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Printed Hearing The Committee on Energy and Commerce W.J. "Billy" Tauzin, Chairman Capacity Swaps by Global Crossing and Qwest: Sham Transactions Designed to Boost Revenues? <DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:81961.wais]
CAPACITY SWAPS BY GLOBAL CROSSING AND QWEST: SHAM TRANSACTIONS DESIGNED
TO BOOST REVENUES?
=======================================================================
HEARINGS
before the
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 24 and OCTOBER 1, 2002
__________
Serial No. 107-129
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
RICHARD BURR, North Carolina BART GORDON, Tennessee
ED WHITFIELD, Kentucky PETER DEUTSCH, Florida
GREG GANSKE, Iowa BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming BART STUPAK, Michigan
JOHN SHIMKUS, Illinois ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico TOM SAWYER, Ohio
JOHN B. SHADEGG, Arizona ALBERT R. WYNN, Maryland
CHARLES ``CHIP'' PICKERING, GENE GREEN, Texas
Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
TOM DAVIS, Virginia THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland LOIS CAPPS, California
STEVE BUYER, Indiana MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
ERNIE FLETCHER, Kentucky
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Oversight and Investigations
JAMES C. GREENWOOD, Pennsylvania, Chairman
MICHAEL BILIRAKIS, Florida PETER DEUTSCH, Florida
CLIFF STEARNS, Florida BART STUPAK, Michigan
PAUL E. GILLMOR, Ohio TED STRICKLAND, Ohio
RICHARD BURR, North Carolina DIANA DeGETTE, Colorado
ED WHITFIELD, Kentucky CHRISTOPHER JOHN, Louisiana
Vice Chairman BOBBY L. RUSH, Illinois
CHARLES F. BASS, New Hampshire JOHN D. DINGELL, Michigan,
ERNIE FLETCHER, Kentucky (Ex Officio)
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Hearings held:
September 24, 2002........................................... 1
October 1, 2002.............................................. 365
Testimony of:
Armstrong, Jackie, Counsel, Global Crossing, Ltd.; Robin
Wright, former Vice President of Carrier Sales, Global
Crossing, Ltd; Greg Casey, former Executive Vice President
of Wholesale Markets, Qwest Communications International
Inc.; Susan Chase, Vice President of International
Wholesale Markets, Qwest Communications International Inc.;
Kym Smiley, former Director of Strategic Negotiations,
Qwest Communications International, Inc.................... 65
Crumpler, Lenette, Frontier, a Citizens Company.............. 501
Floyd, Ken, Director of Sales in North America, Flag Telecom. 67
Hellman, Peter S., Chairman of the Audit Committee, Qwest
Communications International Inc........................... 599
Joggerst, Patrick, former President of Carrier Sales, Global
Crossing, Ltd.............................................. 14
Mohebbi, Afshin, President and Chief Operating Officer, Qwest
Communications International Inc........................... 592
Nacchio, Joseph P., former Chairman and Chief Executive
Officer, Qwest Communications International Inc............ 588
Olofson, Roy L., former Vice President of Finance, Global
Crossing, Ltd.............................................. 15
Shaffer, Oren G., Vice President and Chief Financial Officer,
Qwest Communications International Inc..................... 595
Smith, Paula M., Consultant and former Qwest Employee........ 506
Szeliga, Robin, Executive Vice President, Qwest
Communications International, Inc.......................... 20
Winnick, Gary, Chairman of the Board of Directors, Global
Crossing Ltd.; Jim Gorton, former General Counsel, Global
Crossing Ltd.; Dan Cohrs, Chief Financial Officer, Global
Crossing Ltd.; Joe Perrone, Executive Vice President of
Finance, Global Crossing Ltd.; and David Walsh, former
President and Chief Operating Officer, Global Crossing Ltd. 520
(iii)
CAPACITY SWAPS BY GLOBAL CROSSING AND QWEST: SHAM TRANSACTIONS DESIGNED
TO BOOST REVENUES?
----------
TUESDAY, SEPTEMBER 24, 2002
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Oversight and Investigations,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2123, Rayburn House Office Building, James C. Greenwood
(chairman) presiding.
Members present: Representatives Greenwood, Stearns,
Gillmor, Burr, Whitfield, Bass, Tauzin (ex officio), Deutsch,
Stupak, Strickland, and DeGette.
Staff present: Jennifer Safavian, majority counsel; Casey
Hemard, majority counsel; Ann Washington, majority professional
staff; Kelli Andrews, majority counsel; Tom Dilenge, majority
counsel; Mark Paoletta, majority counsel; Brendan Williams,
legislative clerk; Edith Holleman, minority counsel; and Nicole
Kenner, minority research assistant.
Mr. Greenwood. Good morning. We welcome our witnesses and
we welcome our guests. The Chair will recognize himself for the
purpose of making an opening statement.
Good morning and welcome to the Subcommittee on Oversight
and Investigations' first day of hearings on a series of highly
questionable business transactions involving the Global
Crossing and Qwest Corporations. In particular, this committee
is interested in what are referred to in the telecommunications
industry as ``reciprocal fiber optic capacity transactions,''
more commonly known as capacity swaps.
Ideally, in a globally competitive marketplace, the ability
of one telecommunications firm to purchase capacity from
another improves market efficiency and shareholder value by
eliminating network bottlenecks and reducing redundancies. 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 the telecommunications firm
purchases increased capacity in a market of shrinking demand,
that raises serious questions about the underlying rationale
for such a purpose 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 transactions 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 do 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 revenue.
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 a significant
portion of these transactions were 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
consummating 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 quarters
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 the 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 purchase 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, its 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 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 eliminate the significance of the problems we have
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
next week.
Like many other telecommunications firms in the late 1990's
and the first 2 years of this century, Global Crossing and
Qwest were confronted with a declining market for their
products and a glut in telecommunications capacity. By now,
this has become a familiar, if disturbing story. In the go-go
1990's when 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 cannot justify what these
firms seem to have attempted with these swaps any more than the
bizarre partnerships at Enron, with the ginned up books at
WorldCom. In every case, these short term efforts at hiding the
true facts only serve 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 companies.
Our second day of hearings will allow us to ask the high
ranking, current and former executives at these companies about
the legitimacy of the 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.
I welcome all of our witnesses today and I will now
recognize the ranking member, Mr. Deutsch, for his opening
statement.
Mr. Deutsch. Thank you, Mr. Chairman, and thank you for
holding this very important hearing. It has been 10 months
since this committee began investigating a string of corporate
scandals ranging from last year's collapse of Enron to the
admission of WorldCom that it improperly booked $3.9 billion in
expenses as capital costs.
Since then, we have seen the demise of other companies,
Tyco, Delphi and these companies have unfolded because of
questionable accounting and misuse of funds by top officers.
A new sense of responsibility and fear has entered into
corporate suites and board rooms across America. These scandals
have been devastating not only to employees, retirees and
shareholders, but to our Nation's economy. Congress must work
to reverse this trend of corporate malfeasance until ultimately
all publicly traded corporations recognize that their duty is
to all of their shareholders, not just to chief executives and
other top insiders.
Today, this committee will be hearing testimony on two
telecommunications companies where in an effort to keep the
stock prices high, the chief executives imposed unrealistic
revenue goals on their sales staffs at the same time the
industry was facing a glut of fiber optic resources and a sharp
drop in prices.
In order to meet these goals, Global Crossing, Qwest and
others engaged in swaps of fiber optic capacity under which
each claimed revenues through creative accounting techniques.
In Sunday's announcement of a $1 billion plus restatement,
Qwest placed the blame on its accounting firm. What was left
unsaid, however, is the reason that we're all here today, that
Qwest and these other companies knowingly entered into many
deals which they knew had no real business purpose except to
recognize revenue.
This committee has reviewed dozens of e-mails in which
sales staff openly admitted that these deals were for revenue
recognition. As early as June 2000, Robin Wright of Global
Crossing wrote to David Walsh, Global president, that her
``biggest concern about Qwest is buying something we don't
really need to trade for the revenue.'' This desperate attempt
to meet the numbers probably reached its lowest point when some
of the Qwest sales staff made undisclosed oral and written
representation to several companies' sales staffs that would
have allowed the portability of the assets that were allegedly
sold.
Neither the accountants nor the internal orders were told
of these agreements. One such agreement was essential to
sealing a $109 million year end deal which sent from the
computer of Qwest president, although he claims no knowledge of
the message and everyone else denies sending it. Although the
existence of this e-mail has been known for almost a year, the
company inexplicably has not yet finished its investigation of
who sent it, how it was sent or even taken affidavits from the
involved employees. These side agreements, had they been known
to Qwest accountants would have completely changed the
accounting and reduced Qwest's revenue by hundreds of millions
of dollars.
At Global Crossing, employees tried to carry out two
opposing directives. The network engineers had been ordered to
reduce the amount of capital expenditures while the sales
people were spending it on whatever deals that they could, just
to book revenue. The culmination of the unraveling of the
situation is when Global did not know whether or not Qwest was
trying to sell something that it already had bought.
Mr. Chairman, the people who will testify today did not set
out to disrupt the lives of fellow employees, retirees and
shareholders. However, most made no attempt to step these
unethical and possibly fraudulent deals.
As we learned from Enron, Global Crossing and Delphi, Qwest
and others, corporate abuses demand real solution. It is my
hope that these hearings will provide the insight needed to
restore the public's face in their investments. Thank you, Mr.
Chairman.
Mr. Greenwood. The Chair thanks the gentleman from Florida
and recognizes the chairman of the full committee, Mr. Tauzin
for an opening statement.
Chairman Tauzin. Thank you, Mr. Chairman, and let me extend
my warm appreciation again to you, Mr. Deutsch, and to Ranking
Member Dingell for the extraordinary cooperation and assistance
in the continuing bipartisan committee investigations into
corporate responsibility failures. We could not do our work
without that spirit of bipartisanship and the agreement not to
politicize these hearings. And again, I want to extend to you
publicly our compliments, our thanks because Chairman Greenwood
and I are deeply appreciative that we've been able to make such
progress because of that. Thank you.
