dictate how the transactions should be accounted for.
Therefore, my letter was not designed or meant to conclude that I knew that
these transactions were shams; instead, it was designed to say that they didn=t
pass the smell test and should therefore be investigated. However, the
facts that have been made public since that time only seem to further undermine
the legitimacy of these transactions. In particular, I have reviewed
reports that are in this Committee=s possession from Global=s engineers that
show that most of the IRUs Global received through these swap transactions are
now considered absolutely worthless. Apparently, this study was completed
in mid-2001 and therefore it appears that Global management must have been aware
of the issue prior to my letter of August 6th. I have also reviewed the
recent pronouncement of the SEC which in my opinion fully supports the concept
that if all a transaction represents is an exchange of capacity, the transaction
should be treated as such and not be counted as revenue. As Mr. Timothy
Lucas, head of the FASB Emerging Issues Task Force said, AAn exchange of similar
network capacity is the equivalent of trading a blue truck for a red truck, it
shouldn=t boost a company=s revenue.@
Second,
I have been characterized in the press as a Awhistleblower@ and I have even
heard my counsel use that term when referring to me. I do not see myself
that way. Rather, I see myself as simply an officer of the corporation who
was merely attempting to do his job. I first aired my concerns with
Joe Perrone in June 2001. On August 6, I complied with the company=s
ethics policy and wrote my letter to Mr. Gorton. I did so because I
was concerned that the public was being misled. I concluded that,
regardless of the ramifications, as an officer of the company, I had an
obligation to express my concerns about what I thought was potentially
over-aggressive accounting. At the time, I believed the company would
investigate my concerns in good faith. I was wrong. Instead, they
fired me. I can honestly say that I never imagined in my wildest dreams
that my letter would contribute toward putting in motion a series of events that
has led to my appearance before this Committee today. However, had I not
written my letter, I suspect I might be sitting here trying to answer questions
as to why I didn=t express my concerns.
That
all being said, I welcome the Committee=s investigation, and I will do
everything in my power to assist the Committee in its search for the truth -- no
matter what that may be. I now invite your questions and hope that I prove
to be of service to you.
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