[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
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
__________
U.S. GOVERNMENT PRINTING OFFICE
81-961 WASHINGTON : 2002
___________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
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 financial harm
that was being done by the company by the sales force and the
operations people proceeding with a number of these deals.
Chairman Tauzin. The other two of you, Mr. Olofson, Ms.
Szeliga, if you would comment on that. Was that the problem?
Was that the goal? Keep the numbers up, make the Wall Street
estimates so that the stock prices can continue to benefit
those who held stock or options in the company?
Mr. Olofson. In my opinion, I think that was always the No.
1 consideration. I think from the get go, the company was very
oriented toward Wall Street and had a good relationship with
all the financial analysts on the street. Making the numbers in
the early days was relatively easy and I think that as Mr.
Joggerst has mentioned, when the market started to decline,
prices started to drop. It became more difficult to make the
numbers, but the culture was still there.
Chairman Tauzin. Ms. Szeliga?
Ms. Szeliga. The Qwest culture was changing over time quite
a bit because we had merged with U.S. West and at the time of
the merger the markets were still doing fairly well. It was
subsequent to the merger when we were trying to bring two very
diverse cultures together that we were also faced with the
market down turn and what appeared to be about a year after the
merger or maybe a bit longer than that an industry that we all
believed demand would continue to grow in, in fact,
contracting. And so I think that the pressure that Mr. Joggerst
is referring to, my recollection of how that felt and what that
looked like was it wasn't that hard to make your numbers
because it was growing and then all of a sudden in the midst of
what was a difficult time in trying to combine two companies,
there was this economic downturn and this contraction in the
market that made it extremely difficult and there was certainly
a heightened sense of pressure for everyone in the company and
I believe in the industry to keep going and getting that done.
Chairman Tauzin. Thank you. Thank you, Mr. Chairman.
Mr. Greenwood. Mr. Joggerst, I wanted you to look at Tab 32
for a second before I go to Ms. DeGette, because you've
testified this morning that you believed that these
transactions were all, they would have been needed eventually.
The capacity would have been needed eventually, but you are
just questioning the timing. Maybe we don't need it right now.
Isn't that how you've testified this morning?
Mr. Joggerst. For the transactions that I was aware of----
Mr. Greenwood. Here's one I think you're aware of. This is
a confidential memo dated September 27, 2001. It has to do with
the Qwest deal into Scandinavia and you receive an e-mail from
Brian Fitzpatrick which says ``I received a call this a.m.
regarding the Qwest deal, specifically regarding our interest
for swap capacity into Helsinki. I want to make sure we are all
operating from the same place. We do not need any capacity in
Scandinavia. We currently have invested $80 million plus into
this region and have no customers. To tell ourselves we will
take this capacity into inventory will add value to our efforts
of yielding a return on the investment we've already made is
not what we want to do.'' And then he says ``do not mask a
business plan to justify an ugly deal'' to which you responded,
``I'm not kidding. I can't work like this where everyone is now
in the mode to cover their ass by documenting opinions.''
Now was that about the capacity you were eventually going
to need?
Mr. Joggerst. Clearly, it was my understanding and my
belief and I did not work directly on many of the Qwest
transactions, but if somebody would ask me whether there was a
requirement or a need to get capacity into Scandinavia, since I
was so early into Global Crossing's tenure, yes, in fact, we
did have a project called Baltic Crossing where there was even
a traffic study done to look at what would be the requirements
into that region of the world, and yes, I did believe that
there might be some requirement going forward in the future for
that.
As I already mentioned----
Mr. Greenwood. Even though your co-president of sales who
apparently did understand what was going on in Scandinavia said
this is ridiculous, we're never going to use this. We've
already dumped a bunch of money into this place. We have no
customers. Did you take his opinion to have some value since he
seemed to understand this?
Mr. Joggerst. This e-mail was not sent just to me. It was
sent to a number of people.
Mr. Greenwood. I understand that.
Mr. Joggerst. And yes, I did take his opinion into
consideration.
Mr. Greenwood. So this morning when you testified that, in
fact, it is your opinion today that all of these deals were
done for some--they weren't just done to make the revenue
figures, they were done because you think eventually this
capacity would have been needed. Here, when you're looking at
this and he says we've already got $80 million invested into
Scandinavia. We have zero customers. Let's go buy some more,
you thought it made sense to you that that's probably what was
going to be needed some day?
Would that have been in this millennium?
Mr. Joggerst. My reaction, Mr. Chairman, would really be
that it would be important to aggressively go out and try to
pursue opportunities there. If none came to be, then we would
need to look at some large outsourcing deals that I've already
mentioned that were in the works that Brian Fitzpatrick worked
on as well. One that would have been in the billions of
dollars.
Mr. Greenwood. This was the Baltic deal.
Mr. Joggerst. No, no, no. Outsourcing of a global network--
--
Mr. Greenwood. But I'm talking here, the Baltic deal. You
said the Baltic deal.
Mr. Joggerst. The Baltic deal, Mr. Fitzpatrick probably was
not aware of. That was a business case that was done, I think
prior to Global Crossing and Frontier merging. Global Crossing,
I came from Global Crossing and Brian came from the Frontier
organization.
Mr. Greenwood. I'd like to play Monopoly with you some time
and I'll trade you Baltic for Boardwalk. The Chair recognizes
the gentlelady from Colorado, Ms. DeGette.
Ms. DeGette. Thank you, Mr. Chairman. I'd like to follow up
a little bit on Chairman Tauzin's questions because I think
he's hit the nerve.
Ms. Szeliga, I think you testified that you became the CFO
of Qwest in April 2001. Correct?
Ms. Szeliga. That is correct.
Ms. DeGette. And you were actually acting in that capacity
since the beginning of 2001, right?
Ms. Szeliga. Not exactly, Congresswoman. I was an acting
CFO from approximately the beginning of March 2001.
Ms. DeGette. Okay. And you also are a CPA by training so
you know about accounting rules and all of that?
Ms. Szeliga. Yes, I am a CPA.
Ms. DeGette. And in your position as Chief Financial
Officer of Qwest, I think you testified earlier you really
tried to make sure that proper auditing and accounting
standards were followed, right?
Ms. Szeliga. Yes, I did.
Ms. DeGette. Now you also, I think, said in your opening
statement or certainly in your written testimony that you
worked very closely with the Audit Committee of the board,
correct?
Ms. Szeliga. Yes, I did.
Ms. DeGette. How often would you say you spoke with members
of the Audit Committee?
Ms. Szeliga. Over time, it changed, but generally at least
quarterly and then as time went on during my tenure we were
speaking up to weekly and even day after day in certain
circumstances where we were resolving issues or having
important discussions that were time sensitive.
Ms. DeGette. And would you speak with the entire Audit
Committee or just certain members of the Audit Committee?
Ms. Szeliga. Under different circumstances, it could be
different, yes.
Ms. DeGette. Now shortly after you became CFO, and maybe
before, you've been with Qwest since 1997, if I'm not mistaken?
Ms. Szeliga. That is correct.
Ms. DeGette. You became concerned about these swaps shortly
into your tenure, would that be fair to say?
Ms. Szeliga. I would describe concerned as the swap
transactions were consuming capital.
Ms. DeGette. Right, and in fact in the first quarter of
2001, the capacity swaps ate up the entire international
capital budget, didn't they?
Ms. Szeliga. The element I believe you're referring to as I
recall and came to find out after I became CFO was an approved
spending budget for international routes that we were trying to
develop in getting our global network up and running. And in
the first quarter we spent approximately the amount that we
thought we would spend for the entire year on the global
network.
Ms. DeGette. And that didn't end after the first quarter,
did it?
Ms. Szeliga. We continued to spend capital on global routes
in the second quarter and a smaller amount in the third
quarter.
Ms. DeGette. Okay, now around the summer of 2001, you
started pushing for more disclosure about swaps, didn't you?
Ms. Szeliga. I actually conferred with folks in my
controller shop, and our auditors, and decided given the fact
that we were continuing to build out our global network, that I
thought it would be prudent to do more disclosure because it
was a----
Ms. DeGette. So your answer is yes?
Ms. Szeliga. Yes ma'am.
Ms. DeGette. Thanks. Now--I'm sorry, they only give us 10
minutes, although I know the clock has been stuck a couple of
times.
So the controller also wanted more disclosure of these
swaps too, correct?
Ms. Szeliga. I would characterize it as we agreed that it
was appropriate to put disclosure----
Ms. DeGette. Exactly. Now during the summer of 2001, did
you start to get wind of--and these swaps, they could have
perfectly legitimate business reasons, couldn't they, in and of
themselves. We've heard some of that testimony earlier?
Ms. Szeliga. Yes.
Ms. DeGette. The problem, of course, from an accounting
perspective would be if there was no legitimate business
purpose for the swaps, right? I'm putting it in lay person's
terms, but that's, in essence, what it is?
Ms. Szeliga. One of our processes and procedures was to
determine by asking those qualified to answer the question, if
there was a business purpose.
Ms. DeGette. Right, so in the summer of 2001, you and the
controller and your staff began to hear about side agreements,
did you not?
Ms. Szeliga. There was a concern that we should reiterate
and codify in writing some of our rules around how we were
putting contracts together.
Ms. DeGette. And that was because there was some concern
about side agreements, right?
Ms. Szeliga. My controller expressed concerns to me.
Ms. DeGette. When was that?
Ms. Szeliga. It was June or July or August.
Ms. DeGette. And what did your controller say?
Ms. Szeliga. I can't remember specifically what he said,
but he was expressing concerns that if there were side
agreements, outside of the contracts being reviewed by the
accountants that we may not account for it correctly and we
need to make sure we had everything together so that we could
get it right.
Ms. DeGette. Right, exactly. Well, why would your
controller think there might be side agreements? Did he say?
Ms. Szeliga. As I recall, and this is a vague recollection,
he was getting questions from folks in the business units or
sales organizations about that sort of thing and that led him
to believe that----
Ms. DeGette. It might exist?
Ms. Szeliga. Or that reiterating the controls----
Ms. DeGette. If you look at Tab 39 in your notebook, Tab 39
is a confidential memo from you to a bunch of people. It was
cc'd to other people and that's what you're talking about, kind
of trying to codify these accounting treatments of the swaps
right?
Ms. Szeliga. This is one of the things I was referring to,
yes.
Ms. DeGette. And on page 2 of that agreement, you said
``note that we are required to provide representation to our
auditors that no side letters or other verbal or written
agreements exist between the parties, right?
Ms. Szeliga. Yes.
Ms. DeGette. And that's based on the concern that your
controller was talking about, right?
Ms. Szeliga. What I believe he and I were trying to
communicate to the people on the memo was that we were going to
be making representations and that we were relying on people to
give us the right information so that we could validly make
those representations.
Ms. DeGette. Now when you wrote this memo on August 2,
2001, were you personally aware of any side agreements?
Ms. Szeliga. I do not recall being personally aware on
August 2 and I did not write it myself.
Ms. DeGette. But your name is on it. You obviously reviewed
it before it went out.
Ms. Szeliga. I did review it.
Ms. DeGette. Okay.
Ms. Szeliga. And gave comment to it.
Ms. DeGette. Now some time after August 1, you personally
found out about a side agreement, right?
Ms. Szeliga. Yes, I did.
Ms. DeGette. And when was that?
Ms. Szeliga. I don't recall.
Ms. DeGette. It was like in July, right? No, that would--
when was it, October?
Ms. Szeliga. I don't recall specifically, but it was some
time in October that I became aware that there was a letter and
an e-mail that would be, could be termed as side agreements,
yes.
Ms. DeGette. And I'm sorry, so you became aware some time
in October?
Ms. Szeliga. Yes, I believe that's correct.
Ms. DeGette. And what deal was that that you became aware
of?
Ms. Szeliga. It was brought to my attention that there was
a letter and an e-mail associated with the C&W transaction.
Ms. DeGette. Right. And what did you do about that?
Ms. Szeliga. I asked my controller to, as I recall, follow
up on it and I went to speak to Mr. Mohebbi, our COO and
president with regard to the e-mail immediately. I believe that
same day and I spoke with him as to whether he had written it
and why it existed and expressed my concerns that it was not
following processes and procedures.
Ms. DeGette. And would that be Exhibit 78 in your notebook?
It's a letter dated December 29, 2000 from Mr. Mohebbi to Nick
Jeffrey?
Ms. Szeliga. I believe this is the one that I had when I
was concerned about it and went and talked to him.
Ms. DeGette. Okay, and that was dated 2000, but you didn't
find out about it until around October 2001, right?
Ms. Szeliga. That's approximately correct.
Ms. DeGette. Did you ask Mr. Mohebbi were there other side
agreements like this? He was the COO of Qwest at that time.
Ms. Szeliga. I don't recall asking him if there were
others. I was certainly very focused on this one, asking him
what it meant and how it did come to be.
Ms. DeGette. What was his response?
Ms. Szeliga. His response was I don't recall writing it. I
don't believe I sent it. I'll need to look into it and I'm
paraphrasing. I can't remember the exact words.
Ms. DeGette. And in fact, subsequently, we learned that it
was said. In fact, it was a side agreement, right?
Ms. Szeliga. I believe we came to understand that it had
been sent and there was some debate about who had actually sent
it and at what time, etcetera.
Ms. DeGette. You had a subsequent conversation with Mr.
Mohebbi about this, right?
Ms. Szeliga. I believe I did.
Ms. DeGette. Tell me about that?
Ms. Szeliga. It is my recollection that Mr. Mohebbi came
back and followed up with me after our initial conversation
saying that although he couldn't specifically remember, he
didn't think he'd sent it, but had authorized someone to send
it for him.
Ms. DeGette. So in fact, this was authorized by the COO of
Qwest, right?
Ms. Szeliga. As I recall it, that was generally the
statement he made to me and he said he did not review it before
it got sent, as I recall.
Ms. DeGette. Do we know who he authorized to send it?
Ms. Szeliga. I cannot remember if he pinpointed an
individual. I just can't remember.
Ms. DeGette. Now in the meantime, that really concerned
you, didn't it because what the side agreement shows is there's
potentially no reason to book these swaps as legitimate
business transactions, right?
Ms. Szeliga. I thought of it more in terms of if this
particular side agreement had been put in place, that we needed
to follow up on this particular transaction and bring it to the
forefront and investigate to determine if we had appropriately
booked the revenues on it.
Ms. DeGette. Were you also concerned there might be other
side agreements that you didn't know about, given the rumors
that you had been hearing for some months?
Ms. Szeliga. Yes, I was concerned, not generally from
rumors, but that this was a break in policy and that we needed
to look into it and so we took further steps.
Ms. DeGette. Now, in fact, you were so concerned you asked
for a special meeting of the Audit Committee of the board,
correct?
Ms. Szeliga. Yes, I did.
Ms. DeGette. And you had a telephone meeting with the Audit
Committee and you explained these concerns. This is Tab 83 in
your notebook where you said, Andersen, your auditor and
yourself were previously unaware of certain terms of the
transactions and the size of the transactions, but it was your
view the corporation didn't need to take action with respect to
the accounting and then you also said you had talked about it
with Mr. Nacchio, Mr. Tempest and they were comfortable and
that the committee was comfortable with your recommendations,
right?
Ms. Szeliga. That is correct.
Ms. DeGette. Did you have any subsequent conversations with
the Audit Committee about these side agreements?
Ms. Szeliga. On a number of occasions, we discussed the
policies and procedures that we had in place that would not
allow for a side agreement to be made.
Ms. DeGette. Do you know if the Audit Committee or the
board ever took any action as the result of these revelations
detailed in the October 29 board meeting or Audit Committee
meeting?
Ms. Szeliga. I believe that the Audit Committee had direct
conversations with our CEO. I'm not aware of the specifics of
the conversation. I don't know if they spoke to Mr. Mohebbi or
not.
Ms. DeGette. In fact, on October--in fact, they had a
subsequent meeting that you were not at with Mr. Nacchio,
correct?
Ms. Szeliga. The Audit Committee spoke to Mr. Nacchio in
private. I believe it was early December.
Ms. DeGette. And from what we know they pretty much reamed
him out. Do you know anything about that?
Ms. Szeliga. I know they were going to have conversations
with him and they asked me to leave the room.
Ms. DeGette. Do you know if the Audit Committee did
anything after they chastised Mr. Nacchio? Did they ask--did
they report it to the board at large? Do we know?
Ms. Szeliga. I believe that the Audit Committee gave full
updates of our Audit Committee meetings to the members.
Ms. DeGette. Do we have any written minutes that show that,
that you know of?
Ms. Szeliga. I can't say for sure, but the minutes were
taken at the board meetings where the audit chairmen would have
had to come forward and----
Ms. DeGette. So if they did reveal it to the board, it
would be in the minutes?
Ms. Szeliga. Our minutes tends to be brief and----
Ms. DeGette. So you don't know. Do you know if they ever
asked anyone, any outside auditors to look and see whether the
income needed to be restated at that time as a result of these
side agreements?
Ms. Szeliga. As a result of the C&W conversation we had,
they did not. As I had recommended after calculating the
percentage of revenue that it represented, that I would not
recommend that we go back and restate on that particular----
Ms. DeGette. There were many more side agreements. Did they
ever do anything about that?
Ms. Szeliga. After the meeting where I brought this to the
attention of the Audit Committee, we agreed with the Audit
Committee based on my recommendation that we will go back to
our files, gathering them from many places and look to see if
we can find any side agreements, amendments or anything like
that that accounting had previously been unaware of and
determine if we could find anything that would cause us to
think we needed to look further about restatement.
Ms. DeGette. Mr. Chairman, I have many more questions as a
result of that answer, but I'll ask them in the second round.
Thanks for your commenting.
Mr. Greenwood. Thank you. The Chair is going to be flexible
with the time so that everyone has all the opportunity they
want.
Before I go to the next speaker, a question for Mr.
Joggerst, again, I'm having difficult with your earlier
testimony today that you believed that the transactions at
Global Crossing engaged in would have all been justified over
time, but maybe they were done sooner than needed, but it
wasn't the case that it wasn't needed.
I want to read you another quick memo that came to you
again from Brian Fitzpatrick. It's Tab 19. And it says ``We
need to make sure we are all solving for the same problem''
whatever that means. ``We need the top line revenue by the
close of the quarter. In order to get it, we have to spend a
reciprocal amount with key carriers, in this case, Qwest. Our
option is to spend the same amount of cash and end up with
nothing. I want to make sure the three of us are 100 percent
together regarding the fact that the Eastern Europe market,
Vienna to Prague, nor the Scandinavian market, up to Helsinki,
would support the numbers that are stated in the attached
business case. The Euro market is crashing. No one is spending
$700 million on these routes. I feel like we, you and I, are
putting our names and careers on the line supporting this type
transaction without having a discussion with the others about
what we are really doing.'' When you read that memo on June 28,
did you take that to mean that eventually even though he's
saying there's no justification for this purchase of $700
million, you still believed that it was eventually a capacity
that the company was going to need?
Mr. Joggerst. Mr. Chairman, let me just make a comment
about this e-mail as well as the other e-mail that we looked at
a moment ago from Brian regarding capacity into Scandinavia. I
didn't personally work the Qwest deals. I wasn't personally
involved in negotiating the terms and conditions, and frankly,
when I looked at this, the e-mail that we looked at before,
dated 9/27, I'm not even sure that deal was done in third
quarter.
Mr. Greenwood. That's not the point here. The point here is
you saw these e-mails. They were sent to you. And I've got a
stack of them here and I haven't even read the most scandalous
ones in which it was brought to your attention over and over
again, capacity was being acquired for which there was no
rational business deal at all, business purpose at all, not
that--they didn't say we don't need this now, we'll need it
later. They said we don't need this. We can't justify this. And
yet you testified this morning that you thought all of these
deals would eventually, this capacity would eventually be
needed.
I can't reconcile the two. I don't understand how you could
have seen all of these e-mails in which you were told there's
no business justification whatsoever for them and then sit here
and tell this committee that you thought eventually the company
would need all of this.
Mr. Joggerst. First of all, a point of clarification. What
I said is for the deals that I worked closely with, that I was
personally involved with, that I knew where we were acquiring
assets, in those deals specifically, yes, I did believe that
there was either a short term or long term purpose for them.
Mr. Greenwood. So are you willing to say under oath to this
committee that in 2001, last year, you were perfectly aware
that at least your co-president, Mr. Fitzpatrick, was screaming
bloody murder, that there were deals being done for which there
was no business rationale whatsoever. In fact, that any
rational effort to evaluate the business would have said these
deals should not be done? Is that right?
Mr. Joggerst. I was absolutely aware that there were a
number of people including Brian who were quite upset, did not
believe that the market was going to continue to grow. I think
as Ms. Szeliga mentioned, I mean we were at a point where we
were really sitting on top of a bubble. Some of us believed
that we would continue to grow and some people foresaw that
that it was going to burst.
Mr. Greenwood. The problem is that Mr. and Mrs. America out
there banking their retirement on the numbers that you guys
were putting out didn't have the inside information. They
didn't know that the company was full of hot air, did they?
Mr. Joggerst. I absolutely understand your point.
Mr. Greenwood. The Chair recognizes the gentleman from
Kentucky, Mr. Whitfield, for 10 minutes.
Mr. Whitfield. Thank you, Mr. Chairman. I'd like to yield 1
minute to the full committee Chair.
Chairman Tauzin. I thank the gentleman. I'll be brief. Mr.
Joggerst, I have the memo of a meeting detailing the
discussions on the 230 Network financial deal in which the
counsel, Mr. Gorton, was basically cautioning against this
deal. The memo is dated 4 p.m. Pacific time. This is right at
the end of the quarter, get the deal done tonight or don't do
it. And the pressure is to do it. People are saying don't do it
on the phone. A bunch of people get kicked off the phone. What
happens here?
Mr. Joggerst. Let me explain. For a deal of that magnitude
it required approval by the Board of Directors or really I
think what's called a management committee consisting of many
members of the board. The conference call was held. We very
quickly went through the transaction in terms of what was
happening and what the risks were involved and yes, I believe
in the notes it does mention that Jim Gorton was really taking
the lead in terms of explaining what the risks were.
I can recall on the conversation that the independent board
member, Mr. Conway, expressed some serious concerns.
Chairman Tauzin. Conway's concern, Gorton's concern, then a
bunch of you get kicked off the phone and the deal is done.
Mr. Joggerst. Yes, we were asked to leave the call, leaving
Gary Winnick and Tom Casey----
Chairman Tauzin. Now the deal we're talking about was done
right at the end of the quarter, obviously to plug the numbers,
meet the numbers. It amounted to a $50 million cash transfer to
360 Network which goes bankrupt in a couple of months.
Mr. Joggerst. That's correct.
Chairman Tauzin. It's a great example of how this deal was
pushed and done to meet those numbers even though everybody was
saying it was a bad deal.
Now there's a memo, I'll try to be quick, on Tab 13 from
Joe Perrone to Kurt Ross who talks about this. Because there's
another side to this mess. One side of it is making up income,
making up income to make those numbers. The other side is it
takes company cash away. Everyone of these deals the company
has to put out some cash to make the buy and second, it also is
acquiring long term debt and the memo talks about that. It says
in effect that we don't know, we know about our debt issues of
third parties, but we rely upon the accounting regarding
capital lease obligations from Treasury, etcetera. It says
``for the time being, we're using historical balances. But
additional debt from these categories would be significant and
result in covenant violations, consequences of violating the
financial covenant are severe and the time period in which to
fix it is short. And this is called panic.'' What a diatribe.
This is panic.
But the reality is that every time the company in a panic
made one of these deals to make these numbers, it also bled the
company of cash and stacked up debt that wasn't accounted for
and put the company in risk of failing. How could corporate
executives do this to their company except for the greed of
personal gain in the stock?
Could you tell me?
Mr. Joggerst. I'll tell you, seeing this e-mail, it came as
a surprise to me. Myself and I can speak for, I believe, the
rest of the sales team. We're not aware that we were anywhere
near getting close to breaching debt covenants, that there were
the kind of capital constraints. It's normal in any corporation
that I've worked for, operations never has enough capital to do
what they want to do. Sales never likes the revenue numbers.
They're always too high. But to have this come directly from
the financing organization saying that there are some severe
capital constraints which would lead in 20-20 hindsight for me
to agree directly with Mr. Greenwood's comment that there would
be no reason to do a number of these transactions to buy assets
into Scandinavia----
Chairman Tauzin. In fact, there was never a reason not to
do it for the good of the company?
Mr. Joggerst. There was never any capital or any really
really true strong will to expand the network, to integrate it,
integrate those assets and really make them useful.
Chairman Tauzin. Thank you, sir. I'm sorry I took so much
time.
Mr. Whitfield. Mr. Chairman, that actually was some of the
areas I was going to get into, so I'm delighted that you did
so.
Just to reinforce what the chairman, the point he was
making, these senior executives had a lot of knowledge about
the financial condition of the company, obviously, including as
he said this document on Tab 13 in which they talk about--this
was from Kurt Ross to Joseph Perrone. Who is Joseph Perrone
again, would you tell us?
Mr. Joggerst. I'm not sure what his exact title was, but
worked for the CFO.
Mr. Whitfield. Okay. And in this memo, of course, it says
this is the definition of panic we're about to breach our bank
covenants which is a violation and it's severe and there's no
cure for it and so forth.
Have you been aware, like they were aware, that the company
was in danger of violating its bank covenants and had severe
capital expenditure constraints on its ability to implement the
packages, the purchases, what would your opinion of them, what
would you have suggest that they do.
Mr. Joggerst. If I had known that there was never any
intention to continue to invest in the company, other than just
doing deals to book revenue, then I would have recommended
against the deals.
Mr. Whitfield. So you would have recommended against the
deals?
Mr. Joggerst. I would have had I know that there was really
no wherewithal or ability or really will to actually continue
to expand the network and to activate the assets that were
being purchased.
Mr. Whitfield. But those higher up in the company, they
obviously decided not to do that. Okay.
Mr. Olofson, I want to ask you just a few questions. In
your opening statement, you mentioned that Chief Financial
Officer Dan Cohrs told you that he would like to reduce the
guidance to the street. I guess that's telling Wall Street what
we're going to earn, that he would like to reduce that, but he
could not because Chairman Gary Winnick had just sold nearly
$10 million shares of Global Crossing stock. Now that's kind of
interesting. I'd like to be honest with Wall Street, but I
can't do it, because the chairman had just sold nearly $10
million shares of Global Crossing stock. Was this the first
time that you had learned of Mr. Winnick's sale of the stock?
Mr. Olofson. Was this the first time I learned about Mr.
Winnick's sale?
Mr. Whitfield. Yes, when Dan Cohrs told you, made that
comment to you.
Mr. Olofson. My recollection was that that was public
knowledge by that time. I think he sold some time in May and I
think it was in the newspapers.
Mr. Whitfield. Did you have any concern at all about the
sale of that stock, I mean its impact on the company? Did that
concern you at all?
Mr. Olofson. I think most people were a little surprised by
the magnitude of the sale and that the message that it was
sending to the investors that the chairman is selling a large
block of stock. It sends a message that he's not very
optimistic, I guess about the results of the company.
Mr. Whitfield. Now do you remember the approximate date of
that sale?
Mr. Olofson. It was some time in mid-May. I don't remember
the exact day.
Mr. Whitfield. Of?
Mr. Olofson. 2001.
Mr. Whitfield. 2001. About the time when we already know
that everyone's aware or at least certain people are aware that
bank covenants are about to be violated.
Mr. Olofson. Yes sir.
Mr. Whitfield. Just what is your sense that, for example,
of Mr. Winnick's involvement in the company on a daily basis,
just what was your sense of his involvement? Was he a hands on
guy or not?
Mr. Olofson. My opinion, Mr. Winnick was the Chairman of
the Board, of the company, he's not in my opinion somebody
that's going to operate a local telephone company and get into
the details of operations and that type of thing. I think he's
more of a deal guy. I mean that's been his background, so I
think that was his involvement with the company at a very high
level.
Mr. Whitfield. Would you agree with that, Mr. Joggerst?
Mr. Joggerst. Yes, even again as I mentioned I was an early
employee of Global Crossing and I can recall we had weekly
sales calls and Gary attended every weekly sales call for the
first 6 months, as I can recall; that he was hands on when it
came to sales and any large deals that were being done.
Mr. Whitfield. Can you list any specific deals that you
know he was involved with?