When we set out to get to the bottom of Enron's financial
collapse back in November last year, we said we'd pursue the
facts wherever they might lead. And we did so with the kind of
stubborn determination that eventually showed the public how
the deceptive and greedy actions of a few executives could
bring whole companies down to their knees, destroy employee
futures, families and bring financial devastation to honest and
hard working employees and most notably to the whole structure
by which investors invest in public companies.
I'm sad to say this threat of greed and deceit in the
executive suite and the board room seems to have run through
other once high flying companies as well. The hearing beginning
this morning will shine a light on the activities of two well-
known telcom firms, Global Crossing and Qwest. And I'm
disappointed to say the evidence amassed by the committee and
our joint investigative team raises once again some very
troublesome questions about the behavior of certain individuals
entrusted with making the right decisions for a company, its
employees and for its real owners, the investing community of
America, the pension funds and the individual investors who
believe these companies are on the up and up.
What we have before us today are transactions involving the
exchange of long-term leases, so-called swaps of fiber optic
capacity, otherwise known as IRUs, indefeasible rights of use
that appear to derive from quite the same deceptive impulses
that drove a handful of Enron executives to destroy that
company.
Enron executives' central deception was to engage in
transactions that were designed to push the debt of that
company off the books, to hide it from the Wall Street
investment community, the rest of us who were investing in
Enron and indeed to give a false picture of the company's
financial position, all in an effort to prop up its stock
price.
Well, today we'll hear a similar set of efforts to deceive
Wall Street and the American investing community. In this case
we have evidence that Global Crossing and Qwest executives
received sham transactions to put revenue on the books, to
mislead investors and to prevent further drops in their stock
prices. Interestingly, just last week, Mr. Chairman, Qwest
announced a $1.4 billion rewrite of its income indicating the
dimensions of this fraud.
I think it's important to put it in layman's terms, what we
discovered here. There is a legitimate thing called an IRU, a
swap of capacity and there's a legitimate accounting treatment
of it. If it's real capacity, if it's really swapped, and it
really occurs and it's specific capacity that's being swapped,
accountants are allowed to treat that as a capital lease, in
effect, almost a sale, an account for income, either
immediately over the term of the capital lease.
But if there's portability in the deal, if the capacity is
not really specified, if you can move it around, if it can be
other places and other times, if there's portability, there's
flexibility in that deal, generally speaking, that's not a real
capital lease. That's an operating lease. And what we
discovered with documents indicating side agreements, side
agreements that redefined the nature of these swaps conducted
between Qwest and Global Crossing and some other companies,
notably FLAG Communications, Cable and Wireless, as well as
Global Crossing, side agreements which if known to the
accountants would have led them to believe that there was
misaccounting going on, that these agreements were not really
capital leases and should not have produced income on the
company's books.
Even worse, Mr. Chairman, we discovered documents
indicating oral agreements. Now Qwest will deny it, but we have
documents from FLAG and from Cable and Wireless and Global
Communications indicating oral agreements, the winks and the
nods, that these swaps were not really the kind of swaps that
could be treated as capital leases; the winks and the nods,
side agreements, either written or oral, that indicated these
companies were engaged in deception and fraud to try to make it
look like the company was making money when it really wasn't,
to put income on the books that didn't exist and to tell
investors a false story about the progress of these companies.
We'll also hear a la Enron of employees who tried to warn
the higher ups that certain deals were inappropriate, who
worried about wearing orange and black and white stripes, who
worried about the fact that these deals wouldn't stand the
light of day, that if the light ever shown on them, folks would
know that they were fraudulent and deceptive, and yet those
warnings were ignored.
Witnesses before us were well aware of the transactions
under scrutiny today and I'm sure we'll have some dispute about
what were legitimate business transactions and what were
basically deceptive ones, but what is undoubtedly clear is that
we have a case where people within the company thought they
were deceptive, tried to warn someone about it, and were
brushed aside.
Mr. Chairman, our duty is to pursue the facts and the
evidence and I believe it's essential that our committee
examine evidence of deceptive practices and behavior which is
so poisonous to the public trust and the integrity of the
financial markets.
Mr. Chairman, you've been dogged in your pursuit of
corporate responsibility and accountability in these cases and
I believe that dogged pursuit is eventually going to help us
restore trust and integrity because companies watching these
hearings, executives and board members watching these hearings,
watching the light of day shown on these practices, are going
to know that they can't do it any more. They've got to be
honest with investors and they've got to think a little bit
more about the companies and the employees they destroy when
they play games like we discovered were being played at these
two enormously important corporations.
Thank you, Mr. Chairman. I yield back.
Mr. Greenwood. The Chair thanks the chairman of the full
committee and recognizes the gentlelady from Colorado for an
opening statement for 5 minutes.
Ms. DeGette. Thank you, Mr. Chairman. I'd like to thank the
chairman for having this hearing today. Qwest is headquartered
in my District, Denver, and it employs 15,000 people in
Colorado, so you can imagine my constituents' interest in this
matter.
When I was reviewing the e-mails that form a basis for a
lot of this hearing, I couldn't help but think about my
grandmother and how when I was a little girl in Denver, I used
to go over to her house and in her basement she had one of
those old black telephones from the 1940's with the really
heavy handset and you'd pick that telephone up and you'd dial a
phone number and the person at the other end would answer. And
what I was thinking about was, isn't that what the phone
company is supposed to do? And then I was reading these e-mails
and I was thinking to myself how the industry has changed since
then, since I was a little girl and how telecommunications, in
general, has changed. But frankly, how telecommunications'
essential mission has not changed since that time. And the
essential mission is really to still help people communicate.
Now as most of my colleagues know, U.S. West, which is the
predecessor to Qwest, was created with the break up of Ma Bell
as one of the baby Bells serving the Rocky Mountain region.
U.S. West was a solid, profitable and traditional company with
strong ties in the community. The stock wasn't the most cutting
edge, but frankly when you picked up the phone to call somebody
you could get a hold of them and that was exactly the kind of
company you'd want your grandmother to invest in.
In June 2000, in the waning days of the go-go internet
boom, a group of cowboys by the name of Qwest came riding into
town and they acquired U.S. West. These cowboys promised big
changes, higher profits, more efficiency, new innovation. They
plastered the Qwest name in huge blue letters visible day and
night across two of the biggest skyscrapers in Denver, to show
their vision. Instead of a traditional telephone company, they
would turn the new Qwest into a model of the new economy. This
led, as you might imagine, to a bumpier corporate transition
than most. The top management changed almost completely.
Service problems abounded. There were painful layoffs and
almost a complete halt of corporate charitable giving. This
corporate culture led to dramatic changes in how Qwest did
business.
In the years since Qwest's new management took over, their
bad business decisions have had a significant impact on our
local economy, the local work force and the community. And now
it appears the problems are much worse than simply poor
business decisions. That's why we're here today.
What we know is that Qwest engaged in swaps with companies
like Global Crossing and Enron where each company traded
capacity with the others. The mere fact that these trades
occurred is not a problem, but what is a problem is the
recording of profits from these swaps and the oral side
agreements that were part of the swaps. As you've heard from
our Chairman and others, Qwest booked revenues in the same year
that it received capacity from Global Crossing, yet it recorded
the expenses over a number of years. This, of course, had the
effect of artificially inflating Qwest profits.
In reviewing the e-mails that document transactions one
thing becomes clear, the Qwest management was not spending its
time trying to fix all of the problems associated with the
bumpy takeover. Instead, they were trying to figure out how to
maximize their book value.
Now I think that we need to get to the bottom of this. I
think we also need to look at the role of the Qwest board which
has been an important issue, with Enron, ImClone and other
investigations. And here's why this is so essential, even
though we have all of these problems Qwest is still my local
telephone company and remains an important part of the
community. I am heartened to report, Mr. Chairman, that Qwest
has new leadership and I believe that the new leadership in
making the $1.4 billion adjustment, in reaching out to the
community and the employees and the retirees is trying to do
the right thing. And I hope when you bring the former
management in, you will also bring the new management in to
talk about what they're doing. But in the meantime, Qwest has
more than 50,000 retirees and employees across the United
States. I want to be confident in this company. I want to be
confident in the entire telecommunications industry and I think
that the investors on Wall Street want to have that same
feeling.
I look forward to hearing the testimony today, Mr.
Chairman, and I yield back the balance of my time.
Mr. Greenwood. The Chair thanks the gentlelady and
recognizes the gentleman from Kentucky, Mr. Whitfield for 5
minutes for an opening statement.
Mr. Whitfield. Thank you, Mr. Chairman, and members of the
committee, it is imperative that the hearings be held and our
continuing effort to bring to light the serious problem of
deception in parts of corporate America.
Today, we're once again confronted with two companies whose
business practices are being called into question. I hope we do
not hear corporate executives pleading ignorance to facts that
indicate the contrary. Workers raising concerns, but those
concerns being ignored, all with the same result, bankruptcy,
thousands of jobs lost nd pensions and retirement funds lost.
Since our committee first started investigating the issues
of corporate accounting abuse, the American people have been
shocked at the deception and lack of concern by senior
management for employees, for stock holders, for customers, for
the general public. Employees who went to work every day, put
in long hours, committed to the company, providing a living for
their families, hoping to save for the future, buying stock on
the company, those people did their part, but unfortunately
senior executives did not do their part. These greedy
individuals looking out only for themselves and the quick buck
have shattered the dreams of thousands and have caused alarm
throughout the country.
While the Congress, the Justice Department and SEC and
maybe other governmental agencies will examine the culpability
of those individuals, I believe we must recognize, as my friend
from Colorado said, that companies are much more than senior
executives. As we hear testimony from the witnesses today, our
goal should be to get the information we need to help ensure
that these abuses do not happen again. What has happened, has
happened. We must look to the future and if there is a way to
save the company, the jobs, the pension funds, the hopes, we
must pursue it.
Qwest alone has over 50,000 employees and nearly as many
retirees. Nobody, of course, benefits from the demise of any
company, so I look forward to hearing from the witnesses today
and the questions from my colleagues and I hope that we are
able to bring measures to light that must be brought.
