Ideally, In a globally competitive market place, the ability of one telecommunications firm to purchase capacity from another improves market efficiency and shareholder value by eliminating network bottlenecks and reducing redundacies.  In such cases, a firm that is experiencing increased demand on its own network can use such a purchase to meet increased customer demand. 

If, on the other hand, a telecommunications firm Purchases increased capacity in a market of shrinking demand, that raises serious questions about the underlying rationale for such a purchase. and in cases where two firms engage in a capacity swap in which both firms are confronting shrinking markets, that raises further questions as to the business motives behind these transactions.  

it is this variety of dubious transaction, in which both Global Crossing and Qwest engaged, that we will examine in the course of our hearings. were these capacity swap transactions undertaken to respond to new business opportunities, or were they merely designed to provide the appearance of expanding business and growing revenues?  

evidence uncovered by this Committee’s investigation SUGGESTS that THE latter IS true. confronted with shrinking markets and declining business volume, executives at Global Crossing and Qwest used capacity swaps to Conceal slowing growth by booking fictitious revenues. 

The importance of these swaps to the financial image these firms were seeking to create becomes clear as we examine the Details.   

Global Crossing reported $720 million in cash revenues from the sale portion of these capacity swaps in the first and second quarters of 2001 alone.  at the same time, We have acquired Global Crossing documents that suggest that A significant portion of these transactions was constructed solely to meet the company’s PUBLICLY ANNOUNCED revenue targets.  The documents suggest that it was less important to the executives  authorizing these swaps what capacity was actually being purchased by Global Crossing as was the perceived need for consumating the transaction itself and booking the revenues. Documents also suggest that the amount of capacity to be purchased and sold in these swaps was remarkably fluid, allowing dollar values that could be set as necessary to bridge the “gap” in the firm’s ability to meet a particular quarter’s revenue numbers.  it was not the value of the transactions themselves, but rather the urgency to complete them by the end of certain quarters, that drove the deals.  

As further evidence of this strategy, we have e-mails showing that the sales team was the driving force behind these deals, while the network people -- those who would know whether or not such capacity was needed -- questioned the rationale for many of these purchases. 

Moreover, Global Crossing apparently continued to engage in these questionable transactions even while an internal review was underway to determine how to dispose of excess capacity acquired through previous swaps.  This review subsequently revealed that Global Crossing lacked sufficient working capital to incorporate roughly $1 billion OF the purchased capacity into its network. in the end, This overextension cost the company dearly, as it was forced to try to find buyers of this excess capacity for pennies on the dollar.  

Global Crossing filed for bankruptcy on January 28, 2002 -- the fourth largest bankruptcy in United States history.  As a result, innocent investors- average american families- lost $54 billion, and nearly 10,000 employees lost their jobs. 

 As for Qwest, the company reported revenues of more than $1 billion from network capacity sales in 2001, but as it turned out, more than two thirds of those sales were swaps in which Qwest simultaneously purchased similar amounts of capacity from its purchasers. Moreover, documents and interviews make plain that the company’s strategy was to book up front as much revenue from these swaps as possible, even though Global Crossing and others in the industry generally booked such revenue gradually over the life of these long-term contracts. 

to recognize revenue from these swaps up-front, the deals had to meet certain accounting criteria -- such as the inability of the purchaser to freely alter the capacity route at a later time -- which made it harder to get other companies to agree to such purchases from Qwest.   

What we’ve learned in our investigation is that, in an apparent attempt to circumvent these and other accounting criteria, Qwest executives and employees entered into side agreements with transaction partners to permit the purchaser route flexibility, while keeping the finance and accounting personnel in the dark. We also have discovered that Global Crossing personnel agreed to structure these swaps with Qwest in such a manner as to permit immediate revenue recognition by Qwest, so long as global crossing received oral promises that the contracts’ terms would not be enforced. 

Just this past Sunday night, Qwest announced that it was going to restate approximately $950 million in revenue that it recognized from capacity swaps between June 30, 2000 and the end of 2001. These are the very swaps that have been the subject of our investigation, and investigations by other Federal authorities.  While we do not yet know the specific findings that led to this restatement -- all Qwest has said so far is that “its policies and practices” did not support the company’s prior accounting treatment for these swaps, we believe their restatements illuminates the significance of the problems we’ve identified.  

Although Global Crossing utilized different formal accounting methods for its swaps, its pro forma financial reporting -- which included virtually the full value of the “sale” side of the swaps in its cash revenue and earnings numbers – can also be said to have MISLED INVESTORS.  And there are questions as well as to whether the Securities and Exchange Commission and the Financial Accounting Standards Board were sufficiently proactive in dealing with the important issues arising from the increased use of such swaps throughout the industry.  We will seek to address these vital issues more in depth during the second day of our hearings into these transactions. 

Like many other telecommunication firms in the late 1990’s

and the first two years of this century, Global Crossing and Qwest were confronted with a declining MARKET for their products AND a glut in telecomunications capacity.  

by now, this has become a familiar, if disturbing story. in the go-go ‘90’s when the irrational exuberance of the marketplace dictated that stocks only increase in value, meeting wall street’s expectations came to be seen as the paramount duty of all too many corporate executives. But that can not justify what these firms seem to have attempted with these swaps anymore than the bizarre partnerships at Enron or the ginned up books at worldCom.  in every case, these short term efforts at hiding the true facts only served to dreadfully distort the stock market’s ability to efficiently allocate resources… THE critical genius of our economy. 

This number-obsessed atmosphere also placed employees of these companies in untenuous positions.  At today’s hearing, we will hear from some of those current and former employees from both companies. They have come forward to help us understand these transactions in more detail and to grasp the importance of these swaps in meeting wall street’s expectations. Some also will describe their concerns with these swaps and the efforts they took to raise red flags within the company. Our second day of hearings will allow us to ask the higher-ranking current and former executives at these companies about the legitimacy of these swaps, the impact these swaps had on their financial reporting, and what if any steps they have taken to avoid similar situations in the future.