Mr. Joggerst. I know, other than we mentioned the 360
Network's deal. He was clearly involved with that. I recall
second quarter of 2001 there was actually a press release that
one of our competitors had won a deal in Asia. A request came
back from the Office of the Chairman, why is this happening? I
need to understand what's in the sales final and I want to
become personally involved, please prepare a summary. That came
from Tom Casey and I know in here there's an e-mail from Jim
Gorton to Mr. Winnick with my assessment of the second quarter
final.
Mr. Whitfield. Let me just go on and ask another question
to Mr. Olofson there a minute. You also told us that in your
discussion with Mr. Cohrs that he told you that the company had
decided to back stop margin loans to certain officers and that
he hoped the price of Global Crossing stock would increase
because this would have to be disclosed in Global Crossing's
next proxy statement.
Could you explain the significance of the company's
decision to back stop margin loans to company officers?
Mr. Olofson. Well, I didn't know the specifics of what
arrangements had been made, but my impression was, my
understanding was that there were individuals and I don't even
know who the individuals were that would have been forced to
sell their Global Crossing stock because of the declining price
of the stock and that rather than making them come up with
monies or somehow they would essentially backstop that loan.
My understanding is--I'm not really clear on the term back
stop, but I think it's kind of a secondary guarantee or some
type of----
Mr. Whitfield. Did you know which officers were included in
that?
Mr. Olofson. I did not.
Mr. Whitfield. Now in your opening statement, you mentioned
that you expressed your concern about what was going on to Mr.
Perrone.
Mr. Olofson. Correct.
Mr. Whitfield. And I think you indicated that he maybe
threatened to terminate you. Is that correct?
Mr. Olofson. Correct.
Mr. Whitfield. Did he do that--did you--you expressed your
concern in a memo that you wrote to him, right?
Mr. Olofson. Well, I originally expressed my concern to Mr.
Perrone about the first quarter transactions, in particular,
the 360 transaction that we talked about quite a bit this
morning on June 1 and then eventually I wrote my letter to the
Chief Ethics Officer. During this period of time the company
was considering layoffs. That had been rumored for some period
of time and I think probably from the beginning of the year. It
was, in my opinion, handled somewhat amateurishly because they
set dates to meet with people and then cancel them and so on
and so forth.
But I later found out that my name was included on a list
of management people that were to be laid off and I think it
was dated some time in June. It was going to be part of the
layoffs that took place in August. And I didn't know that at
the time.
Mr. Whitfield. So you were surprised at that.
Mr. Olofson. Well, I didn't even know it, but then I wrote
my letter and then I found out that I was on that list and then
I got a call from Jim Gorton, or he had called my attorney at
the time, and said that I'd made the cut, so I hadn't seen this
list. I didn't know I was on the layoff list to begin with and
he calls him and tells him I made the cut. And then I received
a letter from Mr. Perrone, dated August 15, saying that he had
this position on the East Coast for me that we had talked about
previously and that I should contact him and come back and
we'll talk about travel allowances and living allowances and
what have you. And by that time it was obvious that I was not
going to be laid off. And I was advised not to go back to the
company until this investigation had been resolved because Mr.
Gorton had advised me in his letter to me that they were
investigating the allegations in my letter and until we heard
from that I didn't want to go back to the company and be
accused of any complicity with what was going on in the
company.
So eventually I got the letter that I was terminated.
Mr. Whitfield. Okay, I yield back the balance of my time.
Mr. Greenwood. The Chair thanks the gentleman and in fact,
eventually 9,000 or 10,000 people were terminated from that
company. Average American investors lost $54 billion because of
this falsification in large measure and Mr. Winnick walked away
with what a half a billion dollars, $700 million?
The Chair recognizes the gentleman from Michigan, Mr.
Stupak for 10 minutes.
Mr. Stupak. Thank you, Mr. Chairman. Mr. Olofson, I was
looking at your testimony here. I'd like to ask you a question
or two on it if I may. On the bottom of page 2 you said you had
substantial assistance from Arthur Andersen and in particular
its partner, Joseph Perrone, with whom you worked closely with
on many issues. Did Arthur Andersen just do auditing or did
they do financial advising? Did they do both of them?
Mr. Olofson. Arthur Andersen were the auditors for Global
Crossing.
Mr. Stupak. They didn't do any financial consulting or
advising to Global Crossing?
Mr. Olofson. Oh yeah, there was a lot of consulting work
done. I think from a systems perspective on the financial side
I don't recall any specific projects, but there was that.
Mr. Stupak. Did you also mention in your testimony that
they did pre-issue reviews?
Mr. Olofson. Pre-issue reviews?
Mr. Stupak. Yes, Arthur Andersen helped with the pre-issue
reviews?
Mr. Olofson. Yes.
Mr. Stupak. What are pre-issue reviews?
Mr. Olofson. Well, I assume by the definition that it would
be a review that they would make prior to a public offering.
Mr. Stupak. They would review the financial stability of a
company before an offering? Is that correct?
Mr. Olofson. I don't know if financial stability is the
right term, but I think----
Mr. Stupak. When they pre-review your financial
statements----
Mr. Olofson. Yes, I thought they would review the financial
statements, sure.
Mr. Stupak. So----
Mr. Olofson. It could also have occurred, and I don't know
the context that you're speaking of, but it could also have
occurred in terms of a merger or acquisition.
Mr. Stupak. Sure. But the pre-issue being stock, a public
offering?
Mr. Olofson. I know that they reviewed the documents and
worked long hours for every one of the offerings that we made.
Mr. Stupak. Did you help with these pre-issue reviews at
all?
Mr. Olofson. Did I help?
Mr. Stupak. Yes.
Mr. Olofson. Yes.
Mr. Stupak. The financial statements, did you help on those
financial statements?
Mr. Olofson. Yes.
Mr. Stupak. Are you familiar with the 1995 Private Security
Litigation Reform Act?
Mr. Olofson. No sir.
Mr. Stupak. Also, on page 3, and you talked a little bit
about the swaps and you talked about the telephone conferences
in which there were swaps and--or you believe there were swaps
and that Global's CEO, Tom Casey, unequivocally stated there
were no swaps in the quarter and that earlier you had heard the
same thing on another telephone conference.
Why was that important that the analysts would ask that
question? Why would that be important to the analysts to know
whether or not there were swaps?
Mr. Olofson. I think that these transactions became so
material in the first and second quarter of 2001 that some of
the financial analysts were starting to question what this was
all about and I think, I don't recall the analysts or the
investment banking firms, but I do recall seeing some of their
reports raising this question of exchanges of capacity and
something we'll have to follow up on with the company.
Mr. Stupak. Okay. You go on to state on page 5 that you
told Mr. Perrone that, and I'm quoting, ``I disagree with his
interpretation''--this is on the swaps--``and I also told him
that additional language was vague and that the analysts and
investors would not understand the ramifications of the brief
mention of purchase commitments.''
I've seen throughout some of the documents the word
``inventive wording''. Is this inventive wording? Used terms
and descriptions which would confuse analysts and others,
financial analysts and others?
Mr. Olofson. Well, I mean it was pretty vague.
Mr. Stupak. It's pretty vague and we're telling analysts
that there are no swaps. Then we have vague language trying to
clarify. What's the purpose of doing that in your opinion?
Mr. Olofson. In my opinion, I mean obviously, I don't know
who wrote it or why. Perrone indicated to me that he put it in
there, so I assume it's his words, but I assume it's to at
least--if anybody challenges these transactions that the
company could say that it was disclosed.
Mr. Stupak. So we can be vague and we can use creative
words and we can deny swaps and we can always say it was in
their vague language, once again mislead the investor, the
public, right?
Mr. Olofson. That's a pretty fine line.
Mr. Stupak. And mislead the analysts who you rely upon to
offer your stock to the general public, correct? Not your
stock, but the company stock, correct?
Mr. Olofson. [No response.].
Mr. Stupak. I know you're shaking your head a little bit,
but I need to get an answer on the record.
Mr. Olofson. Would you repeat the question?
Mr. Stupak. Sure. The vagueness that you give to the
analysts in denying the swaps, that's to keep the analysts,
financial analysts to continue to offer the stock for public
consumption, to keep the stock prices up and the company going.
Mr. Olofson. The vagueness wasn't necessarily given just to
the analysts. It was included in the press release and I think
probably in the 10Q. The analysts can pick it up from there,
certainly.
Mr. Stupak. Sure. And whether it's truthful or accurate,
that was neither here nor there, as long as the company stock
was still being sold to the public and keep the price up?
Mr. Olofson. I think that was probably a very strong
motivation.
Mr. Stupak. Sure. And under the Private Securities
Litigation Reform Act of 1995, as long as we put a disclaimer
on the front, we're no longer legally actionable by the
shareholders. They can't do anything. I need an answer. I know
you're shaking your head, agreeing with me.
Mr. Olofson. I didn't realize it was a question. I thought
you were making a statement.
Mr. Stupak. Do you feel qualified to answer?
Mr. Olofson. I'm not familiar with that legislation you're
talking about, but----
Mr. Whitfield [presiding].
Mr. Stupak. Okay, all right. Ms. Szeliga, I'm sorry, I
murdered your last name. Would you say it for me?
Ms. Szeliga. Szeliga.
Mr. Stupak. In your testimony, in review of your testimony,
it indicates that on the swaps, Global Crossing reported the
amount of the revenue received as GAAP revenue, gradually over
the life of the contract, a distinctly more conservative
approach than one taken by Qwest. Why would Qwest take a
different approach than Global Crossing on how they did these
swaps, how they reported them?
Ms. Szeliga. I don't know why there was a difference. I
believed when we were booking those and I believe now, that we
were doing our best to follow the technical literature that was
out there and booking them through our books and records to
reflect the transaction that we were doing. So I can't really
speak to why there was a difference of interpretation or how it
was different.
Mr. Stupak. Well, your auditor was Arthur Andersen, right?
Ms. Szeliga. That is correct.
Mr. Stupak. That's the same for Global Crossing, correct?
Ms. Szeliga. That is correct, I believe they stated their
auditors were Arthur Andersen, today yes.
Mr. Stupak. So this technical advice you got, you're saying
Arthur Andersen gave you two different interpretations for the
same transactions between these companies?
Ms. Szeliga. I can't speak to how they accounted for their
transactions that they did with us. I can speak to how we
accounted for it and how we attempted to follow Arthur
Andersen's guidance and interpret the technical guidance that
was available to us.
Mr. Stupak. The technical guidance, where was that received
from?
Ms. Szeliga. Well, our technical accounting team, under the
controllership would use the FASBs, APBs and other
pronouncements that were issued from the FASBs as well as staff
accounting bulletins and such, including EITFs which are
merging issues, task force types of guidance. They would come
to the auditors and seek guidance and advice as to how to be
sure they were applying them appropriately. In a particular
situation of the IRUs, we used the Arthur Andersen white paper
fairly extensively to guide us in how to book those.
Mr. Stupak. All right, yet we have two companies, same
transaction, covering it differently.
Let me go to Tab 83, the one that Ms. DeGette was asking
you about, the memo there to the Audit Committee of the Board
of Directors.
It says in this that you are going to--``Mr. Iwan stated
that Andersen agreed with Ms. Szeliga's view of the same'' and
you informed the committee that you had discussed the matter
with the chairman and CEO and your assessment of the matters
and the reasons were the same and therefore they were
comfortable with your assessment and nothing had to be done. Is
that basically a good summary?
Ms. Szeliga. It's a fair summary.
Mr. Stupak. What was the value of this issue here, this
swap here that you're concerned about?
Ms. Szeliga. I don't recall the dollar amount. It was low
single digits as a percentage of our revenue.
Mr. Stupak. Right, it's about $109 million?
Ms. Szeliga. I'm not sure, I'd have to look to be sure.
Mr. Stupak. Do you have something there you could look to
see what the value of that is? Anything that you have in front
of you that could help refresh your memory?
Ms. Szeliga. I don't know, let me take a----
Mr. Stupak. Sure, take a look at your notes or whatever you
have.
Ms. Szeliga. I believe that the detail that I have here
shows the fourth quarter transaction as 109.
Mr. Stupak. Okay, 109. And you didn't need to take any
action with respect to accounting or financial reporting of
those transactions, that was your conclusion?
Ms. Szeliga. The conclusion was based on materiality
analysis that I did with my controller and talked to Arthur
Andersen about and talked to the Audit Committee about.
Mr. Stupak. Sure, but wouldn't you at least have to restate
your earnings for that quarter or something with $109 million
that's not there?
Ms. Szeliga. It was my belief and understanding with the
support of our auditors that because it was immaterial that we
did not need to book an adjusting journal entry to restate our
financial statements.
Mr. Stupak. And that's within the accepted general
principles of accounting?
Ms. Szeliga. Yes sir, I believe it is.
Mr. Stupak. All right, and you're not required to report
that to the SEC or anyone like that?
Ms. Szeliga. To the extent that something is deemed
immaterial to the reader of the financial statement, I don't
know of any specific reporting requirements that I had
overlooked.
Mr. Stupak. You've since restated that $109 million,
correct? The company has?
Ms. Szeliga. I can't speak to the restatement. I've not
been involved in the calculation of the numbers that were
reported in the press release.
Mr. Stupak. Okay. All right. Mr. Joggerst?
Mr. Joggerst. Yes.
Mr. Stupak. The chairman asked you a question about and he
asked you a little bit about these transactions and you felt
that they would all----
Mr. Whitfield. Excuse me, you're about almost 2 minutes
over and if you could finish up here and let us give Mr.
Stearns of Florida an opportunity and then we'll talk about a
second round. Is that okay with you?
Mr. Stupak. Sure. Let me just ask this one question.
Mr. Whitfield. All right, go ahead.
Mr. Stupak. The chairman had asked you about the--some of
the transactions, and you said all the transactions you were
involved in you felt that they would have been a benefit for
Global Crossing. And then you were asked a little bit about the
360 transaction there. And then a few months later they went
bankrupt. I think that was like the 360, you objected to it. So
you were really familiar with that one, right?
Mr. Joggerst. I'm familiar with the 360 deal, correct.
Mr. Stupak. And how was that going to benefit the company
when you had just recommended it not be approved?
Mr. Joggerst. What my comment was was their business
purpose, did Global Crossing at that time have a forecaster
requirement for transatlantic capacity----
Mr. Stupak. Right, and you told Global Crossing it should
not enter into this one. They're on shaky, financial grounds
and it was not a good deal.
Mr. Joggerst. However, yes, there were some strong concerns
from myself and the entire team whether we should do this
transaction at that time.
Mr. Stupak. Did you have any strong concerns then?
Mr. Whitfield. Mr. Stupak, if you could bring this to
conclusion.
Mr. Stupak. This is the last question. Did you have any
strong concerns then after you were told to get off the phone
and then they went ahead and made the transaction, $150 million
cash was received and then about 60 to 90 days later, Mr.
Winnick cashes in $124 million worth of stock. Did you have any
concerns or strong reactions then?
Mr. Joggerst. I can't honestly say that I recall when he
made his stock transaction.
Mr. Whitfield. Okay, I recognize the gentleman from Florid
for 10 minutes.
Mr. Stearns. Thank you, Mr. Chairman, and Ms. Szeliga, let
me just ask you some easy questions. What is your educational
background? It's easy to talk about yourself, I'll give you a
breather here. I mean you were the CFO, correct, at one time?
Ms. Szeliga. I was the CFO of Qwest from April 2001 until
the very beginning of July 2002.
Mr. Stearns. Can you just tell me your educational
background? I'm sure the resume is in here, if you just bear
with me, just tell me you have a bachelor's?
Ms. Szeliga. I do.
Mr. Stearns. And what is that in?
Ms. Szeliga. Accounting.
Mr. Stearns. And do you have any advance degrees?
Ms. Szeliga. I do not.
Mr. Stearns. Okay. So you're not a lawyer.
Ms. Szeliga. No sir, I am not.
Mr. Stearns. You probably wish you were now. Having been
through these hearings and also chairing what's called Commerce
Consumer Protection and Trade, I have oversight over FASB which
is the Financial Accounting Standards Board. And we've had
hearings and some of the things have come up in addition to the
special purpose entities which Enron used to hide debt.
Revenue recognition. And the areas I'm going to talk to you
about is dealing with Qwest's revenue recognition and see if I
can understand what your policy was and particularly dealing
with Cable and Wireless which is, as I understand, is a company
in England that you dealt with.
If you can just briefly tell me how Cable and Wireless of
England and Qwest interfaced, because I have here some of the
agreements that you had where you recognize, for example, on
December 28, 2000, $109 million of revenue with Cable and
Wireless.
Is it possible to tell me in just broad terms how you
recognize revenue with Cable and Wireless? Would you have a
written agreement with them and would you buy their ports? Can
you just take me through that a little bit? Do you understand
my question?
Ms. Szeliga. I do understand your question.
Mr. Stearns. Let me just, Qwest has the fiber optics is
coming to England and you've got to get to the consumers, so
you call Cable and Wireless and you say look, can we use your
services and your ports to get to the customers. Is that true?
Ms. Szeliga. I'm not a sales person, nor an engineer, but
we were buying capacity from Cable and Wireless as well as
selling capacity to Cable and Wireless to transport voice and
data services. That's my understanding of it, generally.
Mr. Stearns. So you would sit down with the CEO which I
guess was Nicholas Jeffries and did you ever deal with Nicholas
Jeffries yourself as CFO?
Ms. Szeliga. No, did not.
Mr. Stearns. Did you deal with anybody in Cable and
Wireless?
Ms. Szeliga. Not to my recollection.
Mr. Stearns. I have a memo here dated August 2, 2001 from
you to a group of individuals including Grant Graham, Mark
Shumacher, Bill Evliss and Afshin Mohebbi. Do you know those
people?
Ms. Szeliga. Yes, I do.
Mr. Stearns. And I have this memo here, August 2, 2001,
dealing with IRU accounting, some rules of engagement. Do you
want to see a copy of this memo?
Ms. Szeliga. I believe I have one here if you'll give me a
moment to find it.
Mr. Stearns. Sure. It's number 39 in our notebook.
Ms. Szeliga. I've located it.
Mr. Stearns. And IRU is indefeasible rights of use, so
you're talking in this memo, as you say, the rules of
engagement, when we sit down with companies, Cable and
Wireless, these are the things we should do. Is that correct in
this memo?
Ms. Szeliga. It was not an attempt to outline everything,
but to deal with some specific issues. I believe we were trying
to document in writing some of our procedures.
Mr. Stearns. Okay, you had indicated just moments earlier
that you did not ever deal with Nicholas Jeffries yourself?
Ms. Szeliga. I don't ever recall ever dealing with him.
Mr. Stearns. Now Nicholas Jefferies when he sat down to
work out these IRUs, agreements, for buying the ports and
everything, who would he deal with if he wouldn't deal with the
CFO which is the Chief Financial Accounting Officer. Who would
he deal with?
Ms. Szeliga. I believe that the representatives from Cable
and Wireless who were purchasing service with us dealt
primarily with our sales organization.
Mr. Stearns. So you had no interface with Cable and
Wireless yourself?
Ms. Szeliga. I have no recollection of ever having a direct
interface with Cable and Wireless personnel.
Mr. Stearns. When the sales people signed an agreement with
Cable and Wireless would you review that?
Ms. Szeliga. I would not review it directly, but there was
a procedure in place wherein people within my organization were
to be given time to look at the contracts that were being
signed with any customer, given it was a large contract of this
nature.
Mr. Stearns. In this memo that you wrote, you said on page
2, ``in addition to the foregoing, there will be no side
letters or verbal commitments outside of the IRU, agreement
that conflicts with the contractual upgrade language or
specifically indicate that an upgrade will be agreed to.''
Right, that's what you said. So let's say that your sales
people sat down with Cable and Wireless and we said okay, we
have this agreement. We want to use your ports, but we also
want to change this port. We can't have a fixed agreement for
one port because we might have to change it. From your
standpoint if you have a very flexible contract that allows
them to change ports, that is Cable and Wireless, could you
book that easily as revenue or not?
Ms. Szeliga. It was our policy that we had----
Mr. Stearns. Could you pull the mike us just a little bit
closer to you?
Ms. Szeliga. Is that better? It was our policy that we
were--had to be able to clearly indicate that we had
transferred the title to an asset before we recognized the
revenue up front.
Mr. Stearns. Right.
Ms. Szeliga. To the extent that we didn't identify routes,
I don't know how we could have recognized the assets.
Mr. Stearns. I think you just made an absolutely accurate
statement. And I wish I could have said it as well, but you
cannot accurately book revenue if you don't have a contract
that identifies the ports that you're using.
Ms. Szeliga. That was our policy.
Mr. Stearns. Do you recollect ever having verbal agreements
with Cable and Wireless?
Ms. Szeliga. I do not recollect ever having spoken with
Cable and Wireless myself, as I referred to earlier. I saw a
letter and an e-mail that were outside of the contract we had
reviewed when we, Finance, reviewed the contract with Cable and
Wireless.
Mr. Stearns. So you're saying today that if there was an
agreement that did not identify the ports, you would not, your
company would not book the revenue?
Ms. Szeliga. Our policy was that we needed to identify an
asset and transfer title to the asset, as one of many different
elements to be able to recognize the revenue.
Mr. Stearns. Okay, so you know, I've got here Cable and
Wireless contract amendment 3, December 28, 2000; the contract
amount was $109 million and you recognize it as roughly
$108,739,000 million, roughly the same amount.
So that contract was a contract that you could identify all
the ports and everybody had a full understanding of what they
were doing and there were no verbal agreements?
Ms. Szeliga. I can't speak to that----
Mr. Stearns. But philosophically that's what you're saying?
Ms. Szeliga. Philosophically, the contract should have
identified the assets that we were selling specifically.
Mr. Stearns. Would you be surprised if Nicholas Jefferies,
we asked him to be a witness and he didn't want to be a
witness, so he made out an affidavit. And he made it out
September 24, today.
Would you be surprised that he can actually identify
documents where you made verbal agreements? In fact, he can
give you an e-mail from the person you wrote this memo to. This
memo you wrote saying no, IRU accounting, please. And you wrote
it to Afshin Mohebbi and he's got an e-mail from him that would
indicate that he had verbal agreement. He's got another second
document, this is now Nicholas Jefferies saying in an
affidavit, swear under oath, that Qwest did not follow your
memo and in fact, the people you addressed it to were taking
oral agreements and the second document is a letter from
Gregory M. Casey of Qwest to Mr. Coe and so he's saying that
you went ahead and used oral agreements, contrary to what your
memo said and he's implying in this that you booked the revenue
on something which you did not have an accurate understanding
of the ports and that goes to what I started--my time is coming
out here, is that a lot of corporations, not just Qwest went
ahead and booked a lot of stuff that they shouldn't have.
So I'll be glad to let you look at this affidavit, but this
is basically the CEO, Nicholas Jefferies saying that Qwest took
oral agreements and appears they booked these as revenue which,
in your own words now, you just said, is not correct.
Ms. Szeliga. I believe that I said that our policy was we
needed to identify the assets we were selling.
Mr. Stearns. Say that again, I'm sorry, I was just
distracted. Go ahead, I'm sorry.
Ms. Szeliga. I believe that I said it was our policy that
we needed to specifically identify the assets we were selling
in order----
Mr. Stearns. Oh no, I agree with you. I think you did
right. I'm just telling you some of your people didn't do that
and somehow, and I'm not making any statement here other than
it appears the evidence would appear that your company is
booking revenue it should not have been booking, based upon
oral agreements in dispute of your own memo of August 2, 2001.
I think we can give you this affidavit, if someone on the staff
has it.
Ms. Szeliga. If I may make a couple of points of
clarification?
Mr. Stearns. Sure.
Ms. Szeliga. The August memo was intended to put in writing
some of the--what I thought were very important elements of our
policies and procedures and that was in August 2001 after
speaking with my controller.
Mr. Stearns. That's a good point.
Ms. Szeliga. Yes, and the deal had been done that we're
referring to, I believe, in the fourth quarter of 2000.
However, that was not a new policy. It was just a reiteration
of----
Mr. Stearns. Ah, it's an accounting policy that has history
and it's not something new and you're just trying to say to
these fellows, look, this is the law, this is the way it should
be done and obviously Qwest was not--your memo is really,
because Qwest wasn't following what they should be doing in
your mind?
Ms. Szeliga. In mind the memo was to make sure I continue
to communicate in responsible fashion and remind people what we
were supposed to be doing and how we were supposed to be
following our processes and our procedures because that's what
they were set up to do.
Mr. Stearns. This is a tough question for you. You might
now want to answer it.
But in your heart of hearts, didn't you know that there
were oral agreements being made before and you wrote this memo,
but before this memo was written, didn't you know in your heart
of hearts that oral agreements were being made and that you
were booking revenue based upon oral agreements where you
didn't identify the ports? Didn't you know that in your heart
of hearts?
Ms. Szeliga. I don't recall knowing that, no.
Mr. Stearns. You didn't have any suspect that this was
occurring?
Ms. Szeliga. I believe that my controller, after talking
with me, was concerned that people thought they might be able
to get around the rules by doing it, so we ought to
recommunicate to people and let them know that that was not
going to be acceptable to us.
Mr. Stearns. The CEO of Cable and Wireless knew, Nicholas
Jefferies, he knew. That's in his affidavit that he swore
today. So it seems like if he knew, somebody in the
organization should have known, including the CFO. And the way
he indicates, this is not something isolated.
Ms. Szeliga. May I take a moment to read this?
Mr. Stearns. I'm sorry, you should take time. So my time is
expired.
Mr. Greenwood [presiding].
Mr. Stearns. Can I ask you one last question? Why were you
removed as CFO?
Ms. Szeliga. Joseph Nacchio who was the CEO of our company,
exited the business and Dick Notebaert was hired as CEO. Mr.
Notebaert determined that he wanted his prior CFO from another
company that he worked at and whom he was very comfortable
working with, to work alongside him as his CFO. And at that
point, he communicated that to me.
Mr. Stearns. So it was an amiable separation in your mind?
Ms. Szeliga. I did not exit the business. I am still at
Qwest.
Mr. Stearns. You did what?
Ms. Szeliga. I did not exit the business. I'm still at
Qwest.
Mr. Stearns. I understand, but generally when you move from
3 Star or 3 Star General down to Full Colonel, there is a
reaction.
Ms. Szeliga. There was a reaction of disappointment.
Mr. Stearns. Disappointment, obviously.
Ms. Szeliga. Yes.
Mr. Stearns. Do you think it was fair for them to move you
from CFO down to Executive Vice President? I mean a lot of
people might not know the difference, but at least I do. Do you
feel it was fair?
Ms. Szeliga. I don't know that I thought of it as fair, but
I didn't think of it as surprising because I think lots of
times when CEOs come in to companies, they want to bring their
right and left hand with them in order to feel comfortable in
doing the tasks they're about to do.
Mr. Stearns. That makes sense.
Ms. Szeliga. So I explained to Mr. Notebaert that I
understood it as a common business practice to do that. And we
understood each other.
Mr. Stearns. The old President is still there, though,
isn't he?
Ms. Szeliga. Afshin Mohebbi is still President and COO of
our company.
Mr. Stearns. It would seem like he would want to keep you.
Ms. Szeliga. Who would want to keep me, sir?
Mr. Stearns. Mr. Notebaert.
Ms. Szeliga. Mr. Notebaert asked me to stay at the company
and I agreed to take over----
Mr. Stearns. Wouldn't he want to keep you still as the CFO
because he's the top guy?
Ms. Szeliga. Well, it seems reasonable to me that he would
want somebody he knows.
Mr. Stearns. Who knows the history and knows where
everything is in the closets and everything in terms of how do
we find something?
Ms. Szeliga. That's not what I've been asked to stay and do
and I've agreed to stay and do. I have not been involved in
accounting or that element of finance since I was removed as
CFO. I'm currently in charge of real estate and procurement for
the company.
Mr. Stearns. Mr. Chairman, thank you.
Mr. Greenwood. The Chair thanks the gentleman. The Chair
would announce that we're going to do a second round of
questions. It may not take, every member may or may not want to
take the full 10 minutes, but if they do, it could be another
hour. So first off, I want to ask the witnesses on our first
panel, would any of you like a couple minute break?
Okay, we will take a 5-minute break and then I would also
notify the second panel that if you haven't had lunch yet, and
you'd like to have lunch before your ordeal begins, you may
want to take that opportunity because you will have time to do
it. There are restaurants or snack bars in this building.
So we will reconvene in approximately 5 minutes.
[Brief recess.]