Thank you, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentleman from Michigan, Mr. Stupak for 5
minutes for an opening statement.
Mr. Stupak. Thank you, Mr. Chairman. Lately we've been busy
with the debate to create another government agency, the
Department of Homeland Security. My concerns regarding that
agency have long been whether there will be someone
accountable, someone in charge, someone who will accept
responsibility for the decisions made or to be made. I find
myself here today asking similar questions. Why is there no one
accountable? Very few individuals, if any, have stepped forward
to stop this corporate wrongdoing. How are these companies
getting way with this? How many hearings will we have to find
out why American investors and employees are left empty handed
while corporate executives leave their bankrupt companies
richer than when they came in?
What I've heard from Enron and now today Qwest has left me
stunned. We find corporate America knowingly making
misstatements and intentionally padding the revenues of their
companies with blatant disregard for the truth and for facts.
I have before me this binder of documents, as we all do.
These documents, has paper upon paper, of select company
employees who knew they were misleading the public. E-mails
that put revenues first and actual business need second.
There's an e-mail right here that's marked ``confidential'' on
the top. It says here, ``Susan told me Greg is ready to write a
check for $75 million this quarter for capacity on SAC.'' It
goes on to say ``what the hell are we going to buy?'' I guess
I'd ask what the hell is Congress going to do about this total
corporate mess.
I believe and I've long advocated that we must repeal the
1995 Private Securities Litigation Reform Act. I've introduced
legislation to do just that, to return the legal rights back to
the American investor by repealing the ill-conceived Private
Securities Litigation Reform Act of 1995. The Private
Securities Litigation Reform Act of 1995 has fostered this
total disregard for ethics, legal and moral responsibility in
corporate and financial America.
I have introduced a bill that will repeal the Private
Securities Litigation Reform Act of 1995 and empower
shareholders to seek legal redress when they have discovered
wrongdoing, rather than being prohibited as they are now under
current law.
It is no coincidence that the restatement of earnings that
you will hear about today go back to the passage of the 1995
act. My bill would also allow shareholders to use the full
extent of the court system to go after corporate wrong doers.
It would restore legal liability for those corporate
executives, auditors, attorneys and others who have abused the
public trust and corporate trust.
We must empower the investors to be on the front lines as a
practical and as a proactive check on the rampant misdeeds that
have been going on in some corporations.
These hearings are needed to end an era where corporate
executives have been operating in the cover of darkness at the
expense of corporate responsibility and good faith and innocent
shareholders and employees are being hurt.
I'd like to thank our staffs, both Democrat and Republican
staffs for the fine work they've done over the summer. In this
case, they've been working on the Qwest documents since March
2002 and helping us and this country understand the lack of
corporate accountability and responsibility to the American
people, shareholders and their employees.
With that, Mr. Chairman, I yield back.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentleman from Maine, Mr. Bass--New Hampshire.
Mr. Bass. When did I come from Maine?
Mr. Greenwood. New Hampshire.
Mr. Bass. I appreciate the gentleman from Ohio recognizing
me. Thank you, Mr. Chairman, for holding this hearing and
building on this subcommittee's impressive record of oversight
response to crisis in corporate governance accounting
practices.
Mr. Chairman, I look forward to today's testimony and I
remain frankly amazed at the level of duplicity and greed that
a small amount of people thought they could get away with. It
reminds in some respects to the events of last week when a
robber was able to be conned into entering the Capitol Police's
Central Headquarters in the Longworth Building to reach an ATM.
How he ever thought he'd get away with that is similar to what
we seem to be uncovering today.
But I also am concerned about the fate of what's left
behind in the wake of all these scandals and earnings
restatements, layoffs, plummeting equity prices and so on. It's
important to remember that there are, especially in the case of
Qwest, real companies and real employees, real retirees, and
customers who need services, underlying services that are now
controlled or managed by these companies and we can and should
vigorously pursue the people involved and they should spend
real time in real prisons as we have legislated with our
Corporate Accountability Bill, the Sarbanes-Oxley Bill, but we
shouldn't through these hearings or anything else, cause more
harm to those innocent people who have been so affected. These
companies need to convince their customers, their investors,
their workers and government regulators that they've cleaned up
the mess and have worked to get past the problem in a
sustainable and equitable manner and I assume we'll hear from
these witnesses about such progress.
The case before us today warns of this danger more than any
of the others that have come before us. In Qwest, not just
another dot com or technology enterprise, but Qwest is, as we
know, the local telephone company for the whole western part of
the United States and a failure of bankruptcy of this company
would have substantially more impact on consumers and we ought
to keep that in mind as we move forward.
The problems, I suspect that relate to corporate
malfeasance are over. This hearing and the others that we've
held before us, as the chairman mentioned in his opening
statement, send--serve to send a clear message to current
corporate executives, that Congress and the Justice Department
and the American public will not tolerate this kind of behavior
in the future.
It is our responsibility to get to the bottom of this
issue, but do so in such a manner so that we do not jeopardize
real value that exists today and I yield back to the chairman.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentleman from Ohio, Mr. Strickland, for 5
minutes for his opening statement.
Mr. Strickland. Thank you, Mr. Chairman. Mr. Chairman, the
reputation of corporate America has been tarnished over the
course of the past year. We've learned the hard way that
America's accounting standards are insufficient and that
American business ethics fall short of the general public's
expectations. We must not write off the collapse of Enron and
the unfolding financial turmoil of the telecom sector as the
growing pains of new industries. Accounting standards must stay
ahead of the curve in anticipation of the newest developments
in energy trading and the technological advances of
communications.
Yesterday, we learned that Qwest Communications plans to
restate its financial statements from 2000 and 2001 in order to
cancel $950 million in sales of capacity swaps. We will hear
today how those capacity swaps were used in vain to revive a
dying company.
In 1999, Qwest's stock doubled in value from $20 per share
to $40 per share and in 2000, Qwest shareholders experienced a
heady ride as the stock bounced around between $40 and $60. It
was during 2000, that investors were fooled into believing that
Qwest's high stock price was founded on solid business
practices and good management. Employees bought stock. Pension
funds bought stock. Americans all over the country prepared for
retirement by buying Qwest stock for their 401(k) plans and it
was all a sham. It seems that Qwest engaged in these capacity
swaps so they could meet publicly announced revenue targets and
so that its stock price would remain in the clouds with the
dreams of the company executives.
Yesterday, Qwest stock closed at $2.79 and the company is
under investigation, not only by this panel, but by the SEC and
the DOJ as well. Now many of us are wondering what we can do to
stem the tide of all this corporate wrong doing. We created a
new body to set accounting standards in an attempt to change
business practices inside the companies. We required the
executives to certify quarterly and annual statements so that
investors can believe that what they are reading is true, but
we didn't create a penalty for the companies whose principal
executives failed to certify reports.
Later this week I will introduce legislation to do just
that. My bill will prohibit the Federal Government from
contracting with a company whose CEO fails to certify periodic
reports as required by Section 302 of the Sarbanes-Oxley At. It
would also require the SEC to make public a list of those
companies who have failed to comply with Section 302.
I invite all of my colleagues here today to join in co-
sponsoring language that will give executives a reason to think
twice before they falsely certify their 10-Qs or 10-Ks. Qwest
is one of a handful of companies whose CEOs and CFOs have been
unable to verify their companies' SEC filings from the past
year and it has yet to file a quarterly report for the second
quarter. Failure to certify periodic reports should make
investors and customers alike a little wary and I think the
Federal Government itself should be a little wary of
contracting with companies who can't abide by the law.
Today, we will try to get to the bottom of some of these
shady deals transacted over the past years which make Qwest
current executives so uncertain of past financial statements.
Mr. Chairman, there is a malignancy growing within
corporate America and it is killing the hopes and dreams of
America's families. I hope we take the strongest possible
action in this committee and in this Congress. And Mr.
Chairman, I yield back the balance of my time.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentleman from Florida, Mr. Stearns, for his
opening statement.
Mr. Stearns. Thank you, Mr. Chairman, and of course, like
my colleagues, I compliment you for having this hearing. It's
unfortunate that we have to have this hearing. The
telecommunications sector, of course, has been the hardest hit
in this downturn in the economy and it's affected, obviously,
hundreds of thousands of people and they're wondering about
their jobs, could their jobs have been saved if management had
been prudent? Had there been better accounting practices,
disclosure requirements and corporate mismanagement been
curtailed, and if the board of directors of these companies had
been responsible, could they have stopped it? These are a lot
of the questions we need to answer.
Mr. Chairman, there's a fundamental thought that's going
through a lot of people, both here in Washington and outside.
There's been a huge transfer of wealth from investors, men and
women, the small investors to a clique of management in this
country and it has happened seamlessly and this is wrong. If
capitalism is supposed to work, it's going to work, and if free
enterprise is a key aspect about it, we can't have this
transfer to 10,000 individuals or a small group of people.
There has to be in place the requirements, whether it's
accounting practice, disclosure, transparency, preventing
corporate mismanagement or making the board of directors more
responsible because in the end this huge transfer affects every
man and woman who is looking for retirement and they went under
the assumption that when their broker, their institutional
mutual fund made their decision that there was transparency.
For the 9,000 people who lost their jobs as a result of the
Global Crossing bankruptcy, most of which they were unaware of
these improprieties and they've cost them their jobs. The reach
of Global Crossing debacle into telecommunications is deep by
some estimates 500,000 jobs and $2 trillion in market
capitalization and a sector was lost as a direct result of this
bankruptcy. This is an awesome, awesome thing.
So Mr. Chairman, I think it's very important that Congress
give credibility to these hearings by trying to offer solutions
after it's over. So I urge you and my colleagues that we work
together, if there's more that can be done. So I look forward
to the testimony and I thank you for the hearing.
Mr. Greenwood. The Chair thanks the gentleman and I believe
that that concludes our opening statements and now I would like
to introduce our first panel. They are Mr. Patrick Joggerst,
who is the former President of Carrier Sales for Global
Crossing; Mr. Roy Olofson, the former Vice President of Finance
for Global Crossing; and Ms. Robin Szeliga, the Executive Vice
President for Qwest Communications International. We thank each
of you for coming. We appreciate your willingness to come and
testify before us. I think you are aware that the committee is
holding an investigative hearing and when we hold investigative
hearings it is our practice to take testimony under oath.
Do any of you object to giving your testimony under oath
this morning? Seeing no such objection I would advise you that
pursuant to the rules of this committee and pursuant to the
rules of the House, that you're entitled to be advised by
counsel. Are you advised by counsel this morning, Mr. Joggerst?
All right, would you identify your counsel by name, please? Is
your microphone on, sir?
Mr. Joggerst. Yes, my counsel is here. His name is Lorne
Cohen.
Mr. Greenwood. Mr. Olofson, are you represented by counsel?
You need to push your button on those microphones.
Mr. Olofson. I am represented by counsel, Mr. Paul Murphy.
Mr. Greenwood. Good morning, sir. Thank you for being with
us. And Ms. Szeliga, are you represented by counsel? You have
to push your button as well.
Ms. Szeliga. Yes, I am.
Mr. Greenwood. You have two attorneys and they are?
Ms. Szeliga. Pardon me, Terry Byrd and Vince Morella.
Mr. Greenwood. Welcome, gentlemen, we thank you for being
with us this morning.
All right, in that case, if you would rise and raise your
right hand, I will give you the oath.
[Witnesses sworn.]
You are under oath. You may be seated and I believe each of
you has an opening statement that you'd like to make and we're
going to go from right to left and we're going to begin with
you, Mr. Joggerst. You are recognized for 5 minutes for your
opening statement.
TESTIMONY OF PATRICK JOGGERST, FORMER PRESIDENT OF CARRIER
SALES, GLOBAL CROSSING, LTD.; ROY L. OLOFSON, FORMER VICE
PRESIDENT OF FINANCE, GLOBAL CROSSING, LTD.; AND ROBIN SZELIGA,
EXECUTIVE VICE PRESIDENT, QWEST COMMUNICATIONS INTERNATIONAL,
INC.
Mr. Joggerst. Very good, Mr. Chairman. Good morning, Mr.
Chairman and members of the subcommittee. My name is Patrick
Joggerst. I joined Global Crossing in early 1998 following 18
years at AT&T. I was the twelfth person asked to join the
company and was involved in marketing and selling wholesale
products and services since its inception.
The founders and early employees of Global Crossing share
da vision of a worldwide fiber optic network. My friends and
colleagues, together with our suppliers and customers, gave
that vision life.
In the early years, demand for global broadband
connectivity was insatiable. Global Crossing's success
attracted many competitors with their own financial backers
eager to replicate Global Crossing's reach.
In the first three quarters of 2001, Global Crossing's
stock price started plummeting and recurring revenues failed to
grow as anticipated. These were the results of the now well-
known glut of fiber optic capacity. However, at the time, I
continued to believe in the company's future and even suspected
that the market for global connectivity might rebound. In
October 2001, I asked the company for additional stock options.
Unfortunately, my optimism has proven to be incorrect.
I left Global Crossing at the end of 2001 to pursue new
opportunities. I have been asked to cooperate with this
committee and I'm pleased to do so.
Thank you.
[The prepared statement of Patrick Joggerst follows.]
Prepared Statement of Patrick Joggerst, Former President of Carrier
Sales, Global Crossing Ltd.
Good morning. My name is Patrick Joggerst. I joined Global Crossing
in early 1998 following 18 years at AT&T. I was the 12th person asked
to join the company and was involved in marketing and selling wholesale
products and services since its inception.
The founders and early employees of Global Crossing shared a vision
of a worldwide fiber optic network. My friends and colleagues, together
with our suppliers and customers, gave that vision life.
In the early years, demand for global broadband connectivity was
insatiable. Global Crossing's success attracted many competitors with
their own financial backers eager to replicate Global Crossing's reach.
In the first three quarters of 2001, Global Crossing's stock price
started plummeting and recurring revenues failed to grow as
anticipated. These were the results of the now well-known glut of fiber
optic capacity. However, at the time, I continued to believe in the
company's future and even suspected that the market for global
connectivity would rebound. In October 2001, I asked the company for
stock options. Unfortunately my optimism has proven to be incorrect.
I left Global Crossing at the end of 2001 to pursue new
opportunities.
I have been asked to cooperate with this committee and I am pleased
to do so.
Mr. Greenwood. Thank you, Mr. Joggerst.
Mr. Olofson, do you have an opening statement?
STATEMENT OF ROY L. OLOFSON
Mr. Olofson. Good morning, Mr. Chairman, Ranking Member
Deutsch and other members of the subcommittee and Chairman
Tauzin. I come here today to assist the subcommittee in its
investigation of Global Crossing, but I'm also here today for
another very important reason. I come here to begin the process
of clearing my name. It is very difficult to pick up the
newspaper day after day and read how Global Crossing and it's
public relations machine has accused me of being a disgruntled
employee. It is also very difficult to find out from friends at
Global Crossing that after spending over 3 years with the
company, its chairman of the board, Gary Winnick, had 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 joined Global
Crossing as Vice President of Finance in 1998. And I was
Global's fortieth employee. When I joined Global, I brought
with me over 28 years of senior financial management
experience. As Vice President of Finance, 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
Chief Financial Officer and I built a staff of some 15 to 20
people.
This was an incredibly exciting time for the company and we
all felt very positive about it's 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, whom you worked
closely on many issues. In May 2000, Global Crossing hired Joe
Perrone as Senior Vice President of Finance. My
responsibilities were then in the process of changing 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
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 difficult time meeting its first
quarter revenue projections. I later learned that Global
ultimately was able to meet its numbers, in part, due to some
large last minute swap transactions.
I returned to work in early May 2001 and on June 1, during
discussions with Joe Perrone about my on-going job
responsibilities, I told Mr. Perrone I was concerned about the
way the company had accounted for certain transactions in the
first quarter and that on a conference call with investors and
financial analysts, Global's CEO Tom Casey said, ``there were
no swaps in the quarter.'' Mr. Perrone minimized my concerns
and said that the company was getting out of the IRU business.
During June and July I again began to hear concerns that
the company was engaging in last minute swap transactions as a
means to boost revenues. I received a copy of a document known
as the sales funnel that indicated that approximately 13 of the
18 largest IRU transactions completed in the second quarter
were last minute swaps, were identical or substantially
identical amounts of cash were being exchanged along with the
underlying capacity.
I found it hard to believe that if the substance of these
transactions were swaps of capacity that the mere expedient of
round tripping cash would allow the Your Honor to record
revenue. By mid to late July, Mr. Perrone still had not given
me any new job responsibilities and I believed that this was
occurring because of my conversation with him back in June. On
August 2, on the company's quarterly conference call with the
financial analysts for the second quarter, I again heard Tom
Casey state there had been no swaps in the 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 Chief Ethics Officer, James Gorton. I therefore
sent a letter to Mr. Gorton on August 6 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, 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 is 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, 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 therefore should be investigated. However, the facts
that have been made public since that time only seemed 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 6.
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, ``an exchange of similar network capacity is the
equivalent of trading a blue truck for a red truck. It
shouldn't boost the company's revenue.''
Second, I have been characterized in the press as a whistle
blower and I have even heard my counsel use that term when
referring to me. I do not see myself that way. I first aired my
concerns 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. That all being said, I welcome the committee's
investigation and I will do everything in our power to assist
the committee in its search for the truth, no matter what that
might be.
I now invite your questions and I hope that I prove to be
of service to you.
[The prepared statement of Roy L. Olofson follows.]
Prepared Statement of Roy L. Olofson, former Vice President of Finance,
Global Crossing Ltd.
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 ``there 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
``no 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
``Global 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 ``hurry back''
because I was ``a 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 ``unavailable.'' 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, ``I 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 ``back-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 ``swap'' transactions as a means to
boost revenues. At one point, I received a copy of a document known as
a ``sales 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 ``CASH IN'' and one labeled ``CASH
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, ``An 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
``whistleblower'' 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.
Mr. Greenwood. Thank you, Mr. Olofson. You have already
proven to be of great service to us and to your country. And we
thank you for your presence.
Ms. Szeliga, do you have an opening statement?
Ms. Szeliga. Yes, I do.
Mr. Greenwood. You are recognized for 5 minutes. I would
suggest that you bring the base of that microphone right in
front of you and speak directly into it. There you go. Thank
you.
STATEMENT OF ROBIN SZELIGA
Ms. Szeliga. Thank you, Mr. Chairman and members of the
subcommittee. My name is Robin Szeliga. I was the Chief
Financial Officer at Qwest for approximately 15 months, from
April 2001 until early July 2002. I am currently an Executive
Vice President in charge of real estate and procurement for
Qwest.
While I served as CFO, I reported to CEO Joseph Nacchio,
and worked closely with the Audit Committee of the Board of
Directors. I headed a CFO organization that was comprised of
nearly 4000 people. Qwest was faced with many important
challenges during my tenure as CFO. Among those challenges were
the integration of U.S. West, a Regional Bell Operating Company
with which Qwest had recently merged; the restructuring of the
organization and the management team at Qwest following the
merger; the reentry by Qwest into the long-distance telephone
market; and the ask of improving telephone service in the 14-
State region previously served by U.S. West.
As CFO, I was ultimately responsible for Financial Planning
and Analysis, Financial Operations, Treasury, Internal Audit,
Tax, Procurement, Corporate Strategy, Billing, Credit and
Collections, and the Controllership, including accounting
systems support, technical accounting, financial reporting,
payroll, and accounts payable. Assisting me in these
responsibilities were various talented and very dedicated
people, including the Controller and the Assistant Controller.