Mr. Greenwood. The meeting will come to order. Can someone
pull that door closed in the back, please?
The Chair recognizes himself for 5 minutes and we'll
confine this panel to 5-minute periods of questioning.
Let me return to you, Mr. Joggerst, and I don't mean to
have been too harsh on you earlier in my questions, but it is
important for us to understand who knew about what and when.
You've made it clear in your testimony that you felt that the
transactions in which you were involved were transactions that
was acquiring capacity that while not necessarily justified at
the time, would be justified in the future.
You also made it clear that you knew at the time that Mr.
Fitzpatrick was of the view, at least Mr. Fitzpatrick was of
the view that the company was acquiring capacity for which
there was no ostensible need, except for the matter in which it
enabled the company to book revenues, correct?
Mr. Joggerst. That's correct.
Mr. Greenwood. Now I would like for you to share with us
your knowledge about who else in the company, going vertically
upwards, do you believe was aware of these transactions were
occurring not for purposes of needed capacity, but just to book
the revenues to make the world believe the company was doing
better than it was. Was Mr. Winnick aware about this?
Mr. Joggerst. Mr. Winnick was definitely aware of
reciprocal transactions and for example, he had to approve our
sending money to 360 Network. That's one example.
Mr. Greenwood. Let's be clear about my question. Of course,
he was aware of reciprocal transactions.
The question that I'm asking you was do you have knowledge
that Mr. Winnick was aware that certain of these swaps were
being conducted, as we've illustrated in so many of these
documents today, strictly for the purpose of enabling the
company to book revenues when, in fact, the capacity wasn't
needed and when, in fact, it was a bad business decision to go
ahead and acquire that capacity.
Did Mr. Winnick know that?
Mr. Joggerst. It's my belief that both Tom Casey and Gary
Winnick both were aware that there was a significant amount of
consternation in the company where people were questioning
whether we would ultimately need the capacity. I do believe
they would know that.
Mr. Greenwood. So is this a fair statement, is it a fair
statement to say that Mr. Casey and Mr. Winnick were fully
aware of the fact that Global Crossing was engaging in a series
of transactions that involved acquisitions of capacity for
which there was no business purpose and strictly done for the
purpose of achieving revenues to meet their quarterly numbers.
Is that a fair statement?
Mr. Joggerst. I would--I think it's a fair statement with
the exception of just weighing with absolutely no business
purpose.
I can tell you that on the conference call that we had with
the Executive Committee that included Mr. Winnick and Mr.
Casey, that one of them and I can't recall who specifically,
but one of them did say that if we don't do this deal, we won't
make our quarterly numbers. So again, i mentioned there was a
need, there was an understanding, a thought that we needed a
trans-Atlantic----
Mr. Greenwood. For instance, you said you agreed with my
statement except for the portion where there was no--I'd be
happy to go through a whole bunch of more e-mails with you
where Mr. Fitzpatrick was screaming bloody murder that these
deals were not only not important in terms of acquisition of
capacity, were being done just to meet the numbers and in fact
were bad business, bad business. Right?
You don't believe that Mr. Casey and Mr. Winnick understood
that to be the reality? Was Mr. Fitzpatrick not communicating
that information up the chain?
Mr. Joggerst. It's my belief that Brian would have fed that
up the chain of command, that's correct.
Mr. Greenwood. So let's get it straight here, Mr. Winnick,
the CEO of the company walked away with $700 million while
American investors lost $54 billion. Mr. Winnick knew what the
game was and the game was we've got to meet these quarterly
numbers. We don't need this capacity in Helsinki or anywhere
else, these specific cases that I've talked about, but we're
going to do this even though it's in the long range bad
business for the company, we're going to do this so we can have
revenues generated and booked to make the investors believe
that the company is doing better than it really is.
Is that a fair statement or not?
Mr. Joggerst. It's my belief that Mr. Casey and Mr. Winnick
were definitely aware of those deals, yes.
Mr. Greenwood. That's not what I asked you. They're aware
of the deals. Were they aware of the fact--were they aware of
the nature of the deals? Not just that we bought some capacity
here and we sold some capacity here. Were they aware of the
fact that these deals--how could they not be aware that the
fact that these deals were being done strictly to meet the
numbers and in complete disregard to the need to actually get
the capacity? How could they not be aware of that? Weren't they
aware in negotiating some of these deals?
Mr. Joggerst. Mr. Casey was involved in discussing the deal
for 360 Network's deal directly with Greg McFaye, so there was
a level of personal involvement.
In terms of Mr. Winnick getting personally involved in
negotiating deals with customers, I can't recall.
Mr. Greenwood. Were there conference calls in which this
information was made clear and Mr. Winnick was participating in
those conference calls and Mr. Casey?
Mr. Joggerst. Absolutely.
Mr. Greenwood. So they knew.
Mr. Joggerst. Absolutely.
Mr. Greenwood. Okay, thank you. Ms. Szeliga, earlier Ms.
DeGette asked you about the C&W cite e-mail sent by Afshin
Mohebbi. She asked you what Mohebbi told you about who sent the
e-mail and you said you could not recall. Is that correct?
Ms. Szeliga. That's correct.
Mr. Greenwood. But isn't it the case that during your
interview with the committee staff, you said that Mohebbi told
you that he had Ken Smiley send it out?
Ms. Szeliga. I said I believe that it could have been Ken
Smiley. I don't recall specifically, but I think I told the
staff that it could have been. I don't recall specifically, but
I did bring up Ken Smiley's name because I generally recall
that he may have mentioned it or mentioned her or a number of
other people who were involved in conversations with him around
that.
Mr. Greenwood. Okay, so your testimony today is that you're
not really certain he said that?
Ms. Szeliga. I'm not certain.
Mr. Greenwood. Mr. Anschutz, what is your understanding--I
want to ask you the same kind of question I asked Mr. Joggerst
about Mr. Anschutz. Did he know that, in fact, the company was
entering into these transactions simply to meet the numbers
when, in fact, it was not a valid business basis for the
capacity?
Ms. Szeliga. I believe that Mr. Anshutz believed, based on
discussions he had with the senior management of the company
that there was a valid business purpose for the transactions. I
heard in board meetings that comment being made. And therefore,
I don't have any reason to believe that he doubted the comment
or otherwise.
Mr. Greenwood. Mr. Deutsch is recognized for 5 minutes.
Mr. Deutsch. We could probably go for 14 rounds. We have an
excellent staff who really spent more time than any of us
individually, I think, on this.
But I want to ask a general question and have each of you
respond because I think this is more of a global concern. We
could debate back and forth these transactions. But I think we
know the result of them in terms of their revenue stream in the
company and how the market looked at them. I guess a concern I
have is which other companies are doing this? Obviously, in the
telecom area, no other companies are doing it right now, but it
would seem as if you could do swaps in almost any business, if
you wanted to. And I guess a concern from the, I think from the
committee perspective is really the devastation from not just
on a personal basis which we can elaborate and talk about
millions of individuals in America today, I mean literal
devastation in terms of their personal lives, untold stories
and the size. That really from a macro basis, in terms of our
economy structurally, I mean in a sense what's happened through
the companies that you either work for or worked for, the
transparency in the markets have really been destroyed. And
what else is out there? It's not just these companies, but it's
a series of companies over the last 12 months that really, you
know, the devastation to our economy is on par, not quite, but
getting there of the Great Depression, and I think that if you
can respond, if you were not with this company, would you look
at those transactions the same way, that this is just a--if it
wasn't illegal or improper and I think what each of you have
said, I think this is different than our committee hearing with
Enron where I think the Enron activity under the microscope to
me is clearly illegal. I would not quite say that about this
because I think there's a real question. I think it should not
be allowed, but whether it was a gray area where you were able
to get inside that gray area which, in a sense, I mean pushing
the envelope consistently and I guess my concern is not just
what's happened, but what might be out there.
Ms. Szeliga, if you were a CFO of another company and that
type of transaction, a similar--it wouldn't obviously be with
fiber optics, but a swap situation, how would you respond today
if you were a CFO at a different company today, a widget
company for that matter, doing swaps of factories or doing
swaps of trucks as an example?
Ms. Szeliga. I would generally say I think the exchange of
goods and services ought to be examined to determine if it's
providing economic benefit and if it, to the companies engaged
and the economic benefit ought to be reflected appropriately in
the financial records because that's how we attempt to
communicate. So for my way of thinking it's not the swap of
goods and services that's problematic. It is really the
understanding that it is economically beneficial to the company
and have you reflected it appropriately in your financial
records or otherwise in order for it to be done correctly.
Mr. Deutsch. And who is the ultimate determiner of that? I
think that seems to be the area because I think Mr. Joggerst's
position still is that these were economically viable. I mean I
think we've gotten some of these statements, the Scandinavia
issue, with all due respect, I understand your position. It's
not a very strong position. You can keep arguing it from today
until tomorrow, but at some point you might be the only one who
believes it and you've done as good a job as you can
articulating it here today, but it's hard to see it pass the
straight face test even.
Mr. Joggerst. I think what makes it difficult is your 20-20
hindsight is perfect and when we were caught up in the
incredible growth and success of the company, where we were
expanding, we were announcing new systems on a record level. I
had been involved in under-sea fiber optics and cable since
1992, selling them to phone companies around the world and
never did I ever think that private equity and private capital
would be as attracted to that industry as it was. So yeah, I
was caught up in what was really this incredible growth swing
that really, I believed the articles that talked about the
insatiable demand for internet, that yes, the truly global
village was here and was here to stay and would require an
increased amount of bandwidth over and over and over again
beyond what all of the industry had invested so far.
Mr. Deutsch. What about the specific question that I'm
asking. I'm running out of time, but I'll take a little bit
extra since everyone else has at this point. If you were CEO,
CFO of a new company that's doing this, have you learned any
lessons in terms of really this whole concept of swaps and
really getting a true value in transparency? Because that's the
concern today.
I don't want to give a running account of the market, but
the Dow is down 130 right now. We, in terms of loss of capital,
I mean it really pales in comparison to the Great Depression,
in terms of absolute dollars that have occurred and I think
each of us really have a sense that people's lives, I'm not
talking about thousands of people who lost their jobs and their
life savings, but really tens of millions of Americans whose
lives are fundamentally different today than they were 12 years
ago about college education, about retirement, about real
things. America has changed. I mean for real. And a lot of it,
unfortunately, has to do with companies like yours and other
companies and hopefully, they'll come back, hopefully, there's
not--I don't believe there's a structural problem in our
economy. I think America is strong economically with the
strongest economy in the history of the world, but what has
happened, what's real today is this transparency which is
really the strength of our economy.
I hate using anecdotal stories, but I had friends over for
lunch over the weekend and a teenage girl, she was yelling at
her father for putting some money from her bat mitzvah into
stocks. I mean if we're at the point where we're ready to call
HHS and report her father for putting her bat mitza money in
stocks, I mean that's the transparency issue and what other
companies are out there? That's the point where we are today,
that we've got some very bright, very creative people who are
looking for the edge, but the edge not in terms of creating
more value in terms of business, but more value in terms of how
to get an edge in this.
I keep thinking to myself, did Warren Buffet invest in any
of these companies? Probably not.
Thank you, Mr. Chairman.
Mr. Greenwood. The Chair recognizes the gentlelady from
Colorado for 5 minutes.
Ms. DeGette. Thank you, Mr. Chairman. To finish my line of
questioning before, Ms. Szeliga, you had said that after you
found the transactions that you took to the Audit Committee in
October, you went back to see if there were any other side
agreements, right?
Ms. Szeliga. Yes, I did.
Ms. DeGette. In fact, you found about 15 of them as I
recall from what I've read, is that right?
Ms. Szeliga. I don't know where that number comes from, but
we put together a binder, fairly thick binder of amendments to
contracts, exhibit to contracts and if you might want to call
them side agreements and went through them with a great deal of
diligence and showed them to our auditors to determine if any
of them were inappropriate. By that, I mean unknown to the----
Ms. DeGette. How many were there?
Ms. Szeliga. A binder.
Ms. DeGette. Ten, fifteen?
Ms. Szeliga. I don't know. It was thick. They weren't bad
side agreements. They were actually amendments or addendums to
the contract that were reflected in the original contract.
Ms. DeGette. Did you ever find any other side agreements
that you thought were of concern? Yes or no.
Ms. Szeliga. Yes.
Ms. DeGette. How many?
Ms. Szeliga. I recall three specifically that come to mind
when we're talking about----
Ms. DeGette. When did you find those?
Ms. Szeliga. In the fall of 2001.
Ms. DeGette. In the fall of 2001, so right around this same
time as all the meeting of the Audit Committee and all was
happening, right?
Ms. Szeliga. Yes.
Ms. DeGette. Now what was the monetary total of those three
additional agreements?
Ms. Szeliga. I don't know.
Ms. DeGette. Was it in the millions of dollars?
Ms. Szeliga. It was.
Ms. DeGette. Was it in the hundreds of millions of dollars?
Ms. Szeliga. If you add the C&W transaction, I think we
were talking to, which was already over $100 million with that
individual transaction.
Ms. DeGette. Okay, but yet it was your business judgment
that that would not affect the bottom line either, those other
three agreements?
Ms. Szeliga. Actually, when we found them all, we had legal
look into them to determine if there was either an
inappropriateness in the way we booked them or something that
would cause us to go back and need to do that. And on the C&W
one, in particular, we determined that it was not binding to
the contract and therefore in the fourth quarter I didn't make
a journal entry to correct that.
Ms. DeGette. Okay, did you make journal entries to correct
any of them?
Ms. Szeliga. We did not restate under my tenure.
Ms. DeGette. And in fact, I think as you testified before,
that under generally accepted accounting principles, you can
only book the up front revenue if it's a legitimate business
transaction, right? That was the accounting rule before all
this happened. That's the accounting rule now, right?
Ms. Szeliga. The intention is to reflect legitimate
business transactions in the books and records of the company.
Ms. DeGette. And the way you found about all of these other
side agreements and oral agreements, you went down to your
division CFOs and found out about it, right?
Ms. Szeliga. We went through the contract records of the
company using internal legal assistants to go through those and
put those in a binder for review.
Ms. DeGette. Did the CFOs give you that information?
Ms. Szeliga. I'm not sure where they got the information.
Ms. DeGette. Let me ask you this, before the summer of
2001, the CFOs, divisional CFOs did not report directly to you
and you changed that so that they did report to you, right?
Ms. Szeliga. That's not quite correct.
Ms. DeGette. Okay, who did they report to before the summer
of 2001?
Ms. Szeliga. Different people at different times. We were
reorganizing.
Ms. DeGette. But they didn't report to you, did they?
Ms. Szeliga. Before I became CFO, some of them did.
Ms. DeGette. To that position?
Ms. Szeliga. They reported into my prior position, some of
them, not all of them.
Ms. DeGette. And these were the same--these were the ones
that had been alleged to make the side agreements, right?
Ms. Szeliga. No, Congresswoman, I don't believe----
Ms. DeGette. Who made the side agreements?
Ms. Szeliga. If we're going to talk about particular ones,
the C&W side agreements that we were referring to, one was a
letter from Mr. Casey as referred to by one of the other
Congressmen earlier, and one was an e-mail from Mr. Mohebbi as
we discussed earlier.
Ms. DeGette. And he was the COO?
Ms. Szeliga. That is correct.
Ms. DeGette. So did you ever fully ascertain how many of
these side agreements there were? You know about three, but was
that it?
Ms. Szeliga. We had a number of, I'll call them side
agreements, but they didn't appear to be inappropriate side
agreements, because they were known at the time of the contract
and were addended or attached as exhibits, so after we
completed the review, we felt pretty comfortable that this was
a limited universe, that we were looking at.
Ms. DeGette. So to what do you attribute the fact that
Qwest just recently had to restate $1.4 billion of its----
Ms. Szeliga. I'm not in a position to respond to that
because I have not been involved in their assertion as to why
they restated.
Ms. DeGette. You don't think it was because of these
accounting problems that happened back in 2000, 2001?
Ms. Szeliga. I'm sorry, I'm just not in a position to tell
you why they reached the conclusion that led to the issuance of
the press release on Sunday.
Ms. DeGette. Thank you.
Mr. Greenwood. The Chair thanks the gentlelady and the
Chair thanks each of you for your forbearance. You've been here
for 3\1/2\ hours. Mr. Joggerst, Mr. Olofson, Ms. Szeliga, we're
going to dismiss you now and excuse you now and thank you for
your testimony and for your candor.
TESTIMONY OF JACKIE ARMSTRONG, 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.; AND KENNETH F. FLOYD, DIRECTOR OF SALES IN
NORTH AMERICA, FLAG TELECOM
Mr. Greenwood. And I would call forth our second panel
consisting of Ms. Jackie Armstrong, Counsel at Global Crossing,
Ltd.; Ms. Robin Wright, the Former Vice President of Carrier
Sales at Global Crossing; Mr. Greg Casey, the Former Executive
Vice President of Wholesale Markets, Qwest Communications; Ms.
Susan Chase, Vice President of International Wholesale Markets,
Qwest Communications; Ms. Kym Smiley, former Director of
Strategic Negotiations for Qwest; and Mr. Ken Floyd, Director
of Sales in North America of FLGA Telecom.
Mr. Deutsch. Mr. Chairman, if we can just before they get
set up, there's been a number of either e-mails or memos that
have been mentioned by other members, including the chairman of
the full committee and others. If we can just make sure that we
get those as part of the record, I'd appreciate it.
Mr. Greenwood. The entire binder from whence all those
documents came will be part.
Mr. Deutsch. Our staff is telling us that some of those
were not in the binder.
Mr. Greenwood. We'll have the staff work that out and any
documents to which members referred to today will be part of
the record.
[Pause.]
Mr. Greenwood. We welcome all the panelists. We note the
absence of Mr. Floyd. We trust Mr. Floyd will be joining us and
will go through the administering of the oath should he return.
We welcome each of the panelists. I think all of you are
aware, most of you watched the first panel. You're aware that
this is an investigative committee and when we hold an
investigative hearing we take testimony under oath, so I would
ask if any of you have objections to providing your testimony
under oath?
Okay. I also tell you pursuant to the rules of the
committee and pursuant to the rules of the House, you are
entitled to be represented by counsel and so I would ask if any
of you are represented by counsel and we'll start with you, Ms.
Armstrong, are you represented by counsel this morning, this
afternoon? And could you identify your attorney, please, and
also if you will push your button. Thank you.
Ms. Armstrong. Jeffrey Canard and Ralph Ferrara.
Mr. Greenwood. Okay, we welcome you, sir. Ms. Wright?
Ms. Wright. Yes, I'm represented by counsel, Jeffrey Canard
and Ralph Ferrara.
Mr. Greenwood. All right, very well. Mr. Casey, are you
represented by an attorney?
Mr. Casey. Yes, Mr. Chairman, I'm represented by Michael
Trager of Fullbright and Jaworski.
Mr. Greenwood. Very well. Ms. Chase, are you represented by
counsel?
Ms. Chase. Yes, Mr. Greenwood. I am represented by Ty Cobb.
Mr. Greenwood. Okay, Mr. Ty Cobb. And Ms. Smiley?
Ms. Smiley. Yes. I'm also represented by Ty Cobb.
Mr. Greenwood. Very well. If you will stand and raise your
right hand, I'll swear you in.
[Witnesses sworn.]
Mr. Greenwood. You are under oath. I would ask if any of
you have an opening statement to make? None of you has an
opening statement to make, very well. The Chair will recognize
himself for the purpose of questioning and I will begin with
Mr. Casey, a Qwest former Executive Vice President for
Wholesale Markets who is here with us today under subpoena.
Mr. Casey has refused to be interviewed by committee staff
and it is my understanding that upon advice of counsel, Mr.
Casey likely will rely on his constitutional right not to
testify at today's hearing. I believe that this privilege
should be personally exercised before the members as we have
done in the past and that is why we requested Mr. Casey's
appearance today.
It is my hope that given the importance of his testimony to
our investigation, he will reconsider his decision to invoke
his Fifth Amendment rights and will answer the subcommittee's
questions today.
Mr. Casey, let me ask you, did you or your employees
provide written side or oral agreements that would permit the
purchase of Qwest capacity to trade in or upgrade that capacity
subject only to availability, contrary to what the written
contract provided for and with the intent of deceiving Qwest's
auditors and investors so that Qwest could book the revenue all
at once and meet its quarterly revenue targets?
Mr. Casey?
Mr. Casey. Mr. Chairman, ranking member, members of the
subcommittee, I recognize and respect the important
responsibilities of the subcommittee and I would like to answer
your question today.
While that was my strong preference, upon advice of
counsel, I am invoking my rights under the Fifth Amendment of
the Constitution and as such I respectfully decline to provide
testimony or to answer your questions today.
Mr. Greenwood. So you will invoke your Fifth Amendment
rights in response to all questions here today?
Mr. Casey. Yes, Mr. Chairman.
Mr. Greenwood. You are certainly entitled to do that and
you are excused from the witness table at this time, but I
advise you that you remain, subject to the process of the
committee and if the committee's need is such, then we may
recall you.
The Chair ask unanimous consent that I may continue with an
additional 5 minutes to question the remaining witnesses on the
panel and without objection, I will do so except that I see
that Mr. Floyd has arrived.
Welcome, sir. Mr. Floyd, let me advise you as I have
advised the other members of this panel and ask you to pull
that microphone, stand right up in front of you and make sure
the button is on. You're aware, I believe that we're holding an
investigative hearing and that when we do that, we take
testimony under oath. Do you have objection to giving your
testimony under oath?
Mr. Floyd. No, I don't.
Mr. Greenwood. Okay, then I would also let you know that
pursuant to the rules of this committee and the rules of the
House, you are entitled to be represented by counsel. Do you
wish to be represented by counsel today?
Mr. Floyd. Yes, I do.
Mr. Greenwood. Would you then identify by name the attorney
who will represent you?
Mr. Floyd. Mr. Michael Flannigan and Ms. Veronica Pastore.
Mr. Greenwood. Okay, then I'm going to need to ask you to
stand and raise your right hand.
[Witness was sworn.]
Mr. Greenwood. You are under oath, Mr. Floyd. Did you have
an opening statement that you wish to make?
TESTIMONY OF KENNETH F. FLOYD
Mr. Floyd. Very simply, my name is Ken Floyd. I've been
working with FLAG Telecom, U.S.A., Ltd. as director of sales
for North America. I've been working there since February 1999.
Before joining FLAG, I worked for more than 7 years in a
wholesale carrier function at RCI Long Distance which had been
Frontier Communications, now Global Crossing out of Rochester,
New York. My primary function was the international business
relationships.
I do appreciate the opportunity to participate in this
forum and I am happy to cooperate and answer any questions that
this committee might have.
[The prepared statement of Kenneth F. Floyd follows:]
Prepared Statement of Kenneth F. Floyd, Director of Sales, North
America, FLAG Telecom
My name is Kenneth (Ken) F. Floyd and I have been working with FLAG
Telecom USA Limited as Director of Sales, North America since February,
1999. Before joining FLAG, I worked for more than seven years in the
wholesale carrier sales function at RCI Long Distance/Frontier
Communications in Rochester, New York, with a primary focus on
international business relationships.
I appreciate the opportunity to participate in this forum and I am
happy to cooperate and answer any questions that the Committee members
might have.
Mr. Greenwood. Thank you, Mr. Floyd. The Chair will correct
himself. I will recognize myself for 10 minutes for questioning
and each of the members will have 10 minutes as well.
Let me turn to Ms. Smiley. How are you this afternoon?
Ms. Smiley. I'm fine, thank you.
Mr. Greenwood. Good. Were you involved in drafting the side
letter in the side agreement that's been referred to earlier
today?
Ms. Smiley. The side letter for which----
Mr. Greenwood. Let me ask that question a little bit
better.
Are you aware--this is the C&W side agreement. Were you
involved in drafting that side agreement?
Ms. Smiley. During the fourth quarter of 2000, yes.
Mr. Greenwood. Who else was involved in drafting these
agreements?
Ms. Smiley. Roger Hoaglund, Greg Casey, and some members
from Cable and Wireless, I believe, Alan Coe.
Mr. Greenwood. It is our understanding that Qwest cannot
determine who sent the Mohebbi e-mail out. We understand that
Mohebbi cannot recall if he did so. Did you send the e-mail out
to C&W?
Ms. Smiley. No, I did not.
Mr. Greenwood. Would you look at Tab 75, please?
Do you have that document?
Ms. Smiley. Yes, I do.
Mr. Greenwood. It shows that at 3:38 p.m. on December 29,
you learned that Mohebbi's assistant was not in the office to
send the e-mail out and we have been told by Mohebbi that he
also was not in the office that day. Did you contact Mohebbi
after you learned that his assistant was not in the office?
Ms. Smiley. No, I did not. I did not have direct contact
with Afshin Mohebbi.
Mr. Greenwood. Did you have indirect contact with him?
Ms. Smiley. Other than sending the e-mail? I sent the e-
mail to both Mr. Mohebbi and his assistant and called her
subsequent to find out to say here it is, please make sure it
goes out and if you have any questions, contact Greg Casey. And
that's basically what I'm saying in this e-mail. After I found
out that she was not in the office, she meaning Mr. Mohebbi's
assistant, I let Mr. Casey know that and that was the end of my
participation in this.
Mr. Greenwood. But with regard to Mr. Casey, how did you
inform him?
Ms. Smiley. This e-mail shows that I said I just tried to
call Pam and she's out until January 3. I may have also called
him on the telephone, but I can't remember.
Mr. Greenwood. You don't remember, recall that, okay. Do
you know who sent the e-mail out?
Ms. Smiley. I do not. I assume Ms. Mohebbi did.
Mr. Greenwood. Okay, did you ever have a follow-up
conversation with either Mr. Mohebbi or Mr. Casey about this e-
mail and whether or not it had actually been sent out?
Ms. Smiley. At this time, I did not. Later on, I believe
maybe October 2001, people at Qwest were asking questions about
it and people asked me whether I sent it out and I said no, I
didn't. I just always assumed Mr. Mohebbi sent it out.
Mr. Greenwood. Let me turn to you, Ms. Wright, and make
sure your microphone is right in front of you and turned on, if
you would, please.
Would you turn to Tab 5 in your binder there? Do you see
that document at Tab 5?
Ms. Wright. Yes, I do.
Mr. Greenwood. You wrote an e-mail entitled ``First Quarter
Reciprocal Deals.'' The beginning of the second paragraph
starts, ``Right now it looks like we'll need to make network
purchases in the neighborhood of $250 to $350 million in order
to meet the revenue target.''
Why is Global Crossing having to make hundreds of millions
of dollars of purchases to meet a revenue target?
Ms. Wright. The sales team came up with a list of
opportunities for--that they were wanting to close in the
quarter. When that was added up, we knew that we had a
shortfall and knew that there were some potential reciprocal
deals on the table. My purpose here was to try and let the
heads of the region who also had some responsibility in the
capital budget process know that these things were on the table
and that we would probably need to make the purchases along
with the reciprocal deal in order to make the revenue targets.
Mr. Greenwood. Was there, in your opinion, a business
purpose for everything Global Crossing purchased from counter
parties in reciprocal deals?
Ms. Wright. My role at this point was to track results, to
work with the sale team on the opportunities. I didn't have any
direct contact with any of the customers other than Qwest, so I
really don't have any knowledge of the business purpose for
those transactions.
Mr. Greenwood. Would you turn to Tab 9, please? And Tab 9
is a memo from Michael Coghill to Wallace Dawson. It says, ``in
reviewing the latest Qwest deal status, I see that U.S.
Domestic Waves has been increased to $60 million. We are now
being asked to provide business cases to support this
transaction. This discussion began with U.S. Waves at $15
million which we could not find justification for, let alone
$60 million.''
Doesn't this indicate that Global Crossing was buying
millions of dollars of assets for which there was no business
justification?
Ms. Wright. What I believe this e-mail says is that a
member of the network planning organization who worked for
Wally Dawson who was head of the network had obviously severe
reservations with a purchase size of $60 million. However,
there were people, other people in the company who had a
different opinion. David Walsh, who was my boss at the time was
a very strong believer in the market for WaveLinks and was
working with a number of customers in the carrier markets, was
expanding the media and entertainment, business and building of
extranet. We had some opportunities on the table with carrier
customers. His viewpoint was that there was a strong market for
WaveLinks, so clearly within the company there were very
differing opinions about the market potential here.
Mr. Greenwood. Would you turn to Tab 25, please? There,
you'll find an e-mail dated August 30, 2000.