They, in turn, had staffs which included accountants who were
responsible for various technical accounting issues. I relied
on, and at times worked with, this team of experienced
accountants to analyze accounting requirements and apply them
to specific transactions. The technical accounting group and I,
in turn, relied on the accuracy of information provided to us
by those who worked on various transactions for which we
accounted. These included personnel in management and in the
engineering and operations departments, various personnel in
business unit and sales organizations,and finance personnel
assigned to those business units.
Qwest's auditors, Arthur Andersen, advised us on our
financial reporting and accounting. Arthur Andersen worked
closely, and on an ongoing basis, with Qwest's Controller and
technical accounting group. In addition, Arthur Anderson
performed annual audits and quarterly preissuance reviews.
Arthur Anderson also periodically presented its findings, views
and opinions on accounting issues to the Audit Committee of the
Board of Directors. When significant accounting issues arose,
the technical accounting team reviewed those issues with Arthur
Andersen's staff to obtain their advice and guidance. Then
appropriate, those issues were also brought to the attention of
Qwest's Audit Committee and Qwest's internal audit and legal
departments.
During my tenure as CFO at Qwest, I took concrete steps to
ensure that accounting principles were applied properly. For
example, I added technical staff to the Controller's staff; I
created a cross-functional team to review the complex sales
transaction process; I initiated monthly meetings between the
Controller and the Financial staff responsible for overseeing
and directing Business Unit Finance; and I recommended a
Finance Committee to the Board of Directors, which was
ultimately established. I also improved the communication
process between Qwest management and the Audit Committee.
One of the many types of transactions that Qwest engaged in
was the sale IRUs or indefeasible rights of use of capacity on
Qwest's fiber-optic network. As you know, Qwest began selling
IRUs well before I became CFO. In fact, as early as 1999,
Arthur Andersen established guidance as to the application of
accounting principles for IRU transactions. The IRU accounting
was primarily performed by the Controller and the technical
accountants in conjunction with finance personnel assigned to
the business units. This team was responsible for the
application of Generally Accepted Accounting Principles or GAAP
in the recording of IRUs. I was not personally involved in
reviewing the detailed terms and conditions of each of the IRU
transactions. However, as with other types of transactions, I
instituted a number of controls around IRUs.
Mr. Chairman, I appreciate the opportunity to make this
statement. As you know, I am appearing voluntarily today and I
have cooperated fully with the subcommittee and its staff.
However, please understand that I have not had access to, nor
have I reviewed, all of the documentation that bears on the
matters of this inquiry. Nevertheless, I will do my best to
help the committee with respect to its inquiry. And now I would
be happy to respond to any questions that the subcommittee
might have.
Thank you.
[The prepared statement of Robin Szeliga follows.]
Prepared Statement of Robin Szeliga, Executive Vice President, Qwest
Good morning Mr. Chairman and members of the Subcommittee. My name
is Robin Szeliga. I was the Chief Financial Officer at Qwest for
approximately 15 months, from April 2001 until early July 2002. I am
currently an Executive Vice President in charge of real estate and
procurement at Qwest.
While I served as CFO, I reported to CEO Joseph Nacchio, and worked
closely with the Audit Committee of the Board of Directors. I headed a
CFO organization that was comprised of nearly 4,000 people. Qwest was
faced with many important challenges during my tenure as CFO. Among
those challenges were the integration of U.S. West, a Regional Bell
Operating Company with which Qwest had recently merged; the
restructuring of the organization and the management team at Qwest
following the merger; the reentry by Qwest into the long-distance
telephone market; and the task of improving telephone service in the
14-state region previously served by U.S. West.
As CFO, I was ultimately responsible for Financial Planning and
Analysis, Financial Operations, Treasury, Investor Relations, Internal
Audit, Tax, Procurement, Corporate Strategy, Billing, Credit &
Collections, and the Controllership, including accounting systems
support, technical accounting, financial reporting, payroll, and
accounts payable. Assisting me in these responsibilities were various
talented and dedicated people, including the Controller and the
Assistant Controller. They in turn had staffs which included
accountants, who were responsible for various technical accounting
issues. I relied on, and at times worked with, this team of experienced
accountants to analyze accounting requirements and apply them to
specific transactions. The technical accounting group and I, in turn,
relied on the accuracy of information provided to us by those who
worked on various transactions for which we accounted. These included
personnel in management and in the engineering and operations
departments, various personnel in business unit and sales
organizations, and finance personnel assigned to those business units.
Qwest's auditors, Arthur Andersen, advised us on our financial
reporting and accounting. Arthur Andersen worked closely, and on an
ongoing basis, with Qwest's Controller and technical accounting group.
In addition, Arthur Andersen performed annual audits and quarterly
preissuance reviews. Arthur Andersen also periodically presented its
findings, views and opinions on accounting issues to the Audit
Committee of the Board of Directors. When significant accounting issues
arose, the technical accounting team reviewed those issues with Arthur
Andersen's staff to obtain their advice and guidance. When appropriate,
those issues were also brought to the attention of Qwest's Audit
Committee and Qwest's internal audit and legal departments.
During my tenure as CFO at Qwest, I took concrete steps to ensure
that accounting principles were applied properly. For example, I added
technical expertise to the Controller's staff; I created a cross-
functional team to review the complex sales transaction process; I
initiated monthly meetings between the Controller and the Finance staff
responsible for overseeing and directing Business Unit Finance; and I
recommended a Finance Committee of the Board of Directors, which was
ultimately established. I also improved the communication process
between Qwest management and the Audit Committee.
One of the many types of transactions that Qwest engaged in was the
sale of IRUs, or indefeasible rights of use of capacity on Qwest's
fiber-optic network. As you know, Qwest began selling IRUs well before
I became CFO. In fact, as early as 1999, Arthur Andersen established
guidance as to the application of accounting principles for IRU
transactions. The IRU accounting was primarily performed by the
Controller and the technical accountants, in conjunction with finance
personnel assigned to the business units. This team was responsible for
the application of Generally Accepted Accounting Principles (``GAAP'')
in the recording of IRUs. I was not personally involved in reviewing
the detailed terms and conditions of each of the IRU transactions.
However, as with other types of transactions, I instituted a number of
controls governing IRUs.
Mr. Chairman, I appreciate the opportunity to make this statement.
As you know, I am appearing today voluntarily, and I have cooperated
fully with this Subcommittee and its staff. However, please understand
that I have not had access to, nor have I reviewed, all of the
documentation that bears on the matters of this inquiry. Nevertheless,
I will do my best to help the Subcommittee with respect to its inquiry.
Now, I would be happy to respond to any questions that the Subcommittee
might have.
Mr. Greenwood. Thank you very much and being mindful of the
fact that you haven't seen all of the documents, if we ask you
to respond to a document, we'll give you plenty of time to
review it and consult with your counsel if you need to.
Okay, the Chair now recognizes himself for 10 minutes for
inquiry and advises the members this will be a 10-minute round
of questioning. And I'd like to start with you, Mr. Joggerst.
Is it your understanding that the revenue targets set for
2001 at Global Crossing were too high and aggressive, given the
forecasted market?
Mr. Joggerst. The sales process, generally, what we do is a
bottoms up view in terms of what we thought was reasonable in
the marketplace, the communications that we've had with our
customers, their view of what their spending was and what their
capital budgets were.
In looking at initially what was the target for 2001 was
someplace around $2 billion for an IRU perspective, $3 billion
for the carrier wholesale business overall, which would have
been a record number by any stretch of the imagination. And
yes, I had some concern that that would be an overly aggressive
target to put to the sales force.
Mr. Greenwood. Okay, I'm going to ask you to turn to Tab 25
in the binder there and I'd like you to review a confidential
set of e-mails from the date, dated August 30, 2000. And I'd
like you to turn to page--to the bottom of page 2 and you'll
see what's titled original message from Robin Wright. This was
sent August 29 at 5:41 p.m. to Gary Brenninger and it was
copied to you. Do you see that?
Mr. Joggerst. Yes, I do.
Mr. Greenwood. And if you'll turn to the top of page 3 I'll
read you some of the content. It says ``As you know, prices are
dropping fast and to some extent we are our own worst enemy.
When saddled with an unreasonable revenue expectations we do
the crazy deals at the end of the quarter. This, in turn,
causes prices to drop which makes it more likely that we'll
need to do another deal at the end of the next quarter.'' Can
you give us your translation of what means and why would Ms.
Wright refer to ``crazy deals'' done at the end of the
quarters?
Mr. Joggerst. Generally, what we'd do is manage the sales
funnel very closely and we had conference calls on a weekly
basis and toward the end of a quarter, it would really be done
on a daily basis. And what we would look at are the
opportunities that were already contracted for, where we knew
money was going to be coming in . We had what we called primary
targets which were pretty well understood and thought out and
we had a pretty strong likelihood of being able to capture
those revenues.
Then we also had secondary targets which were a little bit
further out and of course, obviously, for the other quarters a
much larger sales funnel was----
Mr. Greenwood. So those would be the noncrazy deals?
Mr. Joggerst. Those, well, let me explain what would be
crazy. If you looked at what we normally assumed we could
collect the money that was due to us, we assume--you'd assume
we could get the deals that were in the primary category and
then a portion of the secondary sales final. What is happening
more and more, particularly in 2001 is that there was a
requirement, really that we needed to win 100 percent of our
secondary deals or a large portion of them, much larger than we
normally would in order to make the revenue targets that were
put to us. So that, from my perspective, it was something that
was really pushing the envelope. It was really too aggressive.
When Robin is talking about crazy deals at the end of the
quarter, one thing that was clear during my--during that period
of time at Global Crossing, it was not acceptable to miss your
end of quarter number.
Mr. Greenwood. So by ``crazy'' she meant, I assume, that
this was a deal that was being done not because the bottoms up
review of the market was driving it, but rather it was being
driven by the need to meet revenue expectations period. Is that
fair?
Mr. Joggerst. It's fair that they are accelerated to close
in a very compressed timeframe. I've heard members of the
subcommittee mention that they think some of the transactions
were, in fact, sham, that there really was no value placed in
what we were selling or what we were purchasing. That's not my
belief.
I clearly believed that Global Crossing was still growing,
that there was plenty of opportunity going forward and that we
would have the capital and the ability to integrate those
resources into the network going forward. What was happening is
rather than having say weeks to negotiate capacity purchase
with a customer, sometimes those transactions needed to be
completed within 48 hours because we would literally watch the
clock as it ticked down toward the end of the quarter.
Mr. Greenwood. Did you communicate your frustration about
meeting the 2001 projected IRU targets to senior management at
Global Crossing?
Mr. Joggerst. I recall--I don't recall any particular e-
mails, nor have I been shown any, but I do recall conversations
with our CEO at the time, Tom Casey saying that really the
bottoms up forecast doesn't come anywhere near $2 billion and
the result of that there was a mini task force put in place to
try and come up with some very large, very aggressive
outsourcing deals from some of our major customers to try and
bridge what was really a very large gap.
Mr. Greenwood. Were any of the quarter IRU swaps entered
into at the time they were closed done solely for the purpose
of meeting the quarterly revenue numbers?
Mr. Joggerst. There were at the end of first quarter, there
was a transaction with 630 networks that was critical to make
our quarterly numbers. The transaction could have waited. That
one was a particular concern in that the financial stability of
360 at the time was very much in question. There were a number
of conversations that I had directly with our Chief Executive
Officer, Tom Casey, as well as others about that.
Similar kinds of transactions happened at the end of second
quarter, particularly with FLAG and Cable and Wireless in that
we needed to very dramatically accelerate some transactions
that were going to close the quarter and again, the express
purpose was to make sure that we made that quarter, end of
quarter number. That's correct.
Mr. Greenwood. Is it the case that Global Crossing would
not have met its quarterly numbers, its revenue expectations
without those deals. Is that correct?
Mr. Joggerst. Absolutely correct.
Mr. Greenwood. Can you describe the transaction with 360
because my understanding that it was clear that 360 was on the
verge of bankruptcy, that there was a sale made to 360 that
revenues were--from which the revenues were very realized. Is
that correct?
Mr. Joggerst. The transaction with 360 was unusual in that
we had had on-going discussions. We had other transactions
where we had sold to 360, where we had purchased from 360. At
the end of first quarter, we did have a gap in our revenue and
revenue that we needed to recognize for the end of the quarter
and I was aware that Tom Casey, our CEO, was having
conversations with Greg Mafey about a potential transaction
where Global Crossing would sell to 360 networks capacity in
the Pacific, across the Pacific to replace a project that they
had since canceled and Global Crossing would purchase from 360
networks capacity across the Atlantic which Global Crossing had
been forecasting a need for for some time. So that wheel was
put in motion, but again, as I recall it was toward the middle
of March, giving us a little less than 2 weeks to try and close
this kind of a deal.
Mr. Greenwood. Isn't it the case that the capacity was
never realized because the company went bankrupt?
Mr. Joggerst. That's correct.
Mr. Greenwood. And Global Crossing booked $150 million of
revenue in that transaction?
Mr. Joggerst. That's correct. We had a number of
conversations. One that I can recall directly, at the kickoff
meeting where 360 networks was present. Our Chief Counsel, Jim
Gorton made a statement, stood up and said he was against the
deal in the presence of 360 networks because of their financial
instability.
Mr. Greenwood. Do you believe that that transaction was
done fundamentally, given the fact that Mr. Gorton recommended
against it, given the impending bankruptcy, given the fact in
retrospect that he never got the capacity that that was done
fundamentally to boost revenues in order to convince investors
that the company was in better shape than it was. Is that a
fair statement?
Mr. Joggerst. It's a partially fair statement. The only
caveat I would add is there was a true business need at the
time for Global Crossing to have additional trans-Atlantic
capacity. To get it from that company that had dire financial
needs in a very accelerated timeframe, those factors were done
just in order to reach the revenue targets. That's correct.
Mr. Greenwood. Mr. Olofson, in your opening statement, you
made reference to the fact that you believe 13 out of 18
transactions were questionable. Will you elaborate about that,
please?
Mr. Olofson. Well, what I was referring to was in the
second quarter of 2001, 13 of the largest, of the 18 largest
IRU transactions that are shown on the sales funnel had
exchanges of virtually exactly the same or similar amounts of
cash. And that just--apparently they were done within the last
day or two of the quarter and----
Mr. Greenwood. So what's your interpretation of why the
companies did that?
Mr. Olofson. Well, I think again, I think they were trying
to probably meet their revenue targets and----
Mr. Greenwood. Was there a business justification for those
transactions?
Mr. Olofson. That I don't know. I'm not qualified to answer
that because I really don't know what was on the other side of
those transactions. I don't know what the company acquired. I
do seem to recall that in some cases the capacity may not have
been defined, that it was more in the nature of a credit and I
think Mr. Joggerst mentioned the FLAG transactions. My
recollection is FLAG booked that s some kind of deferred
credit, so it wasn't really defined at the time. So I really
can't answer this.
Mr. Greenwood. Were other people in the company complaining
to you that these transactions didn't seem to quote, as you
said, smell right?
Mr. Olofson. Yes.
Mr. Greenwood. Can you elaborate on that?
Mr. Olofson. Well, I mean there were a number of people in
the Beverly Hills office. We weren't doing the accounting for
these transactions any longer. It was being done in New Jersey,
but a number of the analysts were working on parts of analysis
and some of the statements and footnotes and stuff that went in
the 10Q and people were becoming more and more uneasy, wondered
if there were any rules surrounding the accounting for these
types of transactions any longer because originally when we
just sold capacity, we didn't swap it, we had some pretty hard
and fast rules. And it didn't seem like those rules applied any
longer.
Mr. Greenwood. My time has expired. I just want to ask you
one question, Mr. Olofson and then I'll have some other
questions the second round. Why do you believe you were fired?
Mr. Olofson. I'm sorry?
Mr. Greenwood. Why do you think you were fired?
Mr. Olofson. I think I was fired because I raised these
concerns. As I said in my opening remarks, I raised them in
June and I did it again in the letter. I really was working
within the system. I mean I wasn't out there blowing the
whistle, but I do think that there's obviously enough concern
and once and probably maybe the bankruptcy became imminent. I
got notified the end of December that I was fired retroactively
until the end of November.
Mr. Greenwood. My time has expired. The Chair recognizes
the gentleman from Florida, Mr. Deutsch.
Mr. Deutsch. Thank you. Mr. Joggerst, I wanted to focus on
a couple of the responses to the chairman and I have a series
of questions after that, but if I heard you correctly, some of
us made comments in our opening statements that at least from
our perspective the swaps didn't have a business purpose. And
the analogy, I think Mr. Olofson used very well, the red truck/
blue truck analogy.
I mean would your position be totally opposite that, that
these, at least in your case, in the sort of the hindsight of
time, all the transactions had business purposes?
Mr. Joggerst. It was my perspective for the transactions
that I was more closely involved with that there were business
reasons for that. We needed additional capacity across the
Atlantic. We needed additional capacity in the North American
network. We had no presence in the Indian Ocean and certain
parts of the world. And again, it was my perspective, I still
believed, that Global Crossing was still growing our global
network and that we would, in fact, be one of the survivors and
we needed the network capacity reaching places where we didn't
currently have it in order to fulfill that promise.
Now my caveat would be is from a sales perspective, all of
that made perfect sense. If the company didn't have capital
sufficient to integrate those network resources that we were
purchasing into the overall network to create a more robust,
seamless, all reaching network, then, in fact, I don't believe
that those transactions were really, the business purpose was
going to be fulfilled.
Mr. Deutsch. If I could focus a little bit, I understand
you don't have capacity across the Pacific in certain companies
and you do a swap to get that. But my understanding at this
point is you were swapping basically inside the United States
in areas you already had capacity and that you were doing the
blue truck/green truck situation. I mean you're not personally
involved in any of those?
Mr. Joggerst. I'm not aware of anything that was actually
just a blue truck/green truck kind of transaction. I will give
you an example that would be in an undersea cable environment
where that kind of a transaction might make sense. For example,
one of the things the network engineer and my customers,
wholesale customers require would be geographic or physical
diversity, so in fact, if I had a facility between New York and
London on one route and I needed to create another physically
diverse path, one way of doing that might be to acquire that
from another wholesale provider. That's just an example.
I don't know, I can't point to any examples specifically
where there was just a pure exchange of exact same assets, no.
Mr. Deutsch. It wouldn't be exact same, but assets that you
didn't need which is really the question. If it's assets that
you need, that's one thing; if it's assets that you don't need,
that you're doing it to create a transaction----
Mr. Joggerst. I think that they were assets that we were
purchasing that from my perspective, we needed in the long run.
They weren't assets that we needed immediately, that we needed
to close these deals in a very compressed timeframe, very
accelerated timeframe, but I can't think of any transaction
that I'm aware of that we bought something that really, that
there was absolutely never any purpose for.
I will confirm that clearly there was dissension within the
company. There were some people who did not hold that belief.
Mr. Deutsch. You told the staff that in the second and
third quarters of 2001 you thought the revenue targets were
unreasonable given the current industry conditions. What were
those conditions at that time?
Mr. Joggerst. Prices were dropping. I had a concern that
thee were--one of the reasons why Global Crossing continued to
have some success quarter over quarter is we implemented new
systems to different parts of the world, opening up new
markets, that we would go to our existing customers. For
example, if we had an existing customer on trans-Atlantic
segments, we could now go back, we could come in a couple of
quarters later and offer capacity into Latin America, then into
Asia. There were no more regions that we were opening up, so I
was concerned that in order to--any large deals that were on
the table, they would have to come from a very large
outsourcing kind of arrangement of a potential, total outsource
of one of our customers' networks.
Mr. Deutsch. Were your revenue goals reduced in 2001?
Mr. Joggerst. Pardon me?
Mr. Deutsch. Your revenue goals, were they reduced in 2001?
Mr. Joggerst. My revenue goals were never reduced in 2001
from an IRU perspective. In fact, if you consider that we
looked at--as I recall, there was $2 billion in revenue for
2001, roughly $500 million per quarter. The first quarter we
were asked to come up with $550 million; the second quarter,
$650 million. So we were on a trajectory that would exceed even
what I thought was an exorbitant target in the first place of
$2 billion for IRUs.