You wrote some thoughts which can be found beginning on the
second page of the e-mail chain. At the beginning of your e-
mail you express, ``I am very concerned about the number for
IRUs here.'' What was the nature of your concern with the
number of IRUs?
Ms. Wright. If I can take a moment to just clarify----
Mr. Greenwood. Please do, absolutely.
Ms. Wright [continuing]. About IRUs. IRUs are not
inherently bad. In fact----
Mr. Greenwood. Of course not.
Ms. Wright. IRUs are great for the business. When Global
Crossing started and I was the 25th employee, that's all we
sold at that point was IRUs and that's how traditionally
carriers built their networks was through IRUs. So I just want
to say that IRUs are really a good thing.
Mr. Greenwood. We understand that.
Ms. Wright. Okay.
Mr. Greenwood. It's like trucks are a really good thing
except if you trade a blue truck for a red truck just to book
the revenues.
Ms. Wright. I hear your point. My concern was that I was--
my concern that I was articulating to Gary Brenninger who was
the finance, head of finance for the product management
department was that the number that they had given us, in my
opinion, was too high for the year and that there was no way
that we were going to be able to meet that target, given what I
knew about the market and the falling prices that we had been
experiencing.
Mr. Greenwood. Did you feel pressured to meet a target
number of sales in that quarter?
Ms. Wright. Yes.
Mr. Greenwood. You also wrote, ``as you know, prices are
dropping fast and to some extent we are our own worst enemy.
When saddled with unreasonable revenue expectations, we do the
crazy deals at the end of the quarter.''
Did you have concerns that the targets set for sales were
unreasonable?
Ms. Wright. I did have concerns, yes.
Mr. Greenwood. What did you mean about a crazy deal? Why
did you refer to it as a crazy deal?
Ms. Wright. Well, this panel has been talking predominantly
about reciprocal transactions. What I was talking about in this
particular e-mail, I believe, was that at the end of the
quarter we were--I believe we were discounting too much in
order to get the business. We had the best network in the
world. We were built everywhere and because of some end-of-
quarter pressures we were discounting and I believe that we
were our own worst enemy in that we were beginning to cause the
degradation in pricing since we had a lot of the inventory.
Mr. Greenwood. Was the increase in numbers of Global
Crossing's capacity swaps over the quarters a result of the
pressure sales incurred to meet target numbers each quarter?
Ms. Wright. I believe that's true.
Mr. Greenwood. Okay. The Chair recognizes the gentleman
from Florida, Mr. Deutsch for 10 minutes.
Mr. Deutsch. Ms. Smiley, did you work for Debra Petri?
Ms. Smiley. Yes, I did.
Mr. Deutsch. Ms. Petri told us that your role was strategic
negotiation and that you were the one who was supposed to get
the deals. Is that correct?
Ms. Smiley. I'm sorry, that I was supposed to do what?
Mr. Deutsch. Get the deals.
Ms. Smiley. Get the deals?
Mr. Deutsch. Get the deals.
Ms. Smiley. I did not bring the deals to the table. I did
not approve the deals. I had no authority to approve the deals
so getting the deals, no. Assisting in the negotiation of the
contract, yes.
Mr. Deutsch. Can you explain to us why some of the biggest
deals that you worked on, those with Qwest, FLAG and Cable &
Wireless all claim that they had side or oral agreements
outside of contract that allowed them to port the capacity they
purchased from one asset to another, that they might select
later?
Ms. Smiley. I did not make any oral agreements with any of
the customers on the contracts that I negotiated. We negotiated
the upgrade provision of the contract very hard. Qwest
maintained and I maintained that we had to have upon mutual
agreement of the parties. Was there a reason for them to expect
that we would not give mutual consent? No. Because in my
opinion that would be bad faith negotiation if I'm negotiating
a provision that I know that says upon mutual consent and going
into it, I know that we're never going to consent. So when we
were negotiating, we had no reason to believe that we would not
give the consent.
Did I say or do anything that would contradict the contract
terms that we are negotiating? No.
Mr. Deutsch. Mr. Floyd, could you respond to that as well?
The question? Because our understanding is that Qwest, FLAG and
Cable and Wireless claim that they had side or oral agreements.
And why would they claim they had side or oral agreements?
Mr. Floyd. During one of the deals that we had put
together. There was an agreement to upgrade at a later time to
a different system increased capacity. And that is FLAG's
position.
Mr. Deutsch. And that was an oral agreement?
Mr. Floyd. Yes.
Mr. Deutsch. Ms. Smiley, with Cable and Wireless deal that
you were involved in at the end of 2000 with Mr. Casey and Mr.
Mohebbi, Cable and Wireless wanted a side letter to the
agreement for the swap or capacity. It was Alan Code, Cable and
Wireless who asked for that letter. Is that correct?
Ms. Smiley. That's my understanding. I was not involved
with the conversations between Qwest and Cable and Wireless as
to why Cable and Wireless wanted that. I was just asked to
change language in a document and forward it for approval Mr.
Deutsch. Did Cable and Wireless also draft the letter?
Ms. Smiley. Yes, they did.
Mr. Deutsch. The letter states the following. ``Cable and
Wireless may exchange some or all of the original capacity for
OC 192 WaveLink capacity on the routes indicated in Exhibit A
on other routes that Qwest may have available to which Cable
and Wireless U.S.A. agree before December 31, 2001, the
exchange capacity.''
This would allow Cable and Wireless to trade in capacity
purchase uncertain routes for other routes, is that correct?
Ms. Smiley. Is there a copy I can take a look at?
Mr. Deutsch. Yes, 76 and 77.
Ms. Smiley. Okay, I'm sorry, could you repeat your
question?
Mr. Deutsch. 76 and 77.
Ms. Smiley. Oh, I have the tab. Could you repeat your
question?
Mr. Deutsch. Well, the question is, is this a cause that
would allow Cable and Wireless to trade in capacity of purchase
uncertain routes for other routes?
Ms. Smiley. It does allow for an upgrade upon mutual
agreement of the parties. It's my understanding that the
auditors had approved certain language that would be in the
contract that would say under certain terms and conditions the
purchaser could sell back capacity to Qwest and Qwest would
sell them exchange capacity.
Mr. Deutsch. But Cable and Wireless was not satisfied with
this letter. It wanted further e-mails from Afshin Mohebbi,
Qwest present. Is that correct?
Ms. Smiley. Again, I wasn't involved in those
conversations. I don't know why they asked for it. The only
thing I was told--again, I wasn't personally involved in those
discussions, I was told it was more of a comfort--this was a
letter about pricing and then the subsequent e-mail was more of
a comfort e-mail that we worked with you in the past. We're
going to work with you in the future.
Mr. Deutsch. I mean if you don't know about the letter, how
do yo know it was about pricing, if that was the issue?
Ms. Smiley. That's what I was told.
Mr. Deutsch. By who?
Ms. Smiley. I believe Roger Hoaglund, but I'm not positive
sitting here today. This was a long time ago and it wasn't
something that stuck out in my mind.
Mr. Deutsch. Who would have drafted that e-mail?
Ms. Smiley. Who would have drafted the e-mail? Are we
talking about the e-mail or the side letter?
Mr. Deutsch. The e-mail.
Ms. Smiley. The e-mail from Mr. Mohebbi? It's my
understanding that Cable and Wireless created the original
draft and forwarded it to Qwest and it was negotiated between
Roger Hoaglund and Greg Casey and Alan Coe.
Mr. Deutsch. According to an e-mail that you did send on
December 29 which is Tab 75 to Pam Deatru, Mr. Mohebbi's
assistant, this e-mail was supposed to be sent by Mr. Mohebbi
to Nick Jeffries at Cable and Wireless in London. Is that
correct in London?
Ms. Smiley. Yes.
Mr. Deutsch. And the e-mail states as follows ``Qwest
understands your concerns regarding the language in that side
letter as agreed upon by the parties. This e-mail is intended
to assure you that in accordance with Qwest past practice Qwest
will honor the understanding and intention of the parties with
regard to any request by Cable and Wireless to obtain a full
and fair trade of the capacity in Exhibit A of the agreement,
of the 192 WaveLink capacity. Qwest guarantees that Cable and
Wireless requests such a trade prior to December 31, 2001 and
Qwest shall provide such capacity.''
Was Pam Deatru in the office on December 29, 2000?
Ms. Smiley. It's my understanding that she was not.
Mr. Deutsch. And you e-mailed Greg Casey to that effect
that 3:38 p.m., is that coarct.
Ms. Smiley. Yes.
Mr. Deutsch. And what did Greg Casey tell you to do at that
point?
Ms. Smiley. Nothing. I did not do anything further
regarding this e-mail. I sent it off. It was sent to Afshin and
his assistant and I informed Greg Casey that Afshin's assistant
wasn't in and that he need to contact Afshin. I had no further
involvement after that point.
Mr. Deutsch. So how did you know his instructions were
carried out?
Ms. Smiley. I saw an e-mail in October 2001 that was sent
to us from Cable and Wireless and they had received around this
timeframe and the e-mail had come from Mr. Mohebbi's computer.
Mr. Deutsch. So at that point you went home and you forgot
about it? This is $109 million transaction as far as we're
aware at this point?
Ms. Smiley. I did my part of it. I revised the language as
I was requested. I forwarded the e-mail as I requested. I
didn't have direct contact with Afshin Mohebbi so it would not
be my place to follow up with him and call on him. I did what I
was asked to do and then I went home.
Mr. Deutsch. Was that contract singed in that quarter, the
fourth quarter?
Ms. Smiley. Yes, it's my understanding it was.
Mr. Deutsch. Earlier today, Robin Szeliga testified that
when she found out about the Cable and Wireless letter and the
e-mail from Mr. Mohebbi she asked Mr. Mohebbi about it. Mr.
Mohebbi said he was not in the office that day and had not read
the e-mail, but he authorized someone to access his computer
and send out the e-mail. According to Ms. Szeliga, that person
may have been you, is that correct?
Ms. Smiley. It absolutely was not me. I have never accessed
Mr. Mohebbi's computer. I have never sent any e-mails on his
behalf. That is absolutely not correct.
Mr. Deutsch. Did you have Mr. Mohebbi's access code to his
computer?
Ms. Smiley. No sir, I did not.
Mr. Deutsch. Mr. Floyd, you represent FLAG which is one of
several companies which has told us that sales people from
Qwest promised that if they bought certain capacity from them
it could be traded for other capacity at a later date. Is that
correct?
Mr. Floyd. The premise was that we were buying a certain
amount today and being able to get some capacity later when it
became available. It was not available at the time that we
contracted for it.
Mr. Deutsch. At Tab 67, there was an e-mail dated June 4,
2001 from Susan Chase to Greg Casey. Ms. Chase states that for
Qwest to start recognizing revenue on this $20 million IRU it
would sell FLAG 10 STMs on Pacific Crossing. FLAG would then
pour it over to 16 STMs on Japan U.S. within 2 or 3 months once
Japan U.S. is turned on. Who are Susan Chase and Greg Casey and
what exactly are they proposing?
Mr. Floyd. Who are they?
Mr. Deutsch. That's correct.
Mr. Floyd. Susan Chase is sitting to my left as the Vice
President of International Wholesale Markets. Greg Casey was
the President of that group. What they are suggesting here was
exactly as I was just saying. We bought a certain amount of
capacity today and getting an increased capacity in the new
system when it was available. It hadn't been available as of
yet, the Japan U.S.
Mr. Deutsch. Thank you.
Mr. Greenwood. The Chair recognizes Chairman Tauzin for 10
minutes of inquiry.
Chairman Tauzin. Thank you, Mr. Chairman. We thank this
panel for appearing and for testifying and let me first take
you back, Ms. Smiley and Ms. Armstrong, to April 2001. I passed
out a document to you indicating a series of e-mail
communications in which you, Ms. Smiley, apparently communicate
to Robin that ``I understand the issue with the end points. I
really do not want to lose the flexibility we currently have
and that we can designate which end points we want when we
choose to activate them, etcetera. I know this is a quirky
request but it's something our auditors are not requiring.''
Can you tell us, Ms. Smiley, what your auditors were
telling you you had to have in the deal?
Ms. Smiley. Yes sir, I can.
Chairman Tauzin. What exactly were they telling you?
Ms. Smiley. At that point in time and prior to that point
in time when Qwest purchased capacity from another provider
such as Global Crossing, Qwest was not required to activate the
capacity it purchased by the end of the quarter. In contrast,
when Qwest sold capacity, Qwest was required to activate it and
the customer accept it before the end of the quarter.
Around this timeframe what happened was the auditors came
out and said if you're doing a transaction where Qwest is
making a purchase from a customer to whom it is also selling
capacity, if we sell them capacity and they pay for it and we
deliver our capacity, then if we buy capacity from them and we
pay for it and they don't deliver it, then it has the
appearance that we're financing our own transaction. So
therefore they said at that point if we are paying for capacity
that we are purchasing at the same time we were selling
capacity, then we needed to have it activated. That was, to my
knowledge, a new requirement this quarter and I was asking them
to activate the capacity for us.
Chairman Tauzin. That was a problem because the contracts
didn't require that it be activated in that quarter. You had
that flexibility in the contracts, is that correct?
Ms. Smiley. Sir, the point of flexibility that I'm talking
about here is when Global Crossing sold the capacity to Qwest.
There were a couple of different POPs, points of presence, that
Qwest could have the capacity activated to in Japan as well as
three different options in the United States. It was over the
same trans-Pacific cable system so it's still the same
capacity, but it's either going to go from the cable landing
station and land at one area in Japan or another.
Chairman Tauzin. Why were the auditors requiring that, for
what purpose? What difference did it make for Qwest?
Ms. Smiley. It was my understanding that they needed it for
the revenue recognition.
Chairman Tauzin. What is revenue recognition? What is that?
Ms. Smiley. I'm not an accountant, sir.
Chairman Tauzin. Doesn't it mean to get the revenue
recognized for purposes of that quarter?
Ms. Smiley. That's my understanding of the term.
Chairman Tauzin. That's to make the numbers. So to get
Qwest to make the numbers, you had to somehow deal with this
flexibility issue.
Ms. Armstrong, you responded, I believe, in this same
series. ``I understand quirky. We do quirky all the time. We'll
be happy to help as long as we don't go to jail or something.
Let me know what you find out.''
And then you came back and responded, I believe, Ms.
Smiley, with ``Believe me, I would never ask you to do
something that would end up with that result. I don't like
orange, although I like black and white, I don't prefer those
stripes.'' Is that correct?
Ms. Smiley. Yes sir. I made very clear that I would not
ever ask her to do anything that would end in that result. I
was not asking her to do anything improper. And I made a joke.
Chairman Tauzin. You sent some interesting e-mails around
not too long after in June and it's Tab 55 if you want to
follow with me. It's entitled a ``Bump in the Qwest Road.''
``We agree to move forward but I want to alert you to an issue
that came up this evening and has to do with portability and
here's the deal. In our deals with Qwest, our capacity of stock
fiber that we buy from them has to be activated in order for
them to get revenue recognition'' and you go on to say that
``Susan and I agree with Greg Casey and David. We'll talk some
time tomorrow and just get gentlemen's agreement and we'll work
out together to establish pricing, the purchase price. David,
I'll work it out with Jean.''
The issue on pricing also came apparently from the
accountants. ``Our argument has been that we do not want to be
penalized for their rev recognition problems. Now their
accountants are insisting that it has to be fair market value
instead of what you paid for it.''
So you had two problems. You had the portability issue, the
accountants are saying you can't do that in the contract and
get Qwest its numbers and you also have to have agreement on
pricing that reflects something other than what you paid for
it, something like fair market value. Is that right, Ms.
Wright?
Ms. Wright. Yes, there are a couple of issues here and let
me see if I can walk through them.
Chairman Tauzin. All right.
Ms. Wright. First of all, on the issue of portability,
portability gave us the flexibility to move the capacity based
on customer requirements. We had had a history of having
portability in our contracts with Qwest and during the first
quarter of 2001 we were working on the language for
portability. They always knew that it was a requirement of ours
to have portability. We were not interested in pursuing it if
we didn't have portability.
Chairman Tauzin. You had to have it and you also had to
have an agreement from them that they would consent. Isn't that
correct?
Ms. Wright. That is correct.
Chairman Tauzin. In effect, you had to have an agreement
from them that they would give you consent, you had consent
guaranteed to you, according to your understanding in these
contracts on portability, and yet the accountants are telling
Qwest that if you do it that way, you can't get revenue
recognition.
So where did you get these agreements that they would
consent? Is that in the documents?
Ms. Wright. I believe the documents actually said good
faith efforts--I don't remember the exact----
Chairman Tauzin. What do they explain to you about revenue
recognition? Do you understand it the way I just understood it,
that if they give you consent agreements like that in
documents, they could not get revenue recognition. Did they
explain that to you?
Ms. Wright. Revenue recognition was an issue with every
customer that we dealt with and every customer, every contract
was different in terms of requirements. Testing of circuits,
accepting of circuits----
Chairman Tauzin. What did Qwest tell you?
Mr. Ferrara. Excuse me, Mr. Chairman? Mr. Chairman, one of
the regrettable risks in inviting a witness to have counsel to
a company representative and advise her, I would respectfully
ask the Chair to ask Chairman Tauzin to let the witness finish
her answer before there's a second question, please. She's been
interrupted twice. We'd like her to finish her answer if that
would be agreeable.
Chairman Tauzin. Mr. Chairman, I'm going to interrupt any
witness who is not answering the question I asked them. I
didn't ask the gentlelady to go in that discussion. I asked the
gentlelady to tell me what did Qwest tell her about their
understanding of revenue recognition and I'll be glad to hear
her out if she'll explain that to me.
Mr. Ferrara. With respect, thank you, sir.
Chairman Tauzin. Thank you, sir.
Ms. Wright. We didn't have an extensive discussion about
what they needed for revenue recognition other than some
circuits had to be activated, had to be designated and
activated prior to the end of the quarter.
Chairman Tauzin. Now Ms. Armstrong, in again a memo that is
Tab 63, regarding some e-mails that you sent, if you'll follow
with me, this is a memo apparently entitled--the whole thing is
entitled ``From Robin Wright to Jamie Lorinia.''
You write, ``As everyone involved knows the portability
language is not great, we need their consent to the swap and we
had their word that they would consent.''
Is that correct?
Ms. Armstrong. Yes.
Chairman Tauzin. Who had given you their word that they
would consent?
Ms. Armstrong. The written agreement that we had with them
on portability.
Chairman Tauzin. I didn't hear you, I'm sorry.
Ms. Armstrong. I'm sorry. The written agreement that we had
with them on portability provided that the right for Global
Crossing to exercise its portability option was subject to the
consent of both parties, both Global Crossing and Qwest.
Qwest indicated to us in meetings and on conference calls
that they would, in fact, give that consent.
Chairman Tauzin. So it's your testimony that Qwest in their
conference calls and meetings orally committed to consent in
order that you might get mutual agreement on portability?
Ms. Armstrong. Yes. They weren't saying anything that was
contradictory to the agreement and the agreement did give us
the right to portability, but it was subject to their consent.
And what they were saying basically was we will give you that--
--
Chairman Tauzin. Don't worry about it, you'll get consent.
Ms. Armstrong. Yes.
Chairman Tauzin. Who at Qwest was giving you those oral
assurances?
Ms. Armstrong. It was Susan Chase.
Chairman Tauzin. I'm sorry?
Ms. Armstrong. Susan Chase. She was the principal
negotiator for the----
Chairman Tauzin. It's your testimony that Susan was giving
you oral, Susan Chase, was giving you oral commitments, not to
worry that the consent would be available to you on these
mutual agreements, is that correct?
Ms. Armstrong. Yes.
Chairman Tauzin. Ms. Chase, would you like to comment,
please?
Ms. Chase. I did not give oral consent----
Mr. Greenwood. Ms. Chase, pull your microphone up nice and
close.
Ms. Chase. Sorry about that. Yes, Congressman Tauzin, I did
not give oral consent. I'm not in a position to make those
types of decisions. I have a large group of people behind me
that look and review every transaction and every issue and I
also have a senior vice president and executive vice president
that I reported to.
However, I had no reason to believe that my company would
not give mutual consent. During that timeframe I cannot recall
any transaction that I had ever been involved with whereby we
did not give mutual consent.
Chairman Tauzin. You are testifying you didn't have the
authority to say that, but did you say that?
Ms. Chase. I did not say that.
Chairman Tauzin. You never told Ms. Armstrong in these
conversations that your company would guarantee consent on
these agreements?
Ms. Chase. I never expressed that Qwest would guarantee
consent.
Chairman Tauzin. Ms. Armstrong, you're saying that's
exactly what you got from Qwest.
Ms. Armstrong. Yes, Susan Chase and Robin Wright were the
business people involved in this deal. I'm a lawyer. I was
there to document the transaction and so the assurances were
made to Robin, but obviously I was on the call in the meeting
and heard them.
Chairman Tauzin. Ms. Wright, you're here to tell us whether
or not you believe--you've heard two different stories here.
Who's correct?
Ms. Wright. I believe Jackie is correct. It's my firm
belief that we had their oral assurance that we could port the
circuits.
Chairman Tauzin. Ms. Armstrong, if you didn't have the oral
agreements that you would get consent on portability, would you
have entered into those contracts? Would you have recommended
the company enter those contracts?
Ms. Armstrong. That wouldn't have been my decision, but I
would be very surprised if the company had done the deal
without those representations.
Chairman Tauzin. You'd be very surprised if it had done the
deals without the consent being guaranteed?
Ms. Armstrong. Yes, the background to this was that Qwest
and Global Crossing had been doing business together for
several years and had very good relationship. Whilst we were
relying on what they were telling us, clearly it would make
business sense for them to agree to give us the portability in
the future when the occasion arose.
Chairman Tauzin. Later on in December, Tab 65, if you want
to follow with me, 65, Ms. Armstrong, you sent an e-mail to Ms.
Smiley at Qwest.
It reads as follows: ``I cannot stress enough how concerned
and frustrated we are with this. As you know, when we did this
deal and the other similar deals with Qwest, where portability
was involved, the capacity which was activated was for Qwest's
internal reasons that which you were able to activate by the
end of the quarter, rather than that which we actually
required. Everyone involved was clear that the only reason this
was accepted was in reliance on Qwest's unequivocal
representation that the capacity would be ported to the
required routes after the event.''
In effect, saying the only reason anybody agreed with these
deals was upon those assurances of consent. Is that correct?
Ms. Armstrong. Yes, I mean this is backing up exactly what
I've just told you, that that was the understanding we had when
we did the deal.
Chairman Tauzin. That was addressed to Kym Smiley, is that
correct?
Ms. Armstrong. Yes, because Kym was present on conference
calls and meetings when this was said. I can't actually
remember what Kym said and whether she said anything on this,
but she was definitely present.
Chairman Tauzin. So what we have is a situation, as I
understand it, and correct me if I'm wrong now, but I think
I've got it.
Is that you signed some deals and the deals say that part
of the deal will give you the right to portability, the right
to make these choices when you need them?
Ms. Armstrong. Yes.
Chairman Tauzin. But the oral understandings are that
you're going to get their consent to whatever you need in terms
of that portability when you require it, right?
Ms. Armstrong. No, the terms of the deal were that we would
get portability, but it was subject to their consent. All we
were saying was we will give you that consent. It wasn't
contradict to what was written down.
Chairman Tauzin. That's my point.
Ms. Armstrong. Yes.
Chairman Tauzin. You've got a deal that said you had
portability, subject to mutual consent, but then you got an
oral agreement saying don't worry about mutual consent because
you're guaranteed it.
Ms. Armstrong. It didn't say don't worry about mutual
consent. It said we will give you that.
Chairman Tauzin. We'll give it to you.
Ms. Armstrong. Yes.
Chairman Tauzin. And at the same time the accountants over
here are telling Qwest you can't do that. You can't do that and
make the numbers.
Ms. Armstrong. I mean I have no idea what Qwest's internal
accounting and revenue issues were.
Chairman Tauzin. But you referred to it in your e-mail, Ms.
Armstrong. You basically say ``because of Qwest's internal
reason.'' You knew where they were, didn't you?
Ms. Armstrong. No.
Chairman Tauzin. You didn't know?
Ms. Armstrong. They told us that the reason they wouldn't
put it in writing, they would say, they wouldn't take out
basically the requirement for consent so that it was an
unequivocal right for Global Crossing was that they had
accounting or revenue issues with it. I have no idea what those
issues were.
Chairman Tauzin. They never explained that to you?
Ms. Armstrong. No.
Chairman Tauzin. All you knew was that they had revenue and
accounting issues involved and therefore they couldn't put it
in writing?
Ms. Armstrong. Yes.
Chairman Tauzin. You never asked are we participating in a
fraudulent scheme here?
Ms. Armstrong. No.
Chairman Tauzin. Are we trying to defraud anybody if we
can't put it in writing, we have to hide it in an oral
agreement?
Ms. Armstrong. No, of course, I didn't.
Chairman Tauzin. Nobody ever asked that question?
Ms. Armstrong. No. Every customer we dealt with had lots
of--had different, as far as I could see, and I don't even
understand completely Global Crossing's accounting and revenue
requirements. But every customer we dealt with had different
accounting and revenue requirements. We could not possibly
understand what they were.
Chairman Tauzin. But Ms. Armstrong, again, just as a layman
looking at this, is it ordinary to have secret, unwritten
agreements that have to be kept secret because otherwise it
will threaten revenue recognition which I understand to be
reporting revenue to the public, publicly traded company, is
that normal?
Ms. Armstrong. There's nothing, as far as I was--there was
nothing secret about this.
Chairman Tauzin. How many other oral agreements have you
had with other companies like that?
Ms. Armstrong. Well, things are often said in the context
of negotiations about how a company is going to perform in the
future.
Chairman Tauzin. But you thought this was pretty binding.
Ms. Armstrong. I'm sorry?
Chairman Tauzin. You thought this was pretty binding to the
agreement. You told me that you don't think your company would
have entered into the agreement without it and yet it was an
oral agreement that you had to count on and the persons giving
you the oral agreement are telling you we can't put that in
writing because our accountants won't let us. Doesn't that
raise a red flag to you?
Ms. Armstrong. I said that--I'm sorry, I have forgotten the
beginning of your sentence.
Chairman Tauzin. Let me try it again. Again, you're
representing a company that's about to enter into a deal with
another company. You tell me the consent to portability in your
opinion was so important that you don't think your company
would have made the deal but for that consent by guarantee.
Ms. Armstrong. Uh-huh.
Chairman Tauzin. You also tell me the company is telling
you we can't put that in writing though because our accountants
tell us that gives us revenue recognition problems.
Ms. Armstrong. Well, they didn't go into that much detail.
Chairman Tauzin. Doesn't that raise a red flag to you, that
an essential part of your agreement has to be kept secret,
otherwise the accountants can't treat it a certain way for
revenue purposes? Doesn't that tell you this is a bad deal, I
better not touch this thing?
Ms. Armstrong. It doesn't raise any flag at all.
Chairman Tauzin. None at all?
Ms. Armstrong. Not for Global Crossing. We weren't keeping
anything secret. This was----
Chairman Tauzin. Was this the biggest deal you did?
Ms. Armstrong. I'm sorry?
Chairman Tauzin. Wasn't this the biggest deal that you
didn't, the one with Qwest? Wasn't it $300 million?
Ms. Armstrong. No, no.
Chairman Tauzin. How much was it?
Ms. Armstrong. I can't remember exactly how much it was. It
certainly was one of the bigger deals I worked on, yes.
Chairman Tauzin. It was pretty big.
Ms. Armstrong. Yes, very big.
Chairman Tauzin. Yes. And it would not have been connected,
in your mind, in your opinion by your company without this
guarantee which the party who gave you the guarantee is not
denying you got it. How could you recommend to the company that
they do a deal where you had to count on Ms. Susan Chase 1 day
saying yeah, that was the deal or no, that wasn't the deal?
Ms. Armstrong. That was not a decision that I made. It was
not my decision whether or not we did the deal based on these
oral assurances. In fact, my advice to the company was that we
are taking a real business risk by relying on these oral
assurances because it would be very difficult, if we went to
court on this, we probably wouldn't win.
Chairman Tauzin. Yes. But you don't think that it raised
ethical concerns or legal concerns about whether or not the
other company was dealing fairly and ethically with you?
Ms. Armstrong. As far as, you mean ethical concerns within
Qwest?