Mr. Deutsch. If you could look at Tab 21 which is a July
14, 2001 e-mail. I'm sorry, Tab 20. It's a July 14, 2001 e-mail
from Tom Casey to you. In it he says ``the carrier group is
missing its numbers badly, is forecasting that the second half
of the year would get even worse.'' But Mr. Casey tells you
that he does not and I'll quote ``not want to hear about how
your part of the business is just going to continue to erode.
When we meet next week, I want to know what you guys are going
to do to turn around starting immediately.'' Is that the kind
of pressure that you were talking about?
Mr. Joggerst. Yes, this is indicative of the kind of
pressure that I'm talking about.
Mr. Deutsch. And you pressured your team to meet these
unrealistic numbers as well?
Mr. Joggerst. What I did is we looked at ways of really
engaging upper management, frankly, rather than just apply
pressure to the sales force directly. What we did is say is
there any way that we could achieve some large outsourcing
deals with the help and support of senior management such as
Tom Casey, Gary Winnick and others and they had oftentimes been
involved in the process themselves. So rather than just apply
pressure downward, frankly, my strategy with Mr. Casey and
others would be to engage them to be part of the solution
rather than just part of the problem.
Mr. Deutsch. Are you familiar with the term outscoping?
Mr. Joggerst. Yes, I am.
Mr. Deutsch. What does it mean?
Mr. Joggerst. Outscoping is when there's a customer that
we're working with and there are--where we increase the size of
the deal that we're doing with them and they increase the size
of the deal they're doing with us and typically that happened a
couple of times that I can recall at the end of the quarter,
particularly with FLAG and with Cable and Wireless.
Mr. Deutsch. And the purpose of it would be to?
Mr. Joggerst. To meet revenue numbers for the quarter.
Mr. Deutsch. I mean isn't that just tying to our whole
premise of not having a business purpose? I mean you're just
moving the numbers up to get to those revenue numbers?
Mr. Joggerst. I understand your point that the deals were
made larger, but I don't agree that there was absolutely no
business purpose ever for those assets.
Mr. Deutsch. Throughout 2001, Global Crossing increased the
frequency and size of the reciprocal transaction. It appears
that it was getting harder for the network people to identify
assets to purchase. On March 9, for example, Robin Wright wrote
you and said they didn't have a great deal of enthusiastic
support for purchasing additional assets. This e-mail is in Tab
4.
Is that correct?
Mr. Joggerst. Yes. As I recall, the network folks were
becoming alarmed that they didn't have the resources to
negotiate deals, where they were actually purchasing capacity
and there were a number of people in the network organization
that were in support of these kind of purchases. That's
correct.
Mr. Deutsch. If you could take a look at Tab 9. This is on
March 28, 2001. Michael Coghill, a network engineer, tells his
boss that he can't justify $15 million in U.S. West and now
sales wants $60 million, which he in good conscious and I'll
quote, ``cannot pretend to develop a business case that
justifies that transaction.''
You just overrode objections like this and particularly, I
mean, did you?
Mr. Joggerst. Again, my issue was to work with the sales
team to identify targets for things for us to sell. Mr. Coghill
didn't report to me, nor did Mr. Dawson, and you know and they
were--this looks to me like Mr. Coghill was escalating his
concern to Mr. Dawson.
That certainly is his right and again, I was aware at the
time that not everyone in the network organization were
enthusiastically supporting these transactions.
Mr. Deutsch. So in this case, I mean in a sense, you didn't
care what you were buying, you just cared what you were
selling?
Mr. Joggerst. My focus was--the way most of these
reciprocal transactions took place is my sales force which is
really one of the largest, most well equipped carrier sales
forces in the world, we knew what our customers. We knew where
our network was going in the future and what their requirements
might be. Increasingly, over--particularly in 2001, those
customers came back to us and said yes, we'd be happy to buy
from Global Crossing, but you have to buy something from us. I
mean at that point it was the role of the sales person to make
sure that we got the appropriate operations people involved to
go through what it was that that company was proposing to sell
to us.
Mr. Deutsch. Let me just ask one final question. If you can
refer to Tab 32 which includes a September 26 e-mail from you
to among others, Robin Wright, you state that ``the network
people have put out a string of e-mails that will kill a number
of deals. These deals represent $250 million of our attempt to
get $675 million in revenue. Someone needs to fix this. I don't
have time.'' Is this a good representation, really, of the----
Mr. Joggerst. I'm sorry, what tab was that?
Mr. Deutsch. 32. 31, I'm sorry, 31. 31 on page 2. On the
top.
Mr. Joggerst. Yes, I see it. This is essentially me saying
that, you know, particularly this was the end of third quarter
and a number of the deals that are mentioned there, we didn't
do with Dishnet or with Tycom, but effectively, if the network
people didn't want to buy capacity, that was fine with me. I
didn't have time to try and cheerlead or facilitate them
acquiring something. That really wasn't my purpose. If they
didn't want to buy it, don't buy it. If we didn't do the deals,
then don't do the deals. They would have to really be
accountable to their upper management.
Mr. Deutsch. But if they didn't buy it, you couldn't sell
it.
Mr. Joggerst. I am absolutely convinced that that's the
truth.
Mr. Deutsch. So that's really that whole swap----
Mr. Joggerst. Absolutely.
Mr. Deutsch. Thank you.
Mr. Greenwood. I'll recognize the chairman, Mr. Tauzin in a
second, but Mr. Joggerst, let's go back to Tab 9 for a second
because I can't help but feel that you should have covered that
a little bit.
I'm going to read this to you. It says ``We are now being
asked to provide business cases to support this transaction.
This discussion began with U.S. West at $15 million which we
could not find justification for, let alone $60 million. We
will be factual in our estimation of the value of usefulness of
these assets, but in good conscience, cannot pretend to develop
a business case that justifies this transaction, but rather one
that will show our economic risk.''
So what this guy is saying is we didn't need the $15
million, we couldn't figure out how to justify that on the
basis of capacity. Now you want to quadruple it to $60 million
and you're asking us to justify $60 million when we couldn't
justify $15 million and the only thing they could honestly do
in good conscience is say this is stupid. Isn't that right?
Mr. Joggerst. That would be my interpretation of this e-
mail as well.
Mr. Greenwood. Let's get straight at it here. The Chair
recognizes the full committee chairman, Mr. Tauzin.
Chairman Tauzin. Thank you, Mr. Chairman, first of all, let
me cite for our witnesses a document which you don't have in
front of you. It's actually a news story from The Rocky
Mountain News dated 9/11/02 referring to a witness who will
appear in the next panel, Lynn Turner, I'm sorry, not Lynn
Turner, but Robin Wright. It refers to Lynn Turner, the former
top accountant for the Securities and Exchange Commission in
the last Administration. Lynn Turner is now working for
Colorado State University Center for Quality Financial
Reporting indicating at least in Lynn Turner's opinion that the
memo prepared by Robin Wright of Global Crossing who will
testify in the next panel explaining to co-workers what needed
to be done for Qwest to book revenues quickly ends up being the
smoking gun in this case because it details exactly the
problem. But we have a lot of documents that some of you are
aware of that are sort of the paper trail leading to this
conclusion that indeed this memo may be the smoking gun, if you
will. And I want to refer them to you and get your thoughts on
them.
First of all, Ms. Szeliga, we can go all the way back to
the year 2000 when you first wrote the note to David Walsh
which we have at Tab 26 in the book. This was Robin Wright, I'm
sorry. I've got the wrong Robin. We can go back to that date in
any effect we'll visit with her tomorrow, in the second panel
rather, where she writes about being concerned with the IRU
number. ``I sent the note below to Gary and John and while I
think they understand, I think the IRU number, indefeasible
rights of use number, ends up being the plug number in order to
meet the street's expectations.''
Do you want to tell me what the business of plug numbers to
meet street expectations are all about?
Mr. Joggerst. I can comment. I think I've made the comment
to Chairman Greenwood in that again, as I mentioned at Global
Crossing it was unacceptable to not make the number, so the
IRUs were really what we could do, a deal that could be done
quickly for a large dollar amount, a contract that could be
signed, executed quickly and then you could achieve that goal.
Chairman Tauzin. So literally the plug number is a number
you've got to meet to meet those Wall Street expectations,
because if you don't meet them there are some pretty bad
consequences to the company and these IRU trades was an easy
way to plug those numbers in and meet those expectations. Is
that essentially it?
Mr. Joggerst. What they were was a one-time transaction
where you receive a bunch of cash up front. The alternate would
be to sign up a number of deals that would pay over on a
monthly basis, say 3 or 4 or 5 years, but if you sign that day,
say on the 2 weeks before the end of the quarter, even though
you may have a large commitment for hundreds of millions of
dollars, you wouldn't see that.
Chairman Tauzin. It wouldn't be a plug number.
Mr. Joggerst. That's correct.
Chairman Tauzin. You wouldn't meet the expectations. In
fact, we have a number of confidential members, one at Tab 30
and one at Tab 27 that sort of tell the story about what
happens when a company is anxious to meet those plug numbers
with deals that might not otherwise be very justifiable.
At Tab 27 we see a note from Wes Winkler to Joe Becchi
talking about a deal with Velocita and I quote, ``I have been
charged with the daunting task of figuring out how to sell the
junk we obtained over the past few quarters of reciprocal
deals.''
And if you look at Tab 30 you'll see Joey Wong of Global
Crossing writing to someone named Robert and others, you see
the address on top, ``the problem with the other deals is that
sales folks don't know exactly what they're getting and the
product guys haven't figured out what to do with these assets
and GNO buckets, so this business guy is stuck since there is
no direction given. What makes it worse is that a lot of the
assets we're getting, I don't think we can justify them.'' He
goes on to say ``I wish this company just come clean with the
street--'' that's Wall Street, right? ``Regarding our guidance.
This swap crap is going to kill us in the long run and I'm
personally very fed up with this business case garbage.''
It gets even stronger when we go all the way to the letter
that was written by someone named Michael. We don't know who
that is. That's an anonymous letter on Tab 46. You'll all turn
to it.
And then Ms. Szeliga, I want to talk to you about an
incredible memo that follows on 43, so you might get ready for
it.
But at Tab 46 we see a letter, anonymously written to
someone named Mr. Harad whom the letter writer thought was on
the board of Qwest Communications. It was sent to him and he
forwarded it to Philip Anschutz, the chairman of the board, who
obviously received it. It's a remarkable letter. It's coming
now in April 2002. It begins by asking that Joe Nacchio and
Drake Tempest be fired for cause and the letter writer says
Qwest has violated securities laws, SEC rules, some state
commission rules. It says ``Joe and Drake did not order
specifically subordinates to do unethical acts or illegal acts,
however they set goals and targets'' can I add editorially
``plug numbers?'' ``That were impossible to obtain without
engaging in unethical or illegal acts. Basically, subordinates
were given the choice, Mr. Olofson, of attaining these targets
or being fired. Unfortunately, at least a dozen Qwest employees
chose to break the law rather than face dismissal. The SEC is
searching in some of the right places where some of these
violations occurred. The people involved were at least smart
enough to do most things orally and left a very sparse written
trail. It will either take the SEC getting lucky or employees
breaking ranks in order for the SEC to uncover the smoking
guns.''
The last paragraph this is ``consider your own liability.
This letter will serve notice on you that illegal things were
done at Qwest and finally concludes what I'm assuming that you
learned something from Enron.'' This letter occurs after the
Enron hearing.
So the letter indicates that all this stuff is still going
on. Qwest hadn't come clean with the Street and that employees
were still being threatened with being fired or breaking the
law.
The most important document I want you folks to discuss
with me in the time we have is a memo written from one former
audit chairman at Qwest, Audit Committee chairman to then
current chairman, from Peter Hellman to Tom Stevens. It's at
Tab 43 and I want to quote it to you and I want to get your
comments, particularly, Ms. Szeliga and Mr. Joggerst and Mr.
Olofson.
It raises the question about how this stuff happens and
what might be going on and it states an opinion as to what may
have been wrong. It says ``not that Joe''--I assume that's Joe
Nacchio--``is not saying the right things'' and then in
parentheses ``make the numbers and do it the right way, but the
line people including the divisional CFOs are only hearing make
the numbers. In my opinion there are well-known consequences
for not making the numbers.'' Perhaps getting fired for the
company not making the Wall Street projections, the plug
numbers being there, the stock going down? We can imagine all
the known consequences.
But here's the kicker ``but no clear consequences for
cutting corners.''
Further on, ``Finance people in the business unit were
obscuring the appropriate facts both from AA and Robin to whom
they directly report. As far as I can determine there were no
consequences for their actions.''
Now it appears to me what the Audit Committee, former Audit
Committee chairman is telling the new Audit Committee chairman
at Qwest is look, maybe Joe's not saying do anything wrong to
make the numbers, but all the people are hearing is make the
numbers. And there are terrible consequences if you don't. But
there aren't any real evident consequences if you do the wrong
thing to make the numbers.
Talk to me a bit about that. Was that the culture by which
Qwest and Global Crossing found themselves in the mess they now
find themselves?
Ms. Szeliga. I don't recall it being the culture that there
were no consequences for not following process at Qwest. I
think the record shows that I saw process as being very
important and there were a number of instances when I
personally spoke with folks who I thought hadn't appropriately
followed the policies and procedures we had in place. We
reminded them of those either orally or in writing on different
occasions.
Chairman Tauzin. Give me an example.
Ms. Szeliga. For example, I don't recall the specific
reason, but I received from my controller a concern that said I
think we need to remind folks of some processes and I can't
remember what the genesis of his concern was specifically, but
I left a voice mail to a number of folks in our company----
Chairman Tauzin. Did anybody get fired for doing the wrong
thing, to make the numbers?
Ms. Szeliga. I wasn't aware at the time that I left this
voice mail I'm referring to that anybody had done anything
wrong, but rather the controller was acting out of a concern
that controls be followed, trying to be proactive.
Chairman Tauzin. You know, we found no memos from anyone
saying don't you dare make the numbers by breaking the laws or
breaking the rules or by hiding the true nature of one of these
deals. We didn't find any memos that said that. We found a lot
of memos of people saying we've got problems with these deals
and we've got troubles with them. We got conversations, we have
interviews that say--Mr. Joggerst, you know what I'm talking
about. There were a lot of people saying there's something
wrong with this and we shouldn't be doing it, but there were
also memos saying you're going to get fired if you complain. Is
that right?
Mr. Joggerst. I did have the impression, I think I
mentioned earlier that not meeting the number was absolutely
unacceptable at Global Crossing. We had to make the quarterly
number. Whether people would get fired, get shuffled aside,
given a nonimportant task, I mean I'm not sure what the
specific penalties might be, but I do contrast it with the
early days of Global Crossing when there was much more of a
collegial atmosphere where deals, pros and cons were discussed
openly and----
Chairman Tauzin. Something changed, right?
Mr. Joggerst. And something changed.
Chairman Tauzin. We learned about the office of the
chairman when we did our Enron hearings. It's a special kind of
office. What was it composed of at Global Crossing?
Mr. Joggerst. The office of the chairman included Gary
Winnick, Lod Cook, the secretary was Sherri Cook, secretary of
the company and the CEO, the point in time that we're talking
about is Tom Casey.
Chairman Tauzin. And Tom Casey and Gary Winnick were very
close?
Mr. Joggerst. It's my understanding that they had known
each other for some time. Tom joined Global Crossing as our
head of mergers and acquisitions from Merrill Lynch in London
and it was generally thought that they were personal friends.
Chairman Tauzin. If I told something to Tom Casey, was it
generally assumed in the corporation, Gary Winnick would know
it?
Mr. Joggerst. That was absolutely my assumption.
Chairman Tauzin. They shared everything.
Mr. Joggerst. That would be my assumption, absolutely.
Chairman Tauzin. I want to turn to some of the consequences
of things going wrong and I've got some of your notes, Ms.
Szeliga, we find them at Tab 87, if you want to refer to them.
This takes us back to June 20 or so of the year 2001. What
has just happened is that Morgan Stanley has dropped a
bombshell. Their analysts have said that Qwest has bloated
income after its merger with U.S. West and Nacchio was furious.
There are meetings and discussions about it. These are notes of
your meetings, apparently, and this is strategy to handle the
issue.
I take you down to number 4, and it says ``quietly close
Morgan Stanley out of company.'' Are those your notes?
Ms. Szeliga. This is my handwriting, that's correct.
Chairman Tauzin. So these are your notes, is that right?
Ms. Szeliga. Yes sir.
Chairman Tauzin. So is it correct that this is the kind of
way the company reacted to Morgan Stanley criticizing it for
bloating income?
Ms. Szeliga. This is one of the ways that the company
reacted.
Chairman Tauzin. Did you, in fact, follow up and try to
close Morgan Stanley out of the company?
Ms. Szeliga. I didn't have the personal responsibility or
the authority to close Morgan Stanley out of our company, but
Morgan Stanley was no longer employed after the notes came out
by the company to do significant banking transactions.
Chairman Tauzin. Was this your idea or are you writing a
note about somebody else's idea of the meeting?
Ms. Szeliga. I don't recall specifically writing it, but I
do believe this was some notes taken following conversations
that were had with senior executives in a company as they----
Chairman Tauzin. Give me some names of people who were
there?
Ms. Szeliga. A number of folks had conversations after the
Morgan Stanley note came out including Joseph Nacchio, our CEO;
Afshin Mohebbi, our COO; Drake Tempest, our general counsel. It
would be not uncommon for me to participate in those
conversations where the company was dealing with a very
significant issue and we would get together and discuss----
Chairman Tauzin. And this note arose from that discussion.
You don't know who came up with the idea to close Morgan
Stanley out?
Ms. Szeliga. I'm sorry to say I don't exactly remember
writing the note, but the tone of what I'm saying in this----
Chairman Tauzin. Do you remember who said that?
Ms. Szeliga. I know Joe Nacchio was very angry at Morgan
Stanley and he expressed it publicly on the call that we had
following the notes that were issued by Morgan Stanley
analysts.
Chairman Tauzin. You see where I'm getting at. I mean when
we read a memo from one Audit Committee chairman to another
saying look, we got a problem here, this business of just
meeting the numbers, making the numbers, everybody getting that
message, having to do it or face the consequences and anybody
who gets in the way gets rolled, including an investment house
that criticized the company. Let just run out the company.
We're not going to do business with them any more. That's the
culture I'm asking about. If that culture--Mr. Joggerst, if the
culture of the company changed, and that became the new culture
of the company, is that not maybe the underlying reason so many
people may have according to that memo violated rules and law?
Mr. Joggerst. It is my belief that the pressure to make the
numbers became really the overriding factor in the company at
that time. The pressure was uncomfortable. I can tell you
myself, I remember the sales people literally did not sleep for
several nights toward the end of a quarter, receiving phone
calls. I can recall in the case of the 630 Network's deal
receiving many phone calls, including one from Tom Casey about
11:35 the night before, that Saturday night before the first
quarter books closed or before the quarter closed, making sure
that the transaction with 360 Network was done.
Chairman Tauzin. And the pressure was coming from whom in
these cases?
Mr. Joggerst. The pressure in my understanding was coming
from the office of the chairman which included the individuals
that I mentioned. The specific conversations that I had were
largely with Tom Casey.
Chairman Tauzin. Although it's rather obvious, and I know
my time is up, Mr. Chairman, but all of this was designed to
meet the numbers, to keep the stock prices high so that those
who enjoyed stock ownership or options in the company might
profit, is that right?
Mr. Joggerst. That is my understanding and again, I think
every company's mission statement says that they're there to
increase shareholder value. What I didn't understand at the
time was the financial situation that the company was in and
what I've since seen is most potentially the financia |