Chairman Tauzin. Yes. You were dealing with a company that
was saying I know you're going to have consent, but we can't
put it in the contract because our accountants won't let us.
That didn't raise any ethical or legal issues?
Ms. Armstrong. I wasn't representing Qwest. It may well
have raised concerns within Qwest. What I'm saying is it didn't
raise concerns within Global Crossing.
Chairman Tauzin. Thank you, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentlelady from Colorado, Ms. DeGette for 10
minutes.
Ms. DeGette. Thank you, Mr. Chairman. I think this is the
essential issue, so if you folks could all go to the memo that
we just handed out. It's not in the notebook. The chairman was
asking about it a minute ago. At the top of the three page
document it says ``From Stout, Kimberly sent April 23.'' Does
everybody have that document?
Because I think this document more than anything we've
looked at, while also having some amusing jokes by the parties,
it says what the essence of the issue is here, so I'd like you
all to follow with me. Take a look at page 2 of this. It's an
e-mail from Ms. Smiley to Ms. Chase and everyone sitting here
just about has received a copy of it and it says ``Robin and
Jackie, as Susan explained, we need to execute acceptance
letters for the capacity that Qwest purchased from Global
Crossing during first quarter 2001.'' And then it goes on.
Then the next e-mail which is dated April 23, 3 days later
it's from Ms. Wright to Ms. Smiley and again everyone had it,
this is it. ``Can you give us some clarification of what you
require? In actuality, you have prepaid circuits, but have not
designated the end points. Since for our revenue recognition
that would be Global Crossing, we are not required to actually
activate the circuits. There is nothing to formally accept
until we have received the order from you. Do you want to say
that you are accepting 20 circuits from Tokyo to Seattle and 80
circuits from Tokyo to Hong Kong? If that's the case, I need to
check with Legal since we have not actually delivered them.''
Now let me start with Ms. Wright. Ms. Wright, you knew when
you wrote this e-mail that the way Qwest did its revenue was it
amortized it over time and so you did not actually have to have
the end points designated because of your accounting
principles, right?
Ms. Wright. For our accounting principles, we did not have
to activate circuits prior to the end of the quarter.
Ms. DeGette. Right, but you also knew that Qwest's
accounting office did require it because they were booking the
revenue quarter by quarter, not amortizing it over time, right?
Ms. Wright. I did not know the reason why they required
something different. As I mentioned, we've had many contracts
with all kinds of different requirements. I knew it was
different, but I didn't know why.
Ms. DeGette. And you also knew that they had to actually
book a deal, they had to have a sale of actual goods. They had
to have the end points, in other words, right? Did you know
that?
Ms. Wright. Of their sale to us?
Ms. DeGette. Right.
Ms. Wright. Correct, I did know that.
Ms. DeGette. Let me ask you, Ms. Chase, from Qwest's
perspective, when you did these deals, you knew that Global
Crossing did not require the end points to be designated from
its accounting perspective, but you guys had to have an actual
sale, right?
Ms. Chase. What we were selling to Global Crossing, we had
a set process in which we needed to follow in how we sold our
services.
Ms. DeGette. Right, and if it didn't have end points, then
you couldn't close the deal by the end of that quarter, right?
Ms. Chase. Correct.
Ms. DeGette. So this is what this memo, this series of
memos is about, isn't it, Ms. Chase?
Ms. Chase. No, it's not. This is about the assets that we
purchased, that Qwest purchased in Asia. And it was after the
first quarter transaction, one of our finance guys came back
and said that we needed a document showing that we accepted
service in Asia.
Ms. DeGette. Right, exactly.
Ms. Chase. That was the Asia piece, not what we sold to
Global Crossing, it's what we bought.
Ms. DeGette. Right, okay.
Ms. Chase. It doesn't have anything to do with revenue
recognition.
Ms. DeGette. Now Ms. Smiley, there's another e-mail sent
also on April 23 from you to Ms. Wright and others and you say
``I understand the issue with the end points. I really do not
want to lose the flexibility in that we can designate which end
points we want when we choose to activate them. So I'm checking
internally to see how we should handle.''
Right? That's what you said.
Ms. Smiley. Yes ma'am.
Ms. DeGette. And then that's when Ms. Wright writes back
and she says that she would be happy to help you, so long as
and here's the first of the jokes, ``you don't go to jail or
something.''
Now what you were recognizing there, Ms. Wright, is you
understood that there could be a potential problem if you both
gave Qwest the flexibility they wanted, but you didn't have any
kind of designated end points, right?
Ms. Wright. No, that's not true.
Ms. DeGette. Well, tell me then.
Ms. Wright. Okay, they sent us a request to activate
circuits. Let me back up. Initially, what we normally would do
would be activate from a cable station to a cable station so
that we have a place holder for that customer for those
circuits on that undersea portion only.
Ms. DeGette. I understand.
Ms. Wright. So that when they tell us where they want the
end points, then we activate them for them Ms. DeGette. Right.
Ms. Wright. I'm just trying to clarify what it is that
she's asking us to do and I wanted to check with legal on it
once I----
Ms. DeGette. Did you ever get it resolved?
Ms. Wright. No, as far as I know, this was the end of this.
Ms. DeGette. Okay, if you can turn quickly to Tab 57,
here's some more e-mails and the first thing, page 3 of it,
there's a whole series of e-mails. It looks to me like
everybody was copied on all of these e-mails and on page 3 a
gentleman named Martin A. Ritt, an attorney from Perkins Coohey
says ``Qwest accounting people are focused on the issue of
whether the repurchase price should be used based on fair
market value as Qwest prefers versus what was paid for the item
as GC prefers. I think that Robin and Susan Chase need to close
the loop on this question.''
Ms. Armstrong, were you aware of those conflicting policies
between Qwest and Global Crossing?
Ms. Armstrong. I was aware of it when I got this e-mail. I
understand the issue, yes.
Ms. DeGette. Okay, and so my question is how did you ever
resolve it with respect to the transaction in this e-mail? Did
you ever resolve how it should be determined?
Ms. Armstrong. Yes, the agreement, we reluctantly conceded
and agreed that the agreements would say fair market value.
Ms. DeGette. And in fact, it did say fair market value?
Ms. Armstrong. It did say fair market value, yes.
Ms. DeGette. Here's an e-mail on the first page of Tab 56
which is from Ms. Wright to Ms. Chase and others and it says
``Kym and Susan, this is an issue that keeps raising its ugly
head. As we've agreed, because we're both being delivered what
we probably don't want in the long term, we've agreed on both
sides that the repurchase price is the actual amount paid, not
the fair market value. You know the issue. We are taking
capacity in order to help with revenue recognition issues.''
Now I want to ask you, Ms. Wright, what is the business
purpose of this deal? You're taking--you're being delivered
what you don't want in the long term. You've agreed that the
repurchase price is the actual amount paid and you know that
you're taking capacity in order to help with revenue
recognition issues.
Ms. Wright. As we discussed, Qwest required to have the
circuits activated prior to the end of the quarter. There were
cases that we were waiting and sometimes it's a matter of a few
weeks for them to have the locations that we wanted, the
circuits extended to, ready for service, and in a lot of cases
we were waiting for our own customers to tell us where they
wanted their end points. So we wanted the flexibility to be
able to port that.
Ms. DeGette. So what you're saying is you closed the deal
so that Qwest could recognize the revenue by the end of the
quarter, when in fact, the final ports weren't determined yet?
Right?
Ms. Wright. We closed the deal because----
Ms. DeGette. No, is that what happened?
Ms. Wright. No, that's not what happened. We closed the
deal with the understanding that we had the flexibility to move
the circuits where we wanted them to be ultimately.
Ms. DeGette. Okay, and so in that case, you took circuits--
I'm sorry, in that case you took capacity that you didn't need
because you wanted to close the deal before the quarter was
out?
Ms. Wright. We took capacity that they had available with
the understanding that we could move it to the locations that
we wanted as soon as it was available.
Ms. DeGette. And was that in the written agreement, the
understanding that you could move it to the locations as it was
available?
Ms. Wright. As Ms. Armstrong has outlined, it required
their consent.
Chairman Tauzin. Mr. Chairman?
Ms. DeGette. I'd be happy to yield.
Chairman Tauzin. I want to ask if the gentlelady could have
an additional 2 minutes and I ask her to yield quickly?
Ms. DeGette. I'd be glad to.
Chairman Tauzin. I thank the gentlelady. I want to go to
Ms. Chase real quick. Now you just heard at Tab 65 again, you
just heard the testimony of Ms. Wright regarding this e-mail.
You responded to it. And you said as follows: ``I agree with
your comments below. It is our intention to keep you whole.''
That sounds like you're agreeing to what Ms. Armstrong has
testified, that you did, in fact, have an oral agreement to
keep them whole.
Am I wrong? What does this mean?
Ms. Chase. Congressman Tauzin, my comment here on--that I
agree with your comments below was that I agreed I thought we
should be able to give them what we refer to as purchase price
versus fair market value. So I was very surprised that we were
reverting our agreement to fair market value versus purchase
price.
So the issue here was that I wanted to try to help Robin
and Global Crossing get what they wanted which was purchase
price. So I followed back to see what we had done before and
was asking had we done this before for you to try to figure out
why we weren't doing it in this particular quarter.
Chairman Tauzin. Isn't purchase price, however, the issue
of purchase price or fair market price connected to the
question of portability as to whether it's revenue
recognizable?
Ms. Chase. I don't know. I don't know. I'm not in that
area.
Chairman Tauzin. How could you have a new agreement if
you're going back to the old agreement which had a purchase
price in it?
Ms. Chase. I'm sorry, I don't understand.
Chairman Tauzin. Your oral agreement had a purchase price
in it.
Ms. Chase. Yes.
Chairman Tauzin. Now you're saying we had to go to a new
agreement that says we're not going to go by purchase price.
We're going to go by fair market value.
Ms. Chase. Right.
Chairman Tauzin. How could you have that without an oral
agreement to do that?
Ms. Chase. Well, no, our company, Qwest, as we go through
the process with our pricing offer management group, our
accountants, our attorneys, they review all of the pieces of
the agreement. At this point, I guess it was toward the end of
the quarter they came back and stated that we needed to have
fair market value.
Chairman Tauzin. Why did you ask did we put it in a side
letter?
Ms. Chase. Because I was trying to figure out if we had
done in a prior agreement which would be in a prior quarter.
Chairman Tauzin. The point was it wasn't in--the purchase
price issue was not in the original agreement and so you were
saying did we put it in a side letter? Is there some way we
agreed to do this? Is that what you're saying?
Ms. Chase. No, not at all. That's not what I'm saying.
Chairman Tauzin. Tell me, please.
Ms. Chase. It turned out that in a prior agreement that we
had with Global Crossing that we had purchase price, that upon
mutual consent, if Qwest agreed to allow Global Crossing to
trade a circuit in, they would get the purchase price that they
paid for it.
Chairman Tauzin. I accept that. But you're basically
saying, I agree with your comments, and it is our intention to
keep you whole. Isn't that the guarantee? Isn't that the
guarantee that you're going to give your consent to this new
pricing arrangement?
Ms. Chase. Not at all.
Chairman Tauzin. Thank you, Mr. Chairman.
Ms. DeGette. Reclaiming my time. Let me just ask, listening
to what Ms. Wright just told me, Ms. Chase, would you disagree
with the statement that the reason the contract was structured
the way it was, was so that Qwest could recognize the revenue
because there was such pressure to book this by the end of the
quarter even though they knew that they were both negotiating
for something they didn't want and that would be changed later.
Ms. Chase. I don't agree with Qwest not needing what they
were purchasing.
Ms. DeGette. So you don't agree with what Ms. Wright told
you in her e-mail. In fact, actually, thank you, Edith, the e-
mail right above that from you dated June 25 says ``I agree
with your comments below.'' So you did agree with Ms. Wright.
Ms. Chase. I agreed that our intention, as I said here, was
to keep you whole, not if you were to change in your network
upon mutual consent that it was our company's intention to put
you in a position where you'd have to pay more money, but
again, I'm not in the position to make that type of decision.
So I did not make a commitment that we would do something one
way or another because we have certain processes within our
company and agreements that need to be made within Qwest that
go into the actual contract itself.
Ms. DeGette. So it's your testimony that in that deal, both
sides got what they wanted and there was no need to modify it
later on? Is that your testimony today?
Ms. Chase. It was what was contracted.
Ms. DeGette. Thank you, Mr. Chairman. I yield back.
Mr. Greenwood. The gentleman from Michigan is recognized
for 10 minutes.
Mr. Stupak. Thank you, Mr. Chairman. Now Mr. Floyd, I want
to pick up a little bit where Mr. Deutsch left off. I'm looking
over on Tab 67 here in your book. And it's an e-mail here from
Susan Chase and it goes on to say that ``the fair market value
for the Japan/U.S. capacity will be from $16 to $20 million
although that cannot be stated.''
Then she goes on to say ``the bottom line FLAG is willing
to trust us. It would be great if you could call Ed McCormack
and assure him that we have no trust issues.''
Did Ms. Chase make that statement to you?
Mr. Floyd. Which statement specifically?
Mr. Stupak. That ``the bottom line FLAG is willing to trust
us. It would be great if you could call Ed McCormack to assure
him that we have no trust issues.'' Did Ms. Chase make that
statement to you?
Mr. Floyd. No. I believe she's talking to Greg Casey.
Mr. Stupak. Okay. All right. Who's Ed McCormack then?
Mr. Floyd. Ed McCormack is FLAG's COO, Chief Operating
Officer.
Mr. Stupak. Of FLAG?
Mr. Floyd. Right Mr. Stupak. Do you know if Greg Casey ever
called him about a trust issue?
Mr. Floyd. Most definitely. Most definitely. You're asking
as far as this e-mail.
Mr. Stupak. Sure.
Mr. Floyd. As far as she say me to call Ed McCormack,
whatever, I took it out of context.
Mr. Stupak. Okay. Well, what were you looking for in this
e-mail then, on behalf of your client? What was FLAG looking
for?
Mr. Floyd. FLAG was looking for 16 STM-1s on the Pacific.
Mr. Stupak. And it hadn't been completed yet, had it?
Mr. Floyd. The Japan/U.S. system had not been completed. We
were looking for 16 STM-1s on the Pacific, period.
Mr. Stupak. And the other option would have been to build
your own, correct?
Mr. Floyd. A little different cost position on that.
Billions versus millions.
Mr. Stupak. Sure. So it would have been better to deal with
someone like Qwest who had this route.
Mr. Floyd. At that time looking for a carrier who had
capacity on one of the available systems or one of the new
systems, yes.
Mr. Stupak. All right, and in late February or early May,
did you have a meeting in New York with Kym Smiley and several
other representatives of Qwest?
Mr. Floyd. Yes, we did.
Mr. Stupak. And was Susan Chase on the phone during the
meeting?
Mr. Floyd. At times, yes.
Mr. Stupak. And did Qwest tell you then that for $20
million they'd sell you 10 STM on their PC-1, but trade them 6
to 9 months later for 16 STMs on the Japan-U.S. route?
Mr. Floyd. Yes.
Mr. Stupak. And actually, would you get more later, in
other words, for your money? Would you get more access later on
these lines?
Mr. Floyd. The 16 later, yes. The market value----
Mr. Stupak. Was dropping, right?
Mr. Floyd. No, no, no. The market value at the time that we
bought them was $20 million for 16.
Mr. Stupak. Okay.
Mr. Floyd. So what we were willing to pay was $20 million
for 16 STM-1s.
Mr. Stupak. Did you anticipate getting more later with the
price?
Mr. Floyd. No.
Mr. Stupak. No?
Mr. Floyd. No. 16, that was what we were contracting for.
Mr. Stupak. All right and that's what you wanted at that
time was 16?
Mr. Floyd. Exactly.
Mr. Stupak. Was there an ability to port from one route to
another in the contract?
Mr. Floyd. No, nothing specific in the contract.
Mr. Stupak. Why wasn't then that ability to port from one
to the other where Ms. Chase was talking about porting from one
point to the other? Why wasn't that in the contract?
Mr. Floyd. We were trying to put in the contract, actually
it talked about a side agreement and they had asked us we not
put it in writing to do it on trust.
Mr. Stupak. Who asked you not to put in writing, but put it
based on trust?
Mr. Floyd. I'm not sure who it was, but the Qwest team.
There was a lot of negotiations going back and forth with all
of us.
Mr. Stupak. Was this negotiation the meeting in New York
we're talking about?
Mr. Floyd. Not that portion of it, no. The oral came in
later, prior to the end of June.
Mr. Stupak. Okay. So you were still willing to pay $20
million even though the agreement wasn't going to be in
writing, was based upon this trust agreement?
Mr. Floyd. Yes, it was by trust.
Mr. Stupak. All right. Who made the representations to you
about this trust? Here you're going to spend $20 million based
upon trust. Who had made that representation to you?
Mr. Floyd. We had, in the conversations that we'd had, I've
known the parties for a while. I was willing to do trust, but I
couldn't commit my company to that as well, that it had to come
from a higher authority per se. And even with the group that I
was dealing with, we were inquiring from a higher authority
within Qwest. And they were the ones that had agreed that trust
was indeed how we wanted to proceed with this and we would get
the capacity we were looking for.
Mr. Stupak. So the final say on the trust deal is between
Mr. McCormack and Greg Casey?
Mr. Floyd. Yes.
Mr. Stupak. After this agreement on trust, did you get your
PC-1 that you were looking for?
Mr. Floyd. No. Still waiting for it to be turned up.
Mr. Stupak. When did you have this agreement on trust and
you're still waiting for it to be turned on, how much time has
elapsed now?
Mr. Floyd. July 2001.
Mr. Stupak. So it's been 15 months. Have you gone back to
Qwest and tried to get this thing turned on so you can start
doing business?
Mr. Floyd. Most definitely.
Mr. Stupak. What happened when you went back to Qwest?
Mr. Floyd. These were issues on both parts, as far as FLAG
changing some of the endpoints. It was very long and drawn out.
We actually had stopped that PC-1 at one point and asked that
they stop activating that and turn it all over to Japan/U.S. as
that was now in service.
Mr. Stupak. At any time in these last 15 months did anyone
say well, we understand but now some issues have come up and
it's not in writing?
Mr. Floyd. Issues have come up because it wasn't in
writing, yes.
Mr. Stupak. So that trust agreement didn't hold up?
Mr. Floyd. Exactly.
Mr. Stupak. Okay. Ms. Smiley, were you involved in these
negotiations or side agreement, we'll say?
Ms. Smiley. I was involved in parts of the negotiation. I
was in and out of the FLAG deal while I was simultaneously
working a couple other transactions.
Mr. Stupak. Were you in during this discussion about trust
us, we'll get this thing turned on for $20 million?
Ms. Smiley. That's not my recollection of the events. I
recall that we had specific discussions about FLAG's desire to
have Japan/U.S. as opposed to PC-1 when it became available.
Our lawyer, as well as our business person, Dan Nimps, was also
in the discussions and our lawyer made it very clear that there
was a possibility that we may not be able to sell Japan/U.S. on
an IRU basis. So therefore they would not be able to trade out
PC-1 for Japan U.S.
Mr. Stupak. Did you ever tell Mr. Floyd or anyone else from
FLAG that they misunderstood the verbal agreement that they had
between Qwest and FLAG on this U.S./Japan route?
Ms. Smiley. I do not believe that there was a verbal
agreement and yes, Mr. Floyd and I have had conversations
back--an audit letter was requested.
Mr. Stupak. Wait a minute. You didn't understand there was
this verbal agreement?
Ms. Smiley. I don't believe, at least in the conversations
I participated in, there was not a verbal agreement that would
allow----
Mr. Stupak. Did you learn there was subsequently a verbal
agreement?
Ms. Smiley. No. I understand it is FLAG's position that
there was a verbal agreement. I have no personal knowledge of a
verbal agreement.
Mr. Stupak. And my question before I interrupted you, did
you ever tell anyone from FLAG or Mr. Floyd that they
misunderstood a verbal agreement?
Ms. Smiley. Yes, when he was filling out the information
for the audit letter for Arthur Andersen, I told him I
disagreed.
Mr. Stupak. If you didn't know there was a verbal agreement
how could you tell him there was a misunderstanding about the
verbal agreement?
Ms. Smiley. Because he told us that his concern was that
there was this oral agreement and that he needed to disclose it
on the audit letter and it was my position that there wasn't an
oral agreement.
Mr. Stupak. That it was not an oral agreement?
Ms. Smiley. That it was not an oral agreement.
Mr. Stupak. All right, do you have any personal knowledge
of any oral agreements in your capacity there at Qwest?
Ms. Smiley. I am not aware of conversations where there--
I'm sorry, where there were oral agreements.
Mr. Stupak. Someone from FLAG told you about their oral
agreement and you said that didn't count because you don't
recognize that.
Are there any other oral agreements that you've been made
aware of that you don't recognize now?
Ms. Smiley. I have been told that Global Crossing thought
we had an oral agreement.
Mr. Stupak. Okay, FLAG, Global Crossing, anyone else?
Ms. Smiley. Cable and Wireless.
Mr. Stupak. Cable and Wireless, anyone else?
Ms. Smiley. That's all to my knowledge.
Mr. Stupak. And only one verbal agreement with each one of
these companies, FLAG, Global Crossing and Cable and Wireless
or were there numerous oral agreements with each one of these?
Ms. Smiley. I don't know sir, respectfully, I didn't
participate in any oral agreements that would vary the contract
terms.
Mr. Stupak. If you didn't, who did? Aren't you the chief
negotiating person for these agreements?
Ms. Smiley. I was the negotiator for FLAG and Global
Crossing and Cable and Wireless. Again, I wasn't involved in
every conversation for every deal. I did not negotiate every
term and condition of every deal. That just wasn't humanly
possible.
Mr. Stupak. So as former Director of Strategic
Negotiations, Qwest Communications International, you weren't
aware of these oral agreements until you were told?
Ms. Smiley. I was not.
Mr. Stupak. Ms. Wright, would you agree with that? Were you
aware of these oral agreements?
Ms. Wright. I was aware of an oral agreement, yes, between
Qwest and Global Crossing.
Mr. Stupak. And how about Cable and Wireless?
Were you aware of oral agreement there?
Ms. Wright. Global Crossing didn't have any oral agreement
with C&W. I don't know about----
Mr. Stupak. I realize that. It's just the coziness of all
of this.
Ms. Wright. I was not aware.
Mr. Stupak. All right. I brought up an e-mail of yours
earlier in my opening statement, so I think it's only fair you
should comment on it. It's under Tab 24 and it's on the bottom
of the page where it says ``Robin Wright wrote Susan told me
Greg is ready to write a check for $75 million this quarter for
capacity on SAC. What the hell are we going to buy?``
What kind of response did you get on that? Or what did you
buy?
Ms. Wright. I'm not positive what we did buy in the third
quarter of 2001.
Mr. Stupak. What was your concern here, I guess is what I'm
trying to ask. I'll let you explain it since I've highlighted
it in my statement.
Ms. Wright. My concern was that over time and again, this
is getting into the third quarter where in my view we were
having to dig deeper and deeper to find things to buy.
Mr. Stupak. Right.
Ms. Wright. And I was concerned that it would be great to
have Qwest buy more capacity. There is no bad sale, but I
didn't know if we could come up--I knew that they would not do
a deal unless it was reciprocal and I was concerned that we
would not be able to find $75 million worth of things to buy.
Mr. Stupak. And that's to meet your revenue expectations
for the quarter?
Ms. Wright. The $75 million came from Susan, so and I don't
know where we were at at that point in the quarter.
Mr. Stupak. Thank you. Thank you, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes himself for 10 minutes and we're going to back to
this tedious business with you again, Mr. Floyd and I think
this demonstrates the detailed the section that we have to go
through to try to understand how these transactions occurred
and American investors lost $54 billion at Global Crossing
alone.
Now let's go back to whether or not you believed that you
had a verbal agreement that FLAG could port its capacity when
it was completed. Did you believe you had that verbal
agreement?
Mr. Floyd. Yes.
Mr. Greenwood. And from whom did you get that verbal
agreement?
Mr. Floyd. Ultimately Greg Casey to Ed McCormack and from
the group that we negotiating the deal.
Mr. Greenwood. You used the word ultimately, did you
discuss that with others at Qwest?
Mr. Floyd. Yes. It would have been Kym, Susan, the
negotiating team.
Mr. Greenwood. They told you verbally that you would have
this portability opportunity?
Mr. Floyd. Collectively, yes; individually, I can't say
which one spoke the words, but it was a--the two companies were
doing a deal.
Mr. Greenwood. Were you sitting at a table? Were you on the
telephone?
Mr. Floyd. On the oral side, no. So it had not gotten to
that position at that point as far as----
Mr. Greenwood. Now you've said that you had an oral
agreement. You said that ultimately it came from Mr. Casey, but
you said prior to that it came collectively. Is this something
you heard? These are words spoken into your ear on the
telephone?
Mr. Floyd. The words were spoken in my ear during a meeting
in New York.
Mr. Greenwood. Those words were spoken by whom?
Mr. Floyd. It would have been Susan Moorehead. It would
have been Shawna Lee. Kym was there. Tanna Sumard, the attorney
and Dan Nimps, their revenue analyst.
Mr. Greenwood. Is that your recollection, Ms. Smiley, that
you were there?
Ms. Smiley. Yes sir, I was in New York.
Mr. Greenwood. And you were aware that there was a verbal
commitment made at that meeting?
Ms. Smiley. I dispute the fact that there was a verbal
agreement there. The staff has documents from Mr. Floyd himself
which show that there was a dispute as to whether Qwest can IRU
Japan/U.S. and we made very clear that we may not be able to
offer Japan/U.S. as an IRU and if we could not offer Japan/U.S.
as an IRU, then FLAG would not be able to trade in PC-1 for
Japan/U.S.
The upgrade provision in the contract clearly specifies
that must be on similar terms and conditions. And so it was
very important to Qwest that if Qwest could not offer Japan/
U.S. as an IRU, that FLAG could not sell back PC-1 and trade in
for Japan/U.S. and that was a point of discussion in New York.
We were very clear. We did not know whether we'd be able to
sell it as an IRU. There are documents the staff has that
reflects that and to date Qwest has not been able to sell
Japan/U.S. as an IRU.
Mr. Greenwood. Okay, Ms. Chase, do you still have Tab 67 in
front of you? Do you have it?
Ms. Chase. Yes, I do.
Mr. Greenwood. It says, ``for Qwest to start recognizing
revenue on the $20 million IRU, we are planning to sell FLAG 10
STM-1s on PC-1. FLAG will then port over to 16 STM-1s on Japan/
U.S. within 2 or 3 months once Japan/U.S. is turned up. Qwest
does not have an issue with this. Bottom line is FLAG is
willing to trust us.''
Would you interpret that for us?
Ms. Chase. Sure. We were still in the process of
negotiating our arrangement. Initially, FLAG had intended to
lease these services, however, we were unable to do that, so we
found a way in which we could sell the PC-1 capacity as an IRU.
They prefer to be on Japan/U.S., so we tried to find a way upon
which we could potentially get them to Japan/U.S. so we looked
at an option that would be, if upon mutual consent, we would
allow them to use the language in the agreement to go to Japan/
U.S. which is where they ultimately wanted to be in the end and
I was stuck and sent a note to Greg to see if he could have a
discussion with Mr. McCormack about what they wanted to do----
Mr. Greenwood. When you said, ``bottom line is FLAG is
willing to trust us,'' what does that mean?
Ms. Chase. FLAG believed that Japan/U.S. would be able to
become an IRU. They believed it to the extent that they, FLAG,
sent us a note stating that they would help us figure out how
we could make Japan/U.S. as an IRU because of the fact that we
didn't agree that we could ever sell Japan/U.S. as an IRU. So I
was stuck, didn't know how we would be pursuing this and
basically escalated it to my senior vice president and then
ultimately to Greg who's our executive vice president that
talked to Ed about what they wanted to do. That's the point. I
didn't guarantee, we didn't give them a verbal commitment that
we would do anything one way or the other. We hadn't even
gotten to the agreements yet, but wanted to give Greg an
opportunity to talk to Ed McCormack and send them this note
because this is where we were in the transaction.
Mr. Greenwood. Let me turn to Ms. Smiley. Do you believe
there was an implicit understanding in all negotiations that
FLAG would be allowed to port based on the past practice and
business relationships?
Ms. Smiley. That's hard to answer because I know that in
the negotiations I participated in, there was not an express
hey, don't worry about mutual consent. That was never an issue.
It was like we need to have mutual consent. This is the
language we required.
None of us had any reasonable expectation that we wouldn't
give our reasonable consent, so if by that you mean implicit,
then yes. Because sitting here today and sitting there when we
negotiated those transactions, we had no reason to believe that
we would not give them mutual consent. So in my opinion, I
don't understand why people are saying there's this side deal
because I didn't see a need for a side deal. You've got this
language that says upon mutual consent. You've got parties that
work together and there was no reasonable basis to believe that
we wouldn't give mutual consent.
Mr. Greenwood. Did you tell FLAG that you would port or did
you explain that you might not?
Ms. Smiley. We explained that the contract terms of the
contract, there are certain requirements that you have to meet
in order to exchange capacity and that's, those are the
discussions that I had. Ms. Chase wasn't in New York with us
when Tanna Samard, our lawyer, made very clear that there was a
possibility that we could sell Japan/U.S. on an IRU basis. And
so she wasn't there when we said we can't sell this.
Mr. Greenwood. Let me turn to Mr. Floyd. FLAG received an
audit letter from Andersen, asking FLAG to set forth all
agreements between the companies including all side letters and
verbal assurances.
If you turn to Tab 69, you raise the auditor's letter to
both Kym Smiley and Susan Chase. And you ask that an accounting
person be on the call because the audit letter, ``may have a
direct impact on your previous quarters' revenue recognition.''
What did you mean by that?
Mr. Floyd. The oral agreement was unusual and the fact that
we were getting 10 STM-1s today, we'd bought 16. It was going
to be a delivery of 10 and 6, for a total of 16. There was an
issue. I don't know what it was. The idea was as a courtesy, we
do have this letter. We do have to fill it out and be honest
with it as far as exactly what the deal was and we are going to
disclose it.
Mr. Greenwood. Ms. Smiley and Ms. Chase, what did you
understand these comments to mean?
Ms. Chase. Which page are we referencing?
Mr. Greenwood. This is Tab 69?
Ms. Smiley. It's my understanding that Shawna Lee had a
conversation with Ken Floyd after which she sent us an e-mail
that explained Ken's concern and Mr. Floyd's concern was about
this alleged oral representation that we would trade out PC-1
capacity for Japan/U.S. And that's my understanding of what his
concern was.
Mr. Greenwood. Turn to Tab 70. There's an e-mail sent to
you, Ms. Smiley, and copied to Ms. Chase. It raises several
questions, concerns and questions regarding FLAG and their
response to the audit letter. It says, this is to you from
Shawna Lee. It says, ``I spoke with Ken Floyd this evening
regarding an audit letter from Arthur Andersen. Concern,
possible exposure on both parties based on 'verbal/oral
agreements'. Question: how should FLAG handle responding to the
requests to list the verbal oral agreements between the
companies?''
What's your interpretation of that?
Ms. Smiley. It's my understanding that Shawna Lee is
recapping the issues that she discovered from Ken Floyd and
this is her repeating what Ken Floyd's concerns were. That's my
understanding.
Mr. Greenwood. What do you think ``possible exposure on
both parties'' means? What kind of exposure?
Ms. Smiley. I would have to assume revenue recognition
issues, but that's just my assumption.
Mr. Greenwood. If there was no oral agreement, then why was
the concern expressed?
Ms. Smiley. Again, you'd have to ask Shawna Lee, but I
believe that she is repeating what he said and she's not
talking on behalf of Qwest.
Mr. Greenwood. Mr. Floyd, will you turn to Tab 73, please?
It's the audit letter and it says, ``for the contract dated
27 June 2001, there is a verbal agreement and that Qwest will
convert the capacity purchased into 16 STM-1s on the Japan/U.S.
cable system when available.''
Can you explain that?
Mr. Floyd. This is for point 2?
Mr. Greenwood. Yes.
Mr. Floyd. Yes. The verbal agreement, I guess I'll start
from the beginning. The value for an STM-16 in June was $20
million and that's what we wanted in the end. So the deal was
such that Qwest could not give us 16 at that point in time. We
only could give you 10, but we will give you the extra 6 later
and that was from an accounting issue that they had with the
value of the PC-1 capacity that they had in inventory at the
time. FLAG agreed to take the 6 later and Japan/U.S. because
the cost position was better on that system. And what this is
saying and outlining very short term is that the verbal
agreement with the contract was that we would be able to get 16
STM-1s on Japan/U.S. when it was available.
It's a system, the Japan/U.S. system was being built. It
had been delayed. We weren't sure when it was going to be in
place. There was also a stipulation on the owners of that cable
system that they could not resell it to others until I think it
was 75 or 80 percent of the system had been sold. So that's the
question mark as far as when it was. Since then, we have bought
IRUs on Japan/U.S. from other carriers because we needed to
have that specific capacity and we couldn't wait any longer for
it to be delivered.
Mr. Greenwood. I suspect that anyone watching this hearing
at home on C-SPAN has long ago gone to a soap opera because
this is so tedious, but the bottom line of this hearing all day
long has been that this committee has serious concerns about
the fact that the telecommunications companies in question were
conducting transactions fundamentally, fundamentally in order
to meet revenue numbers and that all of the rest of this and
that those revenue numbers were being pursued to keep the stock
price from inflating and that that information deceived the
investors into believing that the companies had more real
revenues based on real legitimate business practices than they
actually had and that's why a lot of people kept throwing their
money at these companies and that's how they lost it all.
Now I just want to ask each of you, as I conclude my
questions for the day, did this occur to you at any time during
any of these transactions, were you--did it not occur to you
that the tortuous ways in which these transactions were
construction were, in fact, having the effect of falsifying the
image of your companies that was presented to the investors?
Mr. Floyd?
Mr. Floyd. If I look back at the small slices of reciprocal
transactions that I did, it was one of those where FLAG was
identifying a need first and then find another company out
there that could actually come back and purchase something in
return to offset the cash outlay and if it works, it works out
great. For a small company like ours, just getting started,
that's a nice way of doing it.
You look back now, I guess 2 years later, 3 years later,
you can say the impact was steamrolling, not just Qwest and
Global Crossing, I think it was the industry as a whole, and
our expectations that industry as well. I think that's the part
that failed.
Mr. Greenwood. Ms. Smiley?
Ms. Smiley. With regard to the purchases that Qwest made,
it was always my understanding that there were business cases
for those. I wasn't personally responsible for those and it's
just, I was told that we needed that capacity and my role was
just negotiating the contract for the terms.
Mr. Greenwood. And in retrospect, what is your view?
Ms. Smiley. In retrospect, it's really hard to say because
I have been told that Qwest this desire to be a global player,
that we wanted to be in Latin America, that we wanted to be in
Asia, that we wanted to be in Europe. And so based on those
representations the business case for these assets makes sense
to me.
Mr. Greenwood. Still does?
Ms. Smiley. It still does, but I have heard different
things on well, is the market supporting this now? The market
has completely changed. I'm not a financial person. I'm not a
person that can look at it and say we need this. I'm not a
network person. All I know is that I was told there were needs
for this capacity and here's the deal you need to negotiate and
this is the deal you need to close.
On our cell side, I do know that the contracts were drafted
so that we could get up front revenue recognition. I don't
think that was a secret and I didn't think there was anything
wrong with that. I was told if you followed these rules, you
get up front revenue recognition treatment and the deals were
structured that way because Qwest intended to book the revenue.
I didn't have anything to do with what deals were booked in
what quarter and how they're treated. That wasn't my role. My
role was simply to negotiate the contract and then provide it
to the other departments for approval and treatment.
Mr. Greenwood. Ms. Chase?
Ms. Chase. I believe that the agreements that I was
personally involved with were exciting to the point that we had
an opportunity to be in other parts of the world. I think being
a global provider is important and I was excited about being
able to enter into new business relationships so I looked at
the positive side and view that most of the transactions were
very good transactions.
Mr. Greenwood. Ms. Wright?
Ms. Wright. I believe the deals that we did with Qwest in
the third quarter of 2000, the third quarter of 2000, the
fourth quarter of 2000 and the first quarter of 2001 were good,
sound deals based on customer requirements. And certainly some
proactive buying for what we thought--where we thought the
market was going.
In all honesty, I thought that as we went further we were
getting more and more desperate to do the deals and I think in
retrospect the people who thought these should be more
conservative about buying were probably right. Having said
that, however, I also wonder if the whole, the collapse of the
whole market sort of--excuse me, is a bigger issue and I'm not
sure anything would have overcome that.
Mr. Greenwood. How about the second quarter?
Ms. Wright. The second quarter I didn't feel as good about.
Mr. Greenwood. Ms. Armstrong--well, why didn't you feel as
good about it?
Ms. Wright. I felt like we were pushing to buy capacity--I
look at sort of a continuum of here's a firm customer
requirement on one side and on the other side a future, almost
speculation. We were moving down that continuum in the second
quarter.
Mr. Greenwood. Sometimes I'm not sure anybody is still
getting this. From the point of view of the investor, if your
loved ones were investing in the company at this period of time
would you have said yeah, keep investing and you wouldn't want
to tell them, by the way, we're so desperate to meet our
numbers that we're doing all these crazy swap deals, you would
say it's still a good investment?
Ms. Wright. I can tell you for myself, I lost a great deal
of money on the stock. I thought the end of the first quarter I
exercised my options because I was feeling so bullish about
Global Crossing, so the situation changed drastically in 2001
and would I have recommended it? Probably not in the second
quarter, but it was not my call.
Mr. Greenwood. Right, but everyone else is recommending.
Ms. Armstrong?
Ms. Armstrong. I don't think I'm really qualified to say
whether the business decisions that were made were the right
ones which was really the question I think you're asking. I
think it's clear there were differing opinions within the
company as to whether or not we should be doing these deals.
But as far as transactions being a sham, I certainly--we worked
very hard on these transactions. There was a lot to negotiate.
I certainly didn't think the transactions were a sham. I don't
think Robin did and I don't think Kym and Susan did. We were
the ones who were sitting there until late in the night
negotiating these deals and negotiating them hard on things
like price as well as the legal terms because they were, as far
as we were concerned, genuine deals.
I wouldn't have wasted my time if I didn't think they were.
Mr. Greenwood. Okay. Mr. Deutsch for 10 minutes.
Mr. Deutsch. Thank you, Mr. Chairman. Ms. Wright, what
happened with FLAG is very similar to your experience with
Qwest in 2001. Is that correct?
Ms. Wright. That's correct.
Mr. Deutsch. You thought you had a deal in the first
quarter that allowed Global to trade in its capacity at a later
date. Is that correct?
Ms. Wright. We thought we had a deal with Qwest that
allowed us to trade in the capacity and trade it in at the
price at which we purchased it.
Mr. Deutsch. If you can refer to Tab 49. In a March 28,
2001 e-mail from Susan Chase to Roger Hogan which states in
part ``that Global Crossing is buying $60 million in U.S. Waves
service with portability with additional $45 million for
European service with the ability to port to dark fiber,'' what
was your understanding of the deal you had?
Ms. Wright. I'm sure--we could hear the page number?
Mr. Deutsch. Tab 49 where Global Crossing is buying $60
million in U.S. Waves services with portability with an
additional $45 million for European service with the ability to
port to dark fiber. What was your understanding of the deal
that you had?
Ms. Wright. We had the ability to trade in that capacity
for dark fiber. Actually my understanding was that anything
that was purchased during that quarter was completely portable
to any other service.
Mr. Deutsch. Ms. Chase, you wrote this e-mail and sent it
to 16 people at Qwest including Matthew Scott, your Director of
Finance. Did anyone object to your understanding as stated
here?
Ms. Chase. To which?
Mr. Deutsch. The portability issue.
Ms. Chase. Portability. On what Qwest is buying or what we
are selling?
Mr. Deutsch. What Qwest is buying and what you're selling.
Ms. Chase. What we're selling. Our standard language has
always been upon mutual consent, so the group of people that
the note was sent to was to show the company where we were in
the negotiations.
Mr. Deutsch. Let me just ask the question again, did anyone
object to this to the way it's written?
Ms. Chase. Object to it? It was just--we just continued on
the negotiations. We just kept going. It was going toward
agreement.
Mr. Deutsch. I mean there's nothing in the e-mail about
mutual consent.
I mean you're representing to us that there's mutual
consent, but there's nothing about mutual consent in the e-
mail.
Ms. Chase. It's in the agreement.
Mr. Deutsch. Ms. Wright, what was your understanding?
Ms. Wright. My understanding, now I don't know the specific
timeframe here because the situation was fluid during the last
week and the issue of mutual consent came up at the last
possible minute, so I don't know if they had introduced that
concept at that time, but at the beginning of the negotiations
it was clear that we had complete and total portability.
Mr. Deutsch. What about at the end?
Ms. Wright. At the end of the negotiations, we had I
believe we had the language mutual consent while acting in good
faith and we had again the oral assurance that they would honor
that commitment.
Ms. DeGette. Will the gentleman yield?
Mr. Deutsch. Yes.
Ms. DeGette. Ms. Wright, would you have entered into these
agreements without the oral understandings that you just talked
about?
Ms. Wright. No, I would not have and I was not authorized
to approve this, so I went to David Walsh, explained the
situation and told him that I felt like we had a long lasting
relationship with Qwest and that they had ever intent to honor
the portability.
Ms. DeGette. It wouldn't have made business sense for you
to enter into these agreements without the side or oral
agreements, would it have?
Ms. Wright. Probably not.
Ms. DeGette. Thank you. I yield back. Thank you.
Mr. Deutsch. Ms. Armstrong, is it true that Global Crossing
would sometimes take assets it didn't want so that Qwest could
just recognize revenue?
Ms. Armstrong. I don't really know the answer to that
question.
Mr. Deutsch. If we look at Tab 54 which is a June 24, 2001
e-mail from you to Ms. Wright, Ms. Smiley and others at Qwest,
you say that that and I'm quoting, ``we are only acting in the
capacity we are buying by 30th of June because this is Qwest's
requirement. It would be unreasonable that in say 6 months'
time when we activate what we actually need we suffer because
of a falling price.''
Ms. Armstrong. Yes, this goes back to the portability
issue. We intended that what we bought we would exchange for
capacity under this portability assurance in the future and my
concern here was at what price would that capacity be
exchanged.
Mr. Deutsch. The next day, Ms. Wright, you sent an e-mail
stating that ``in our deals with Qwest any capacity to dark
stock fiber that we may buy from them was to be activated in
order for them to get revenue recognition since many cases we
buy a bucket of services, they just activate what they and we,
in turn, have the right to port that what we want once we
decided what we want.'' We have copies, obviously, this is at
Tab 55. Is that a correct understanding of your past deals with
Qwest?
Ms. Wright. That's correct.
Mr. Deutsch. But in June, Qwest accountants were insisting
these later tradeoffs be at fair market value which could
result in losing money in the market when prices are falling
and at that point is that correct?
Ms. Wright. That's correct, toward the end of the
negotiations, they said that they were required to change the
language and have it at fair market value rather than purchase
price.
I had a severe objection to that because it was a change in
the deal structure and subsequent to that I let Susan know that
as far as I was concerned that was a deal stopper and we went a
couple of different routes at this point. Jackie and Kym, I
believe, negotiated the language that would change our contract
to be fair market value to mirror their contract so the risk
would be equal and let me just, if I could, take a second just
to frame out what that risk would be. If you have a circuit
that you bought for $1 million from New York to Los Angeles and
let's say that we activated or they activated that circuit for
us to be able to, according to their revenue recognition rules,
where we wanted New York to San Francisco. If that price fell
10 percent then we were going to take that hit. However,
mitigating that is typically if that one is going to fall 10
percent so is the other one. So I didn't feel there was a huge
risk, however, I didn't feel comfortable in pursuing it, so I
talked it over with my boss, David Walsh, and Susan suggested
that Greg Casey give David Walsh a call so that they could have
this gentleman's agreement on the pricing because Susan had
told us that that was their intent, to make us whole.
Mr. Deutsch. And again, about this so-called gentleman's
agreement, what was that price the gentleman's agreement would
be at?
Ms. Wright. In the contract, I believe, were some
negotiated prices, so we had agreed on the $1 million or
whatever.
Mr. Deutsch. The initial purchase price?
Ms. Wright. I believe the contract did have some purchase
prices in it.
Mr. Deutsch. Ms. Chase, would you agree with what Ms.
Wright has just described?
Ms. Chase. I agree that we had issues between the fair
market value and purchase price. I wasn't exactly--didn't
remember how we resolved that particular issue. I believe that
I personally didn't guarantee that we would provide
portability, but I had no reason to believe that our company
would ever deny it because at that period of time I hadn't been
involved in a transaction whereby we did deny it.
Mr. Deutsch. Let me ask just one last question to Ms. Chase
and Ms. Smiley. I want to refer you to Tab 62 which is an e-
mail dated September 19, 2001 from Matthew Scott to you and
several other people. It refers to an effort by Global Crossing
to trade in some capacity bought in the second quarter. After
meeting with Arthur Andersen and Ms. Szeliga, Mr. Scott reports
to you that ``this cannot be done with seriously jeopardizing
all future IRU revenue recognition. All of this implied that
it's a service and not an asset. This means we do not complete
the earning process with the original sale and should not have
booked any revenues. That pertains to all future IRU sales as
they will never know if the earning process has been
completed.'' Was this the first time you had heard this
position?
Ms. Smiley. I'm sorry, could you help us find this. I can't
find where you're reading from.
Mr. Deutsch. I believe it's 62.
Ms. Chase. 62? It's not 62.
Mr. Deutsch. It's 62.
Ms. Smiley. What page?
Mr. Deutsch. Let me just check. Second page. ``Met with
Robin Szeliga.'' On top of page 2.
Ms. Chase. I've never seen this before.
Mr. Deutsch. On the bottom of page 1 going up to page 2.
Top of page 2, bottom of page 1.
Ms. Smiley. Could you please repeat your question?
Mr. Deutsch. My question is this position is that there's
obviously a question how they're treating the IRU sales, that
it's no longer a--it's a service, not an asset and you would
deal with it differently from an accounting perspective.
Was this the first time that you've heard this position?
Was this irrelevant to how you were treating it?
Ms. Smiley. I guess I really don't understand your
question. I think what he's explaining here is that you've got
your inventory and these are the different things that you have
to have with regard to buy-backs and these are the issues that
they've identified with regard to buy-backs. And they're saying
that any sales of PT&E should be structured as an operating
lease and not an asset sale.
So I apologize, I just don't understand your question.
Mr. Deutsch. You don't think this is a change in position
in terms of how they're treating the sale, the contracts?
Ms. Smiley. This is concerning a buy-back of capacity of
original capacity that we sold. We are requesting on, I
believe, Global Crossing's behalf to repurchase some of the
capacity pursuant to the terms of the original contract and I
believe here what Matthew Scott is saying is there's some
issues with that. I don't know, I know we had changes in
accounting at different points in time. I don't know whether
this is a new change or if this just tightening up of existing
procedures, so again, I just don't really know how to answer
your question.
Mr. Deutsch. But you're negotiating contracts without
knowing how they're treating this capacity?
Ms. Smiley. How Qwest chooses to account for it is not my
issue. I take what the sales team tells me and they say we want
you to negotiate a contract for the purchase of X capacity, say
for example, PC-1 from Global Crossing and then the sale of
domestic capacity. We negotiate those. There are a whole team
of people, price and upper management, legal. If there are
issues that we believe may raise accounting issues, we'll send
those to the accountants and ask their advice on it. After the
deal is signed, the contracts are turned over to accounting and
they make the call as to how it's treated.
The intent is when we sell IRUs to work within the
parameters so they can be booked up front. Are they always
booked up front? I don't know the answer to that.
Mr. Deutsch. On No. 2 on top of the second page of this
tab, ``the buy-back of assets tolled just after the last
quarter.'' I mean it seems as if he's saying you can't use
that, you can't use that if the buy-back is after the last
quarter or can you?
I mean that would seem as if it would affect how you're
selling.
Ms. Smiley. I'm sorry, I'm just not getting what you're
asking.
Mr. Deutsch. All of this implies that the service is not an
asset, that it has no relevance to your sale and that this
means that we did not complete the earnings process with the
original sale and should not have been booked and should not
have booked any revenues. I mean that means you're booking any
revenues if you're going to get it done in that quarter.
Ms. Smiley. It's my understanding there are a number of
conditions that have to take place in order for Qwest to book
the revenue up front. I'm not an accountant. I don't know the
exhaustive list. During negotiations, I learned a few things
such as it does need to be activated before the end of the
quarter. There needs to be partial patient, those sorts of
things. There needs to be a clearly identifiable asset and I do
know that there's a distinction between a service and an asset.
Mr. Deutsch. Would you be spending your time though
negotiating contracts that don't book revenue?
Ms. Smiley. I'm sorry?
Mr. Deutsch. Would you be spending your time negotiating
contracts that don't book revenue?
Ms. Smiley. Yes. I've negotiated a number of contracts that
book over the life of the contract. That's the distinction.
It's either up front revenue recognition in the particular
quarter that the transaction occurs or it's over the life of
the contract and I have negotiated numerous contracts that have
revenue booked over the life of the contract rather than up
front revenue.
Mr. Deutsch. Would that include an IRU contract?
Ms. Smiley. I don't know if any of the IRUs that I have
worked on were given the recurring revenue treatment versus the
up-front. I know that there was a capital lease that I
understand that we sold, I believe to Global Crossing and we
sold a capital lease one quarter and I believe that was treated
as recurring revenue, but again, I'm not involved with that. I
don't know precisely what they do with the contracts after
they're negotiated and how they treat them.
Mr. Deutsch. Ms. Chase, do you want to respond at all to
this issue?
Ms. Chase. I have no comment. Sorry.
Mr. Greenwood. Ms. DeGette?
Ms. DeGette. Thank you, Mr. Chairman. Let me ask you, Ms.
Smiley, when you negotiated all of these deals, who was your
superior and did you take--what was your requirement of
clearing these deals through someone?
Ms. Smiley. First, let me make very clear I didn't have any
approval authority for any term or condition on these deals.
Ms. DeGette. So who approved these deals?
Ms. Smiley. Our price and upper management group.
Ms. DeGette. Who was in charge of that?
Ms. Smiley. It varied on different deals. Dan Nimps was on
some of the deals. Martha Pye was on some of the deals. Roger
Hoaglund was their superior and he was involved in certain
aspects of the transactions, but pricing and upper management
had ultimate authority and approval on all the deal terms, not
me. I was just a mouth piece----
Ms. DeGette. So you presented them with all the terms and
conditions?
Ms. Smiley. They participated in the negotiations. We
worked as a team.
Ms. DeGette. Mr. Chairman, I'd ask if this witness could
supplement her answer today in writing, specifying, because I
think this will really help us in our investigation, specifying
exactly who approved of all of these deals, particularly the
deals with Global Crossing and also the deals with FLAG.
Mr. Greenwood. Will you do that, Ms. Smiley?
Ms. Smiley. We could, but just to let you know the staff
does have sign-off sheets as part of document production which
have line items that show that network planning, if someone
signs off on behalf of that, someone signs off on behalf of
legal. Someone signs off on behalf of price and upper
management and the staff has those.
Mr. Greenwood. For how long has that been the case, if the
gentlelady will yield?
Ms. Smiley. I believe, I don't know whether it was 2000 or
2001 that that took place. Prior to that, if the request is to
go back and look at the deals and figure out who was involved,
assuming counsel has no issue with that, I'm fine.
Mr. Greenwood. I would suggest that staff prepare questions
of that nature in writing and present them to Ms. Smiley.
Ms. DeGette. That would be great, Mr. Chairman, and I'll
tell you why I can't rely just on the sheets that were produced
because I don't personally have all of the documents. Committee
staff has that, so we'll go through it. We'll ask committee
staff to prepare questions and I would ask that the answers be
supplemented maybe within 10 days after the questions go out,
seeing as this is an on-going investigation.
Ms. Smiley. I'd be more than happy to cooperate.
Mr. Greenwood. Thank you, Ms. Smiley.
Ms. DeGette. I want to ask you a question, Mr. Floyd, Qwest
sold PC-1 capacity to FLAG for $19,921,767. Is that accurate?
Mr. Floyd. I was calling it $20 million. I'm not sure what
the rest of it is.
Ms. DeGette. We've had so many accountants in here rounding
around, I thought I might be specific for one moment, but
roughly $20 million?
Mr. Floyd. Yes.
Ms. DeGette. And let me ask you, did that capacity, did
that ever get delivered to FLAG?
Mr. Floyd. Not as of yet, no.
Ms. DeGette. Now, Ms. Smiley, I guess it would be Ms.
Smiley, in documents that have been provided to us by your
attorneys, it indicates that roughly $20 million was recognized
by Qwest that very quarter.
Let me ask you, how often did Qwest do deals where it
recognized revenue, but never actually delivered the capacity?
Ms. Smiley. It's my understanding that the capacity was
delivered, that we had acceptance letters signed by FLAG, so
it's my understanding that the capacity was delivered.
Ms. DeGette. Is that accurate, Mr. Floyd? Do you have
acceptance letters signed that you did, in fact, receive the
capacity?
Mr. Floyd. Yes, we did.
Ms. DeGette. But you never got the capacity?
Mr. Floyd. It was helping Qwest as far as through their
internal processes. We did not mind signing an activation
letter. The understanding is that we're going to get it turned
on.
Ms. DeGette. But has it been turned on?
Mr. Floyd. No.
Ms. DeGette. Who signed that letter?
Mr. Floyd. It may have been something in the provision. I
do not know. I do not know who that would be.
Ms. DeGette. So what you're saying is someone at FLAG
signed an activation letter in order to help Qwest. Qwest
booked the revenue, but you guys never got the capacity?
Mr. Floyd. We're waiting on the local loop at this point.
It's not as urgent. Our immediate requirement to get trans-
Pacific capacity, we went out and bought an IRU from somebody
else just to--we had some World Cup transmission we wanted to
get going and the World Cup wasn't going to wait for us.
Ms. DeGette. When did you give Qwest the $20 million?
Mr. Floyd. We gave them $15 million at the time of--right
after signature.
Ms. DeGette. When was that?
Mr. Floyd. June 2001.
Ms. DeGette. But you didn't have any of the capacity turned
on as June 2001?
Mr. Floyd. Right.
Ms. DeGette. And you don't have it turned on today, but you
signed the activation letter?
Mr. Floyd. We're still trying to work with them.
Ms. DeGette. Who asked you to sign the activation letter?
Mr. Floyd. It would have been the team, the negotiations
team.
Ms. DeGette. Any particular person?
Mr. Floyd. I'm not sure.
Ms. DeGette. You don't remember. Have you done any other
deals like this with anyone else where you give some $20
million for something, but you don't actually get it?
Mr. Floyd. No, I can't say that we've done that one yet.
Ms. DeGette. Ms. Chase, did you negotiate that deal?
Ms. Chase. I was involved, yes.
Ms. DeGette. You need to pull the microphone closer.
Ms. Chase. Yes, I was involved.
Ms. DeGette. Did you ask for the activation letter from
FLAG?
Ms. Chase. I actually believe that we delivered the
capacity between the points in which we were asked to deliver
it, but if I can recall correctly that requirement changed and
they wanted the capacity to go to another cable station on
another side.
Ms. DeGette. Is that accurate, Mr. Floyd?
Mr. Floyd. Whether it was activated, I'm not sure. Susan is
very correct in that we decided to change the activation point.
That's when we had the problem with that one and then we said
just give us the Japan/U.S. and it kind of snowballed from
there, said okay, stop just go back, give us the PC-1 and we're
just, I think we're in the process of finalizing that right
now.
Ms. DeGette. Let me ask you, Ms. Wright----
Mr. Greenwood. Would the gentlelady yield for just a
moment?
Ms. DeGette. I'd be happy to yield.
Mr. Greenwood. I'm looking at a document, Mr. Floyd, about
this transaction, this FLAG Telecom, Japan Ltd., FLAG Telecom
Network, U.S.A., Ltd., FLAG. There's a letter of agreement, 6/
27/01 and the contract amount was $20 million and I think you
said that you paid $15 million for it?
Mr. Floyd. The payment process was $15 million on
activation and $5 million after 1 year.
Mr. Greenwood. And I understand that Qwest for the $20
million recognized revenue of almost the full $20 million,
$19,921,767.
Can you explain that?
Mr. Floyd. I don't know how they worked that piece of it.
Mr. Greenwood. How about Ms. Smiley or Ms. Chase, can you
explain how, if you received $15 million you would have
recognized revenue of $19.9 million?
Ms. Smiley. Again, I don't have anything to do with what
amounts in the contracts we recognized.
Mr. Greenwood. Ms. Chase, can you shed any light on that?
Ms. Chase. I cannot.
Mr. Greenwood. I thank the gentlelady for yielding.
Ms. DeGette. Thank you. Ms. Wright, if you could turn to
Exhibit 55 in the notebook. This is a memo from you to a number
of people and what it says is ``in our deals with Qwest in a
capacity dark fiber that we buy from them has to be activated
in order for them to get revenue recognition since in many
cases we buy a bucket of services. They just activate what they
can and we have the right to port it, what we want once we
decide what we want. We've always agreed that the value is what
we paid for, not fair market value'' and then it goes.
Now the truth is this is pretty much a summary of the deals
that you guys negotiated with Qwest, isn't it?
This is how the deals were structured, right?
Ms. Wright. I would say that's accurate.
Ms. DeGette. And my question is why would you contract with
somebody for something that you didn't already have? What was
the business reason to do that?
Ms. Wright. Why would we contract?
Ms. DeGette. Why would you make a contract with Qwest for
something that's not specified? In other words for an undefined
port for something that's unspecified?
Ms. Wright. What we try to do is for the things that we do
know that we absolutely have an urgent need for, we specify
those in the contract. The rest, we wait until we get
information from customers to determine what the end points
might be.
Ms. DeGette. In fact, you did the deals, you structured the
deals the way you did because of Qwest's revenue recognition
that the revenue had to be recognized by the end of the
quarter, right? That's what you also say in this memo.
Ms. Wright. We structured the deal to accommodate what they
told us was revenue recognition issues, yes.
Ms. DeGette. And would there have been any reason for you
to structure deals the way you did other than Qwest revenue
recognition rules?
Ms. Wright. Well, there are a lot of different reasons to
structure the deals in certain ways. I'm not sure if I
understand your question.
Ms. DeGette. Well, I think you said it yourself in many of
your memos that we've been talking about today where you're
negotiating deals with Qwest and you are buying things that you
don't need or want. You say that in your memos, right, some of
your memos?
Ms. Wright. As we went on in time, that was my position,
yes.
Ms. DeGette. What would the business reason for that, to do
that be without portability?
Ms. Wright. Without portability?
Ms. DeGette. Why would you structure deals without
portability? What would the business reason for that be?
Ms. Wright. We would not structure a deal without
portability.
Ms. DeGette. But you did structure deals like that, didn't
you? No.
Let me try to back up and restate my question. The deals
you structured, as you increasingly went along with Qwest, the
deals that you structured, why would you do that if they didn't
have anything to give to you in return at that time, as you
said in your memos?
Ms. Wright. Sometimes, it depended on what the circumstance
was. Sometimes if it was a dark fiber, it takes a while to
activate that and we were doing deals the last few days of the
quarter. There was no way you could activate dark fiber, so we
took--in essence, we bought a gift certificate.
Ms. DeGette. And that was no problem with your accounting
because you guys were amortizing the revenue over the life of
the contract, right? So you could buy dark fiber just fine.
Ms. Wright. I'm not an accountant, but I didn't know there
were any issues. You're right.
Ms. DeGette. But even Qwest admitted to you during these
negotiations that they were forcing you to say that you took
things that you didn't really want, right? I mean you took
routes, you took all kinds of things that you really didn't
need on the assumption that you could then later change those
agreements?
Ms. Wright. That's true.
Ms. DeGette. So without that side agreement, you would have
never made the agreement in the first place, right? It wouldn't
have made business sense for you.
Ms. Wright. Without the side letter on portability, you're
correct, it would not have made business sense.
Ms. DeGette. Right. And some of the agreements were not in
writing, they were oral, correct?
Ms. Wright. The only oral agreement that we had was
relative to the fair market value versus the purchase price.
Ms. DeGette. And would it have made sense for you to do the
deal without that side oral agreement?
Ms. Wright. That one actually, the risk was not too great
because of what I explained in terms of the drop in prices, so
obviously we wanted the purchase price honored, but we settled
for the oral agreement.
Ms. DeGette. Okay, thank you. I have no further questions.
Mr. Greenwood. The Chair thanks the gentlelady. The Chair
thanks each of our witnesses. We know this has been a long and
tedious day for you and one you've not looked forward to, but
you've all acquitted yourself well and we appreciate your
cooperation.
This hearing is now adjourned.
[Whereupon, at 3:50 p.m., the hearing was adjourned.]
[Additional material submitted for the record follow:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
CAPACITY SWAPS BY GLOBAL CROSSING AND QWEST: SHAM TRANSACTIONS DESIGNED
TO BOOST REVENUES?
----------
TUESDAY, OCTOBER 1, 2002
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Oversight and Investigations,
Washington, DC.
The subcommittee met, pursuant to notice, at 9 a.m., in
room 2322, Rayburn House Office Building, James C. Greenwood
(chairman) presiding.
Members present: Representatives Greenwood, Whitfield,
Tauzin (ex officio), Deutsch, and DeGette.
Also present: Representative Slaughter.
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. The committee will come to order. Please be
seated.
Good morning. Welcome to the Subcommittee on Oversight and
Investigations' second day of hearings focusing on a series of
highly questionable business transactions involving the Global
Crossing and Qwest Corporations.
We began this hearing last Tuesday by examining a central
question: were these transactions to swap fiber optic capacity
done for substantive business purposes? Or were they, instead,
essentially sham transactions, merely designed to provide the
appearance of increased revenues, aimed at deceiving both Wall
Street analysts and ordinary investors alike?
Our inquiry has centered on actions by senior employees and
executives of both Qwest and Global Crossing who established
and implemented the policies, and who made the key decisions
for these companies.
But our inquiry also concerns broader matters--matters of
accounting and accounting oversight by the executives,
corporate boards, and the appropriate regulatory bodies. Our
duty here is not just to expose what may be wrongdoing by a
handful of individuals, though there is considerable public
value to that, but to also determine if there are more
substantive accounting policies and oversight issues that the
Congress and the executive branch need to address.
During our first day of hearings into this matter, we
explored in detail some of the capacity swaps entered into by
Global Crossing and Qwest. We examined the ostensible reasoning
behind these swaps and whether there were side or oral
agreements that allowed Qwest, in particular, to account for
them illegitimately.
We heard from both current and former employees of both
companies involved in these transactions. And we learned of the
pressure placed on them from executives at the highest levels
to complete these transactions in order to show revenues,
however fictitious, during a time of shrinking markets and
declining business volume.
As knowledgeable as these witnesses were, however, they
were not the ones who determined the high--most knowledgeable
observers have said unrealistically high--revenue targets that
drove the deal-making decisions. Nor did they create the
numbers-obsessed environment in which these deals were made.
The people who created this environment, who made these
fateful decisions, are before us today to speak to these
matters this morning. Our investigation suggests that these
executives continued to find ways to artificially produce
quarterly revenue numbers through capacity swaps, even when
their employees objected that it had become too difficult to
sell substantial amounts of capacity. Now we can hear their
side of the story and question them directly about these
matters.
In particular, we can ask these executives and board
members the same questions that many current and former
employees of these companies would ask if they had an
opportunity to do so.
Consider Mr. Gary Winnick, Chairman and Founder of Global
Crossing, who is before us today. He reportedly cashed in $735
million from his stock in the company, including over $100
million in stock sales at a time in May of last year when
Global Crossing executives were beginning to realize the extent
of the company's financial problems.
Unfortunately, Global Crossing employees and investors were
not so lucky. Approximately 10,000 employees lost their jobs,
their health care, and their life savings, while investors lost
$54 billion.
We have before us today a woman who was one of the
unfortunate investors in, and employees of, Global Crossing.
For 31 years, Lenette Crumpler worked at Frontier, which Global
Crossing acquired in 2000. Ms. Crumpler had invested $86,000 in
her 401(k) while working for Frontier, which could not have
been easy for her to do as a single mother with two children.
She believed in the statements made by Global Crossing
executives that the company was in sound financial shape and
would successfully ``weather the storm.'' As a result, she held
on to her stock, while the boys in the big corner offices did
just the opposite. Sadly, Ms. Crumpler has lost her entire
retirement savings.
We also have before us Paula Smith. Ms. Smith is a former
Qwest employee who lost $400,000 in her 401(k) as the price of
Qwest stock had fallen significantly. She believed that placing
her money into Qwest was a conservative investment. It was her
dream to use that money to put her two daughters through
college.
I know that they and the many other Global Crossing and
Qwest employees who have lost their jobs and their retirement
savings want to hear from these executives.
In addition to our focus on past executive actions, we will
also hear today from some of the current executives and board
members about the future of these companies. They will be able
to address our questions concerning Global Crossing and Qwest's
future business plans.
I am also eager to learn more about Qwest's recent
restatement of its previous financial statements due to its
accounting for these capacity swaps, and to learn if we can
expect to see similar restatements by Global Crossing. I would
also like to learn whether the corporate environment has indeed
changed at these companies, and what lessons these current
leaders have drawn from these past problems.
Let me thank the witnesses for coming this morning for what
promises to be an informative hearing.
The Chair recognizes the ranking member of the committee,
Mr. Deutsch of Florida, for 5 minutes for his opening
statement.
Mr. Deutsch. Thank you, Mr. Chairman. Mr. Chairman, I also
have an opening statement that I would like to submit for the
record and just share with the committee a couple of thoughts.
You know, in this situation I guess of really suffering, as
you have well stated, not just of tens of thousands of
Americans, but really of millions of Americans, who have lost
more money than has ever been lost in the history of humankind
in the last not much more than 18 months to 2 years, you know,
where we have retirees who have put off retirement, families
who saved for college, money wiped out.
You know, I guess last Thursday's Wall Street Journal had
an article in some ways hopefully an optimistic thing--a front
page story, which I would like to submit for the record, and
the lead headline ``Past Crisis Offer Hope for Economy Warnings
to Watch. Railroads in 1870's overcame a fiber optic style
glut, 1929--viability,'' and actually have a graph of railroad
stocks, which basically looks pretty similar to the stock
market over the last 24 months or so. But then, as you can see
the graph, had a dramatic change afterwards.
And, obviously, I think all of our hope is that that is, in
fact, what will happen, that the economy will kick back into
high gear, which I believe it will. I think we have a unique
economy in the history of the world.
Hopefully this will be a very constructive hearing. We had
I think a good start last week, and we have done a lot of work
over the last 18 months in this committee really looking at
some of the crisis and really the dislocations that have
occurred on a both macro and micro level. And I think this very
well might be our last series before the election at this point
today.
But I guess, you know, the focus can very well be in this
area for this hearing the whole issue of the capacity swaps.
And hopefully at the--by the end of the hearing we will have a
better understanding and really a better understanding about
that particular issue.
I think, as I said last week, when we had Enron--and I
think I am--both the chairman and myself have worked very well
together, and I think I am proud of the work that we have done,
but, really, as importantly, if not more importantly, our staff
has done.
When we had Enron in here not that long ago, which was
really the first of this series of hearings that Congress has
had, I held up a chart describing what Enron had done and
talked about--it was in--you know, a number of national papers
took pictures of it.
I think in hindsight what we know, what Enron had done, and
what seems to be bearing out by prosecutions, was, in fact,
illegal and people will go to jail. Absolutely. I think as we
are looking at this industry--and it is an industry--which,
again, hopefully the graph will look like this in not too long
a period of time in terms of fiber optics, that the
transactions that occurred here I think are open to a much
different analysis.
And for all the work of our committee at this point, as
opposed to the Enron investigation, where we found smoking guns
and we found illegal activity, at this point we have found
practices that I think need further, in a sense, explanation,
both to us, to the market, so we can be helpful, because not
only do we investigate in this committee but we also have the
regulatory side of the telecommunications industry. And maybe
we were missing something in terms of our regulatory side as
well.
So I look forward to the witnesses' testimony. I am very
pleased to learn that Mr. Winnick will be testifying today on
his own really offer, which is really the first CEO that I am
aware of in this committee that has taken that option.
Hopefully we will learn a great deal from him and the other
witnesses today regarding that issue.
Thank you, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentleman, and reminds
him that Jeffrey Skilling also testified before us, the CEO of
Enron.
The lady from Colorado for 5 minutes, Ms. DeGette.
Mr. Deutsch. He was no longer the present CEO, Mr.
Chairman, at the time. Mr. Chairman, I really would stand
corrected on that. Mr. Skilling, when he testified, was not the
CEO of the company.
Mr. Greenwood. The record will reflect the gentleman's
comments.
Go ahead, Ms. DeGette.
Ms. DeGette. Thank you, Mr. Chairman.
Mr. Deutsch. And he is not the CEO; he is Chairman of the
Board. Thank you.
Ms. DeGette. Thank you, Mr. Chairman. As I said last week
in my opening statement, accounting decisions that were made
not just in the telecommunications industry but in the energy
industry and in pharmaceutical companies, and really throughout
American business, really went to the edge in the 1990's. And
today in a softening economy we are now seeing the result of
that.
We have two examples of that result sitting right here in
front of us--Ms. Crumpler and Ms. Smith. And before I go on, I
would like to introduce my colleague, Louise Slaughter, who is
a Congresswoman from New York. She has a particular interest in
this issue, because Global Crossing is located in her district,
and Ms. Crumpler is one of her constituents. And so on Ms.
Slaughter's behalf, I would like to welcome you, Ms. Krumpler.
And since Ms. Slaughter is not a member of this committee,
she is not allowed to speak. It is probably the first time
Louise has ever been silent.
So just watch out, Mr. Chairman.
But she will submit a statement for the record. Like Ms.
Slaughter, I have lost--my constituents have lost jobs,
thousands of them. And Paula Smith, who is my constituent and
will testify in a moment, is here today. And as we heard, Ms.
Smith lost $400,000 in her 401 stock plan, because under the
plan employees were not permitted to sell stock until they
reach 55 years old. And so she could not pull her money out of
the fund.
That echoes some other testimony we heard just a few months
ago. I am looking forward to hearing from Ms. Smith on behalf
of all the thousands of my constituents who are now out of
work.
I am also pleased, Mr. Chairman, that you have brought in
the major players in both of these companies who will let us
know from their perspectives exactly why these swamps were made
and what the accounting practices were. In particular, I am
glad that after my questioning last week we are bringing in Mr.
Peter Hellman, who is the chairman of the Qwest Audit
Committee, because one of my big concerns throughout this
entire process with Enron, with Imclone, and now with the Qwest
and Global Crossing hearing, is, what role does the board
play--and, in particular, the Audit Committee--in these
corporate decisions?
And I think that the testimony we will hear from Mr.
Hellman today will give us some insight into what the board's
role was and what, if anything, hopefully something, Qwest is
doing to tighten the reigns and to make sure that there are
stricter controls.
I am looking forward to the testimony today, Mr. Chairman.
I want to thank you for continuing these hearings throughout
the past year. They have been very helpful in formulating
public policy around corporate responsibility and corporate
actions. And with that, I will yield back the balance of my
time.
Mr. Greenwood. The Chair thanks the gentlelady, and also
thanks the gentlelady from New York, Ms. Slaughter, for her
presence. Ms. Slaughter has shared with me her concerns about
her constituents for the past many months. I know that she has
held her own hearing on this subject, to inform herself and all
of us on the matter. And it was she who helped us find Lenette
Crumpler as someone who experienced the losses.
So we thank you for your presence. We regret that the rules
of the committee do not allow you to participate in the
questioning, and so forth. But we are delighted that you are
with us.
Ms. Slaughter. The notes from the forum that we held, may I
ask that they be included in the record?
[The information referred to follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Greenwood. Yes. The gentlelady's statement and the
document that she has presented to me, the transcript of the
hearing that she held, will become a part of the record.
[Additional statements submitted for the record follows:]
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee
on Energy and Commerce
Thank you Mr. Chairman. I've said on a number of occasions that
this Subcommittee over the past year truly has done a tremendous public
service with its dogged investigative work into corporate misconduct--
beginning with Enron and Andersen and extending through to the actions
of Global Crossing and Qwest, which we will continue to explore this
morning. I believe members on both sides here appreciate what they've
learned from this good work.
One important lesson that these investigations have revealed for us
is how a handful of key leaders of a big corporation--the CEOs, CFOs,
Presidents and Board Members--really set the tone for those below them.
Last week we heard from a number of executives, at both Global
Crossing and Qwest, who were charged with making deals happen. And they
did make them happen--sometimes, as we learned, with an implicit, if
not explicit, effort to deceive.
Look at what we've been unraveling in this investigation. It's a
story of deception and betrayal of public trust. How else can we
explain Global Crossing pursuing optical capacity sales and swaps that
its own employees couldn't justify? They did so out of desperation to
make the numbers, as we have learned, when the market for expanding
optical capacity was drying up.
Deception and betrayal of the public trust--how else can we explain
some of Qwest's dealmaking? Here's a company that entered into long-
term capital leases with illegitimate side agreements--winks and nods--
that these deals really weren't what Qwest would report to the
accountants for the purpose of booking income. These were sham deals
that both sides knew were being done for one purpose only--to make
quarterly numbers.
The people who put these deals together were not rogue employees.
We learned they were responding to, and working within, an atmosphere
created from those at the top. This morning we have those who set the
tone before us. And I look forward to learning from them directly about
the atmosphere they set at these two companies.
Congress, the SEC and the Department of Justice, as you also note
Mr. Chairman, all have a duty to help restore trust in the marketplace
when it has been violated. So far, I believe the facts we've uncovered
in our investigation show the SEC has been on the right track in its
recent investigations. Yet some fail to understand this duty. Joseph
Nacchio, the former Chairman and CEO of Qwest, who is before us today,
reportedly told the press that the SEC's investigation of Qwest was
driven by ``global corporate McCarthyism'' and ``Enronitis.'' I wonder
what Mr. Nacchio will say today, now knowing what we've uncovered and
Qwest's own admission that it must restate its prior financial
statements by over one billion dollars.
Mr. Chairman, we should remember that those who believe most
strongly in free markets should be most outraged by deceptive and
fraudulent behavior that undercuts trust in free markets. These
poisonous acts--whether in the corporate boardroom or the boiler room--
violate the trust that is necessary for a marketplace to flourish in a
free society. We should encourage rules and actions that help to
maintain this trust.
Thank you again Mr. Chairman, and I look forward to the testimony.
______
Prepared Statement of Hon. John D. Dingell, a Representative in
Congress from the State of Michigan
Mr. Chairman, thank you for continuing these important hearings on
corporate accounting fraud and misdeeds. The shenanigans by some of the
country's largest corporations and their accounting firms, and the
resulting bankruptcies, have hurt many innocent workers and investors.
The American people have lost confidence in the stock market and in
corporate America, and they have lost billions of dollars in savings
and pension plans. We will hear from just two of those Americans today,
but their experience can be multiplied by a million or more.
We are also going to hear today from the executives who ran two of
these corporations: Qwest and Global Crossing. They are the people at
whose feet the proverbial buck must stop. They are the ones that set
unrealistic revenue and growth goals for their employees in 2001 and
berated or fired them if they didn't make those goals. ``I do not want
to hear about how your part of the business is just going to continue
to erode when we meet next week,'' Global's head of sales ordered his
subordinate. ``I want to know what you guys are going to do to turn it
around--starting immediately.'' Documents from last week's and today's
hearing show they are the ones who knew their revenues could not keep
up with projections without these swaps, but didn't bother to inform
their investors. These documents also show the executives are the ones
who made illegal side deals--hidden from the accountants because they
could not book all the revenue up front if these deals were known.
We have read the e-mails in which these employees acknowledge that
the swaps of optical capacity are being done just to meet the numbers.
``This swap crap is going to kill us in the long run,'' a Global
Crossing employee wrote. ``The sales folks don't know what exactly
they're getting and product guys haven't figured out what to do with
those assets.'' Many of those before us today are the ones who
benefitted the most from the high stock prices. They are the ones who
set a corporate tone that put numerical growth over all else and
rewarded those who achieved that growth, no matter what. And they
continued their push in the face of a tumbling world economy and the
implosion of the dot-com phenomenon.
To rebuild confidence after this sort of debacle, the new
management at these companies will need to clean house and instill a
new culture. Congress and the public will support those efforts, so
long as they are vigorous and effective. Investors and regulators
cannot be expected to trust companies that do any less.
Mr. Greenwood. The Chair then calls forward our first
panel, Ms. Lenette Crumpler, from Frontier, a citizens company.
She is from Rochester, New York. Welcome. Good morning. I
believe your seat is the one to the right there. Thank you.
And also, we have Ms. Paula M. Smith, a consultant and
former Qwest employee. She is from Denver, Colorado. Is Ms.
Smith with us? Good morning, and welcome. Thank you for joining
us this morning.
And if the staff would assist the ladies with their
microphones, so that they are positioned where they should be,
and they are familiar with how to operate them.
And while that is happening, let me share with our first
panel of witnesses that I think you are aware that this is--the
committee is holding an investigative hearing, and when we do
that it has been our practice to take testimony under oath, and
ask if either of you have any objections to giving your
testimony under oath. I see that neither of you do.
I would also advise you that pursuant to the rules of this
committee and the rules of the House that you are allowed to be
represented by counsel, if you choose. Do either one of you
wish to be represented by counsel this morning? Okay. You
haven't brought attorneys with you?
Ms. Smith. I have some attorneys, but I am fine.
Mr. Greenwood. Okay. You don't need--if you need them at
any point, and I can't imagine that you would, you just come--
just let us know that.
All right. If you would rise, then, and raise your right
hand, I will swear you in.
[Witnesses sworn.]
Let me just assure you that, ladies, you should be relaxed.
You are among friends. You are not in the hot seat this
morning.
Okay. And I think we are going to start with Lenette
Crumpler from Rochester, New York.
Ms. Crumpler. Yes.
Mr. Greenwood. Good morning. Welcome. We are delighted that
you are with us. Do you have an opening statement that you
would like to make?
TESTIMONY OF LENETTE CRUMPLER, FRONTIER, A CITIZENS COMPANY;
AND PAULA M. SMITH, CONSULTANT AND FORMER QWEST EMPLOYEE
Ms. Crumpler. I want to thank you, Mr. Chairman, and
members of the subcommittee, for holding the hearings and
letting me tell you what happened to some of the Global
Crossing employees because of the mismanagement and corporate
greed of people running the company.
I grew up in a small rural town called Williamson, New
York. While riding on the school bus 1 day I overheard the
conversation of a foreign exchange student from Thailand. He
said, ``In America, I cannot tell who is rich or poor.'' Now I
was only in the third grade, and I asked myself two questions.
What does he mean? And why does he say that?
I simply couldn't figure it out. For some strange reason,
his comments always stayed buried in my mind. It was not until
my fifth grade study in American history and our presidents
that I learned about the presidency of Theodore Roosevelt and
finally found the answer to my two questions.
Despite his wealth, Theodore Roosevelt became a President
who saw himself as a steward of the people. He didn't like what
he saw going on in corporate America where the rich robber
baron owners of companies were becoming billionaires off the
back of the working poor. This President envisioned a greater
America--an America where all people could prosper.
He battled with the barons of corporate America in the
early years of the 20th century. He used his executive powers
and championed the passage of new laws such as antitrust,
monopoly, child labor laws, etcetera. Because of the vision of
this President, the working poor class Americans became the
working middle class of America.
This is what makes America different from other countries.
From that moment on, I realized although I am a descendent of
slaves, I am so blessed to have been born in the greatest
country on the earth--the United States of America, a place
where impossible dreams can become reality.
This is my story. I have worked 31 years at the phone
company. I lost my entire 401(k) money--$86,000--when Global
Crossing went bankrupt. I raised two children all by myself,
and I never asked the system for one penny because I didn't
have to. I worked for Frontier, formerly Rochester Telephone,
which was a family oriented company. All you had to do was come
to work on time and give the company an honest, full day's
work, and you would always have a job. The odds of a single
mother accomplishing such a feat are astronomical.
I accomplished the near impossible. To me, $86,000 to
supplement my pension was like having a million dollars. I was
so proud of myself. I thought for sure with Global Crossing
buying Frontier I would reach my goal of $100,000, so that my
retirement years would be comfortable years, and I even could
leave something for my children.
That is why I held on, believing the statements that Global
Crossing executives made when the stock was failing. Tom Casey
sent an e-mail telling us the company was funny funded for 2
years and could weather the storm. Joe Clayton sent an e-mail
saying that The Wall Street Journal was wrong about Global
Crossing's debt.
With information like that, I knew I had another three to 5
years to work, so why not hold on to the stock? It will
eventually go back up. Our phone company stock had always been
rock solid. How was I, or any of us, to know that no longer
were there men of integrity at the helm of our 100-year old
phone company?
Instead, our leaders were men of gluttonous greed who told
shareholders to hold on while they were unloading their stock
options and bailing out fast, because they knew something we
didn't know. The company filed for bankruptcy in January 2002,
leaving us shareholders holding the empty bag.
Now, sadly, because I believed all the lies of the
executives of Global Crossing, I have now lost my entire
retirement money. Shattered are my dreams of having a modest
retirement in Florida in a lovely retirement community called
The Villages, where I had visited and had looked at a model
home. Thanks to Global Crossing, that will be a dream
unfulfilled. I no longer dream of retirement. I now worry
whether I will be able to keep my job, or will I be the next
one laid off. For if I get laid off, I will surely lose the
house that I now own in upstate New York.
I am heartbroken, and I am hurt, because I did all the
right things. I was truly an idealist, a dreamer, an achiever,
even when great astronomical odds were against me as a single
mother to amass that kind of money. Now this is what happened
to me because I believed in the system, and the system let me
down.
So here we are again in the 21st century, 101 years after
the start of the presidency of Theodore Roosevelt. Now new
robber barons, such as Gary Winnick of Global Crossing, even
more ruthless than their predecessors, have shown their ugly
faces in corporate America. This time, however, their greed is
even colder, crueler, and more calculated than ever before.
They have literally stolen the wealth of the working middle
class Americans--their own employees--right out from up
underneath their noses before they even knew what hit them.
Their greed is of an immoral, gluttonous nature. After cleverly
succeeding in transferring the wealth out of the pockets of the
working middle class directly into their own pockets, these
21st century robber barons have the nerve to seek protection
through bankruptcy laws and, at the same time, present the
illusion that their companies just needed to reorganize to
survive.
These Global Crossing robber barons know full well that it
was their gluttonous thievery that caused this company to go
under. They are hiding behind bankruptcy laws while unloading
their debt, so that they can start all over again with a clean
balance sheet.
Then, to add insult to injury to the working middle class,
Global Crossing/Frontier employees, after stealing our 401(k)
life savings, under the false pretense of bankruptcy
reorganization, they now are laying us off in record numbers.
Having cooked the accounting books, these robber barons
successfully collapsed the company into bankruptcy.
Simultaneously, they have collapsed and shattered the dreams of
many working middle class people and their families.
This is why I am here today speaking on Capitol Hill. I
have shared with you my shattered dreams, but this isn't just
about me. So many working, middle class American dreams have
been shattered. I would like you to hear what they have told
me.
``I have lost my job, and I can't find work here, so I will
have to move to another state to look for work.'' ``I have no
more money. I have lost it all. Now I must sell my beloved
home.'' ``My child has cancer, and I have no health care. What
shall I do?'' ``I am 72 years old. Who will hire me?'' ``I am
47 years old, and I shall have to work now until I am 75 or 80
years old.'' ``I am 53 years old. I am too old to start over
and recoup my losses.''
``It didn't have to be this way. I believed in the system,
and the system let me down. I have lost everything. Now my
children won't be able to go to college.'' ``Thanks to Global
Crossing, I will have to work another 10 years to try to save
money, and I am not a healthy person. I take eight pills a day,
and I am tired.''
``I have lost $500,000. I worked so hard to save that money
in my 401(k), and I should be retired now. But I can't afford
to.'' Even a dentist said to me, ``What is happening here with
corporate greed is the domino effect. When people get laid off
in great numbers and can't find work, they have to move away to
find work. So even we local doctors and other businesses pay in
lost customers.''
Yes, people's lives have been devastated. They have lost
their new homes. They have lost their ability to send children
to college. They have lost their medical insurance. They have
lost their retirement savings. They have lost their pride,
their security, their self-confidence.
They have lost their faith in the American dream--all
because of the greed and mismanagement of individuals who
should have been looking out for the well being of the
shareholders and the investors of the company instead of lining
their own pockets. The officers of Global Crossing have left
thousands of employees, stockholders, and investors holding an
empty bag.
Now is the time for this government to clamp down hard on
corporations, especially those in charge at Global Crossing who
led the company to ruin, taking many hopes and dreams with it.
It is the responsibility of this government to restore the
confidence of the working, middle class Americans who only
desire to continue working so that all can prosper--both
management and the workers.
There has been a lot of talk about heroes over the last
year. Our firefighters are recognized as heroes. Our police
officers are recognized as heroes. But those of us who get up
each and every morning, whether we are tired or energized,
whether we are sick or well, whether we love our job or dislike
it, those of us who go to the office, or the factory, or the
warehouses, we are heroes, too.
We will never be given a parade or a medal, but we are
heroes to the families who depend on our income for food and
shelter. We are heroes to those who rely on our employment to
obtain health care. We are heroes to those who depend on our
tax contributions to obtain needed services.
Please don't forget these heroes. Please don't allow these
robber barons to victimize our everyday and unsung heroes by
destroying their dreams.
Please have the vision and the courage shown by the
visionary, President Theodore Roosevelt, ``Speak softly, but
carry a big stick.'' Please, on behalf of all of the Frontier
and Global Crossing victims, look hard at the management of
Global Crossing.
Please use your powers to effectively punish those who have
committed these crimes. Please seize the assets and return
those assets to the rightful owners. And, please, legislate
whatever new laws are necessary, so that such abuses never,
ever occur again in America.
Thank you.
[The prepared statement of Lenette Crumpler follows:]
Prepared Statement of Lenette Crumpler
Thank you, Mrs. Slaughter, for your kind introduction. And thank
you, Mr. Chairman and members of the Subcommittee for holding this
hearing and letting me tell you what happened to some of Global
Crossing's employees because of the mismanagement and corporate greed
of the people running the company.
I grew up in a small rural town, Williamson, New York. While riding
on the school bus one day; I overheard the conversation of a foreign
exchange student from Thailand. He said--``In America . . . I cannot
tell who is rich or poor.'' Now, I was only in the third grade, and I
asked myself two questions: What does he mean? And why does he say
that? I simply couldn't figure it out. For some strange reason, his
comment always stayed buried in my mind. It was not until my fifth
grade study in American History and our presidents that I learned about
the presidency of Theodore Roosevelt and finally found the answer to my
two questions.
Despite his wealth, Theodore Roosevelt became a President who saw
himself as a . . . ``steward of the people.'' He didn't like what he
saw going on in corporate America where the rich Robber Baron owners of
companies were becoming billionaires off the backs of the working poor.
This President envisioned a greater America . . . an America where all
people could prosper. He battled with the Barons of corporate America
in the early years of the 20th century. He used his executive powers
and championed the passage of new laws such as anti-trust,--monopoly,--
child labor laws, etc. Because of the vision of this President, the
working poor class of America became the working middle class of
America.
This is what makes America different from other countries. From
that moment on, I realized that, although I am a descendent of slaves,
I'm also blessed to have been born in the greatest country on the earth
. . . the United States of America: a place where impossible dreams can
become reality.
This is my story. I have worked for 31 years at the phone company.
I lost my entire 401(k) money--$86,000--when Global Crossing went
bankrupt. I raised two children all by myself, and I never asked the
system for one penny because I worked for Frontier (formerly Rochester
Telephone Co) which was a family-oriented company. I didn't have to ask
for help. All you had to do was come to work on time and give the
company an honest, full day's work, and you would always have a job.
The odds of a single mother accomplishing such a feat are astronomical!
I accomplished the near impossible. To me, $86,000 to supplement my
pension was like having a million dollars. I was so proud of myself. I
thought for sure with Global Crossing buying Frontier, I would reach my
goal of $100,000 so that my retirement years would be comfortable
years, and I even could leave something for my children. That's why I
held on, believing the statements the Global Crossing executives made
when the stock was failing. Tom Casey sent an e-mail telling us the
company was fully funded for two years and could weather the storm. Joe
Clayton sent us an e-mail saying that Wall Street Journal was wrong
about Global Crossing's debt. With information like that, I knew I had
another three to five years to work . . . so why not hold onto the
stock? It'll eventually go back up eventually. Our phone company stock
always had been rock solid. How was I or any of us to know that no
longer were there men of integrity at the helm of our 100-year-old
phone company? Instead, our leaders were men of gluttonous greed who
told shareholders to hold on while they were unloading their stock
options and bailing out fast, because they knew something we didn't
know. The company filed for bankruptcy in January of 2002, leaving us
shareholders holding the empty bag.
Now sadly--because I believed all the lies of executives of Global
Crossing, I have now lost all retirement money. Shattered are my dreams
of having a modest retirement in Florida in a lovely retirement
community called The Villages, where I had visited and had looked at a
model home. Thanks to Global Crossing that will be a dream unfulfilled.
I no longer dream of retirement. I now worry whether I will be able to
keep my job or will I be the next one laid off. For if I get laid off,
I will surely lose the house that I now own in upstate New York.
I'am heartbroken. And I am hurt because I did all the right things.
I was truly an idealist . . . a dreamer . . . an achiever . . . when
great astronomical odds were against me as a single mother to amass
that kind of money. Now this is what happened to me because I believed
in the system, and the system let me down.
So, here we are in the 21st century . . . 101 years after the start
of the presidency of Theodore Roosevelt. Now new Robber Barons, such as
Gary Winnick of Global Crossing, even more ruthless than their
predecessors, have shown their ugly faces in corporate America. This
time, however, their greed is even colder, crueler and more calculated
than ever before. They have literally stolen the wealth of the working
middle class Americans--their own employees--right out from underneath
their noses before they even knew what hit them. Their greed is of an
immoral, gluttonous nature. After cleverly succeeding in transferring
the wealth out of the pockets of the working middle class directly into
their own, these 21st Century Robber Barons have the nerve to seek
protection through bankruptcy laws and, at the same time, present the
illusion that their companies just need to reorganize to survive.
These Global Crossing's Robber Barons know full well that it was
their gluttonous thievery that caused the company to go under. They are
hiding behind bankruptcy laws while unloading their debt so that they
can start all over again with clean balance sheets. Then, to add insult
to injury to the working middle class Global Crossing/Frontier
employees, after stealing our 401(k) life savings, under the false
pretense of this bankruptcy reorganization, they now are laying us off
in record numbers. Having cooked the accounting books, these Robber
Barons successfully collapsed the company into bankruptcy.
Simultaneously, they have collapsed and shattered the dreams of many
working middle class people and their families.
This is why I am here today speaking on Capitol Hill. I've shared
with you my shattered dreams but this isn't just about me. So many
working, middle class Americans dreams have been shattered I would like
you to hear what they have told me . . .
``I have lost my job and I can't find work here, so I will
have to move to another state to look for work.''
``I have no more money--I have lost it all, now I must sell my
beloved home''
``My child has cancer, and I have no more health care--what
shall I do?''
``I am 72 years old--who will hire me?''
``I am 47 years old, and I shall have to work now until I am
75 or 80 years old''.
``I am 53 years old--I'm too old to start over and recoup my
losses.''
``It didn't have to be this way--I believe in the system and
the system let me down--I've lost everything . . . now my
children won't be able to go to college''.
``Thanks to Global Crossing I'll have to work another 10 years
to try to save money and I am not a healthy person . . . I take
8 pills a day and I'm tired.''
11I lost $500,000 dollars I worked so hard to save that money
in my 401(k) and I should be retired now . . . but I can't
afford to.''
A dentist said, ``What is happening here with corporate greed
is the domino affect. When people get laid off in great numbers
and can't find work, they have to move away to find work. So
even we local doctors and other businesses pay in lost
customers.''
People's lives have been devastated. They've lost their new home.
They've lost their ability to send their children to college. They've
lost their medical insurance. They've lost their retirement savings.
They've lost their pride, their security, their self-confidence.
They've lost their faith in the American Dream. All because of the
greed and mismanagement of individuals who should have been looking
after the well being of the shareholders and investors of the company
instead of lining their own pockets. The officers of Global Crossing
have left thousands of employees, stockholders and investors holding an
empty bag.
Now is the time for this government to clamp down hard on
corporations . . . specifically those in charge at Global Crossing who
led their company to ruin, taking many hopes and dreams with it. It is
the responsibility of this government to restore the confidence of
working class Americans who only desire to continue working so that all
can prosper--both management and the workers.
There has been a lot of talk about heroes over the last year. Our
firefighters are recognized as heroes. Our police officers are
recognized as heroes But those of us who get up each and every morning,
whether we are tired or energized, whether we are sick or well, whether
we love our job or dislike it, those of us who go to the office, or the
factory, or the warehouse, we are heroes too. We'll never be given a
parade or a medal. But we are heroes to the families who depend on our
income for food and shelter. We are heroes to those who rely on our
employment to obtain health care. We are heroes to those who depend on
our tax contributions to obtain needed services. Please don't forget
these heroes. Please don't allow these robber barons to victimize our
everyday and unsung heroes by destroying their dreams.
Please have the same vision and courage shown by the visionary,
President Theodore Roosevelt . . . ``Speak softly but carry a big
stick'''. Please, on behalf of all of the Frontier and Global Crossing
victims, look hard at the management of Global Crossing. Please use
your powers to effectively punish those who have committed these
crimes. Please, seize their assets and return those assets to the
rightful owners. And, please, legislate whatever new laws are necessary
so that such abuses never, ever occur again.
Thank you.
Mr. Greenwood. We thank you, Ms. Crumpler, for your most
eloquent statement. Thank you for being with us.
Ms. Smith, your turn.
TESTIMONY OF PAULA M. SMITH
Ms. Smith. Thank you. My name is Paula Smith.
Mr. Greenwood. If you would like, you can push that
microphone up a little bit.
Ms. Smith. Okay. Can you hear me now?
Mr. Greenwood. Yes, it is flexible. Go ahead. Wherever you
are comfortable with. That is good.
Ms. Smith. Okay. I would like to tell a story, and it is a
story that is not unlike many thousands of other stories of
people and families who have spent some of the best years of
their lives at Qwest, formerly US WEST, and before that the
original Bell operating company we all knew as Mountain Bell,
or we all in our community called it Ma Bell.
I started working for Mountain Bell in November 1980 and
stayed there as a full-time employee through its divestiture
when it became US WEST, and then through its merger, in June
2000, when it was taken over by Qwest. And then, in June 2001,
I was laid off, along with thousands of other employees, many
who had spent decades as employees of this company. I had 20
years. Some of them had 30, 40 years with the company.
I had spent those 20 years as a full-time employee. These
were perhaps some of the prime productive working years of my
life. During those years, I also got married, and I had my two
children--two girls, Kelsey, 14, and now Ali, who is 12.
As far as my investments in the company's 401(k) plans were
concerned, of course, I was anxious to start putting money into
the plan as early as I could, voluntarily deferring income from
every paycheck to save toward retirement and the children's
college funds. For me, it was a slow and deliberate building
approach.
And although it meant making some sacrifices and giving up
on some of the material things we would have loved to have had,
at least I knew, and we knew, we were building toward our
futures, and at least I knew we would be in a position to open
doors for our children, so they could pursue any of the
educational dreams or opportunities they are so entitled to
have in their futures.
It was really fun getting my statements from my 401(k) plan
every quarter. I really looked forward to it. I could see the
growth. It was so rewarding. I was so committed to this.
But, of course, the picture now is very bleak for me and
many thousands of others who invested in the 401(k) plan at
Qwest. And based on my last retirement statement from the Qwest
401(k) plan--and I would like to just make a small correction.
I have lost a little over $230-, maybe close to $240,000 in my
retirement money I once had in my Qwest stock, and that is all
gone.
People often ask me why I kept putting my money into the
Qwest stock plan and didn't take out whatever of it I could,
even after the stock began to fall. And that is a really hard
question to answer for so many of us, as we look back. Of
course, a lot of my Qwest investment couldn't be sold. Under
the rules of the plan I could only sell stock that I had bought
with the money I myself put aside from my salary.
And then, until they changed the rules in April of this
year, I was too young to be allowed to sell any of the stock
which the company had bought with its matching contributions.
But the fact is: I didn't sell, even the part I could have, and
that was because I believed in the company, and I believed what
the company's management said about the future health and
potential and well being of Qwest. They said it was strong, and
they had a tremendous potential.
Mountain Bell, and then US WEST in former years, had been a
wonderful company, a great employer in the community, a great
community citizen throughout Colorado and the Rocky Mountain
region for up close to 100 years. And then, after it became
Qwest, management was so positive.
When we had a kickoff meeting on June 30, 2000, at the
Pepsi Center in Denver to celebrate the merger, Joe Nacchio
said that the Qwest stock, by the end of the year, would be
selling at $75 a share by the end of the year. And, of course,
we, the employees, believed him.
And then, long after the stock began to fall, many of us
still couldn't believe that the new leadership could come in
and destroy, in such a short period of time, really less than 2
years, all that we have built as a body of employees over that
100 years. We were no dot com. We were no startup company
coming and going in the blink of an eye.
We had a tremendous infrastructure. We had a tremendous
history. We provided a universal telephone system to everyone.
We were regulated by the Public Utilities Commission, the PUC.
How could anyone ever have imagined that a company with over
60,000 employees and a 100-year old history could be taken down
in such a short period of time? What a shock. Everybody's head
spun. It was--we all sat there in disbelief, and, consequently,
many of us still held on to our Qwest stock investments.
So as far as my Qwest stock investments were concerned,
this was, and always I had felt it was, my conservative stock.
It was my safe utility stock. This was my secure investment.
I kept putting money into the company, because I believed
in the company. And, of course, while I worked there I kept
thinking that things would turn around. And even after I left,
I kept thinking things would turn around until I started
reading in the Denver newspapers what was really going on with
some of the accounting practices. But by that time, the stark
reality had hit me, as well as so many other people. And by
then most of the value, a big chunk, and most all of my Qwest
stock savings were gone.
I just wanted to bring up one experience I think is
important to state--that as employees of Qwest, US WEST, and
even as Mountain Bell, we were all required to uphold our
corporate responsibility in the form of a type of training and
certification that was called the Code of Conduct, Code of
Business Conduct. We had to be trained on that, and we had to
be certified through testing on our Code of Business Conduct.
And, basically, that involved the illustration that we knew
what our corporate behavior was supposed to be, and that we
knew that our responsibilities were to be honest and above
board in our dealings with customers, the public, and our co-
workers.
In that training, we were warned about the dangers of
insider trading. And as a regulated utility, we understood that
we were accountable for our actions in every way. A specific
goal of this Code of Business Conduct certification was to
ensure that we would protect our company from unscrupulous
behavior, both inside and out of the company.
This was our corporate culture. We were trained in this
every year, and we had to be certified in a Code of Business
Conduct. But it seems that this Code of Business Conduct only
applied to the employees and not necessarily to the executives
who ran our company.
Even when we began to hear rumors that the new Qwest was
flying a little higher and playing a little closer to the edge,
we couldn't believe it could be true, what we were hearing
could be true. We heard questions that were raised about
Qwest's accounting practices, and we heard Joe Nacchio say that
the people raising these questions just didn't understand
contemporary accounting standards or practices.
And he kept referring to them as contemporary, or in some
cases I remember contemporaneous. Though many of us didn't
quite understand what that meant, we assumed he and the
accounting people who ran our company did understand what
contemporaneous accounting practices were. We wanted to believe
in the honesty of our CEO and of the company to which we had
given so many years.
I also had a pension plan at Qwest, but because I was let
go so many years away from my retirement the value in that
pension plan wasn't nearly enough to make up for what I have
lost in my 401(k) plan. And as I had mentioned earlier, my two
daughters, Kelsey and Ali--we are trying to assemble a new plan
through which we will be able to put them through college in
the next few years, and then after that possibly our own
retirement.
But we really no longer know exactly how we are going to do
that. The money I have lost in my 401(k) plan is exactly the
money we had put aside through a slow, deliberate, and
disciplined savings, and through really many sacrifices over
the years.
I understand that Joe Nacchio will be testifying later
today. And, really, I would like to congratulate him on
taking--having taken such good care of his children. I have
read about his children in the newspaper, and I know they go to
private schools, and I am sure that they will have a tremendous
opportunity to go to college, whatever future they wish to
pursue. I really wonder if he would be willing to help me
educate my children.
I believe Mr. Nacchio when he defied his critics and
assured me that Qwest was strong and sound and positioned for
the future. I wish I could still believe in the company I
worked for for such a long time.
I know that I must do now whatever it is going to take to
fight for my future and for the future and educational goals of
my children. But the prime years of my working life were taken
from me. I can never recover those years, those 20 years I had
spent at Qwest. I am now 52 years old, and it is really the
time and that precious life energy during the prime years of my
life--I can't recover that time. I can't get those years back.
I understand that Congress is now beginning to look into
new laws and provisions that will protect the assets for
holders of 401(k) plans, and that is very good, especially if
you are young and just beginning a 401(k) savings plan with a
company. But for those of us in our forties or fifties or
sixties, or even those of us in retirement or who are
approaching retirement, those new laws would really be too late
for us.
We need help now. We need at least some of our money back
from those who deceived us and robbed us and robbed our
children of their futures. Without a real remedy for
restitution in the form of monetary returns, returns that we
put in over so many years, my only hope now is to work full-
time until I die. Right now I see no other alternative, unless
there is some remedy for those of us who have suffered and
those of us who have lost so much. We can't get those years
back.
This is my statement and my testimony. And I really believe
that my story illustrates and represents--is the story of so
many thousands of other people and employees who have worked at
Qwest, formerly US WEST, and even those who started with
Mountain Bell.
I really thank you very, very much for this opportunity to
tell this story. And I would be happy to answer any of your
questions. Thank you.
[The prepared statement of Paula Smith follows:]
Prepared Statement of Paula Smith, Former Qwest Employee
My name is Paula Smith. I started working for Mountain Bell in
November, 1980, and stayed on when Mountain Bell became US WEST and
then when US WEST merged and became Qwest in 2000. I was one of
thousands of employees who was laid off by Qwest in 2001, working my
last day there on June 29, 2001. I started putting money into the
company's savings plan as early as I was able to--I think, probably,
all the way back to 1980, voluntarily deferring income from every
paycheck to save toward my retirement. Based on my last retirement
statement from the Qwest Plan, about $230,000 of the retirement money I
once had in Qwest stock is gone.
People ask me why I kept putting my money into Qwest stock, and
didn't take out whatever of it I could, even after the stock began to
fall. It's a hard question to answer. Of course, a lot of my Qwest
investment couldn't be sold: under the rules of the Plan, I could only
sell stock that I had bought with the money I myself put aside from my
salary. Until they changed the rules in April of this year, I was too
young to be allowed to sell any of the stock which the company had
bought with its matching contributions. But the fact is, I didn't sell
even the part I could have. That was because I believed in the company,
and I believed what the company's management said about the future
health and potential of Qwest.
Mountain Bell and then, US WEST, had been a good company, a good
employer and a good and important part of the Colorado community for
100 years, and after it became Qwest, management was more positive than
ever. When we had a kickoff meeting on June 30, 2000 at the Pepsi
Center in Denver to celebrate the merger, Joe Nacchio said that Qwest
stock would be selling for $75/share by the end of 2000, and we--the
employees--believed him. Long after the stock began to fall, I still
couldn't believe that new leadership could come in and destroy in only
a few years all that we had built as a body of employees over that
hundred years. We were no dot.com . We were no start-up company, coming
and going in the blink of an eye. We had an infrastructure and a
history, and we didn't believe that could be destroyed in such a short
period of time. In fact, I always thought of my company stock
investment as my conservative, safe stock--while I diversified the rest
of my savings fund investment, I kept putting money into company stock
because I believed that that was the secure choice. So while I worked
there, I kept putting my money into company stock; after I left, I
waited so long to think about selling it that, by then, most of the
value, and a big chunk of my savings, were gone.
I was a salaried employee at Qwest, a technical writer. One of our
duties every year was to take a course in corporate responsibility and
integrity, and to certify to the Human Resources department that we had
studied the materials and taken a test to show that we knew what our
behavior was supposed to be, and understood our responsibilities to be
honest and above-board in our dealings with customers, the public, and
our co-workers. We were warned about the dangers of insider trading,
and as a regulated utility, understood that we were accountable for our
actions in every way. A specific goal of our Code of Business conduct
was to insure that we would protect our company from unscrupulous
behavior, both inside and out of the company. Our corporate culture was
one of absolute concern for honor and good faith. Even when we began to
hear rumors that the new Qwest was flying a little higher and playing a
little closer to the edge, we didn't believe that could be true of our
company. We heard that questions were raised about Qwest's accounting,
and we heard Joe Nacchio say that the people raising questions just
didn't understand contemporary accounting standards, and we believed
Mr. Nacchio, because we wanted to believe in the honesty of our CEO and
of the company to which we'd given so many years.
I also had a pension plan at Qwest, but because I was let go so
many years away from my retirement, the value in that plan wasn't
nearly enough to make up for what I've lost in my Savings Plan. My
husband and I have two children, my daughters Kelsey and Ali who are 14
and 12 years old. We are looking forward to putting them both through
college in a few years, and then, after that, to our own retirement.
But we no longer know exactly how we are going to do that: the money
I've lost from my 401(k) Plan is exactly the money that we had put
aside, through slow, deliberate, and disciplined savings--what I liked
to call the Turtle approach to savings--and some sacrifices, to pay for
that. So right now, we are looking for Plan B.
I understand that Joe Nacchio will be testifying later today, and
I'd like to congratulate him on having taken such good care of his
children: I wonder if he is going to help me educate mine. I believed
Mr. Nacchio when he defied his critics, and assured me that Qwest was
strong, and sound, and positioned for the future. I wish I could still
believe in the company I worked for for so long.
I know that I will do whatever it takes to fight for my future and
for the best future I can make for my children, but the best years of
my working life were taken away from me, and I can never recover those
years. Qwest took 20 years of my productive working life away from me.
I am 52 years old, and I can't get those years back. I can try to start
building again, but I know that I simply cannot recover what I, and my
family, lost.
I understand that Congress is talking now about enacting new laws
and new protections for savings and retirement plans, but for those of
us who are in our 50s, it is just too late--we need help now; we need
at least some of our money back now; we need to rebuild our futures
now. Without some help, my only plan now is that I will have to work
until I die.
This is my statement and my testimony, but I believe that my story
represents the experiences of thousands more.
Thank you for your attention, and I will be happy to answer any of
your questions.
Mr. Greenwood. Thank you, Ms. Smith. We thank you both for
your poignant and personal testimony, and for your courage in
coming here. We know that this isn't the easiest thing to do,
but we thank you for being with us.
The Chair notes the presence of the chairman of the full
committee, Mr. Tauzin, and welcomes him, and recognizes him for
an opening statement.
Chairman Tauzin. Mr. Chairman, thank you. And I thank you
for allowing me to pause between this panel and the panel we
are about to receive. Obviously, this panel represents one of
the three classes of victims in the corporate misconduct
hearings you have conducted.
One of the most severely impacted class of victims, those
who gave their lives and their energies to the corporations
that have failed, not only failed them but failed the general
investors and the general public.
But this class of investors I think makes us realize again
perhaps the other side of the insider trading problem that we
have uncovered. The other side of it is where the major key
players of a corporation know or should know that their
corporation is conducting itself in an improper manner, and
perhaps reporting improperly to the investors of its company,
perhaps suffering, as we learned at WorldCom, significant
losses of income and perhaps busy covering up those losses and
putting on a much rosier face than the corporation actually
enjoys. And at the same time advising its own employees that
everything is okay.
They themselves are aware that things are wrong, perhaps
busy cashing in on the high value of their stock before the
public catches on, and at the same time advising their
employees that everything is okay. We all understand
corporations are proud of their success, and they want the
employees to be proud of their success, and they constantly
encourage their employees to work harder and longer and to
believe in their own company. And that's one thing.
But when the key managers of a corporation know, or should
have known, that the corporation is failing, and that those
failures are being covered up, bad accounting, contemporary
accounting perhaps, and yet at the same time advise their
employees that everything is okay, keep investing, don't sell
your stock, that is perhaps the greatest tragedy of all.
I commend you to the Pension Reform Bill this House has
already passed. It is on its way to--it is in the Senate now
awaiting action--that would forbid corporate executives from
selling their stock during periods of time their employees
can't sell and would protect against some of these activities,
not all of them but some of these activities, perhaps too late
for some of you, unfortunately; and commend to you the new
powers we have extended to the SEC to try to go back and
recover ill-gotten gains.
There are lawsuits mentioned today in the paper where there
are attempts being made, at least in New York, to try to do
that.
It is also important, Mr. Chairman, I think to reflect--
and, first of all, to commend your subcommittee, all of its
members, Democrats and Republicans, for the extraordinary job
you have done over the last several months doggedly
investigating the corporate misconduct we have uncovered in
these corporations, beginning with Enron and through this
recent one with Qwest and Global Crossing.
I think what we learned out of all of this is going to not
only help make these new laws work, and hopefully complete the
package of new laws into signature, but it has certainly sent
some strong messages out to corporations across America that
this is not behavior that is going to be tolerated by the
investing public.
And it is certainly not behavior that ought to be tolerated
by the good workers who come to a corporation and love it and
dedicate their lives to it as you two have. So I want to
commend you, again, as the chairman said, for your courage to
come and tell your stories. They are repeated so many times in
all the corporations we have investigated in the last year.
What we learned in last week's hearing was that, you know,
significant executives working at these two companies were
charged with making some deals happen that they themselves knew
were not good for the company, couldn't explain the reason they
were doing them themselves, questioned them in many cases, and,
nevertheless, felt compelled to do them because, as we learned,
there were instructions from someone, sometimes implicit,
sometimes explicit, to make these deals happen because they
helped make the numbers for Wall Street, even though they were
bad for the corporation, even though they drained the
corporation of its cash, stacked up debt for no apparent
business purpose other than to pretend they were making money.
And you cannot characterize what we learned last week
except as a story of betrayal and betrayal of the public trust
and the employees' trust in their own corporations. And what we
do today is to examine whether or not the key players in those
corporations knew or should have known that that was going on
in their corporations and what we might do to make sure this
doesn't happen again.
Now, what we also learned last week, Mr. Chairman, was that
these employees who put these deals together were not rogue
employees. They were responding to changes in the corporate
culture. They called it that--changes in the culture. Something
changed at the corporation. It was a time when they were making
money, and everybody was working together and the corporation
was flourishing, and then things got a little tough.
It was harder to make those Wall Street numbers, and
corporate culture changed. Cultures don't change unless
somebody wants them to change. So today we are going to explore
why those cultures changed. Why all of a sudden it became more
important to make those numbers, even if you had to make them
up, to the detriment of all the workers and the investors in
the company. Why it became so doggone important to make those
numbers up and see a corporation, a great corporation, go down
the way some of these have gone down.
Somebody had to make those cultures change. We are going to
explore that today, and why that happens and when it happens
and who made it happen in these two corporations. And it is not
going to do anybody any good to call this a new McCarthy-ism or
Enron-itis. It is not going to do anybody any good to say that
in the face of corporate income restatements as much as over a
billion dollars we have recently heard from Qwest. Those
excuses are not going to fly here, and they shouldn't fly with
you, and I know they don't.
So, Mr. Chairman, thank you for continuing this very
difficult and painful experience of looking into the lives of
the citizens of our country who have been severely damaged
because of this corporate irresponsibility that we have
uncovered.
And thank you for helping a market that is trying to shake
this off, learn what went wrong, and then begin to make wise
decisions about where to put its money.
This series of hearings has not been--has not fallen well
on the ears of American investors. Until we get all of this
behind us and American investors can again return with some
confidence to the market, and employees can start believing in
their companies again, we are going to continue this rocky
road.
So this is critical. This is important. I commend you for
it. Others I know wish that you would stop and encourage you to
stop. But you have been faithful to the challenge that all of
the members of this subcommittee have invested in you in
staying with the course and sticking to the extraordinary job
of putting the light of sunlight on some of these hidden deals,
so in the future that we won't have to hear from employees
whose families have been ripped like this.
Thank you, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentleman.
The Chair recognizes himself for questions for 5 minutes.
Let me start with you, Ms. Crumpler. In your opening
statement, you mentioned that Tom Casey sent an e-mail to
employees saying that the company was fully funded for 2 years
and could weather the storm. Do you remember when that e-mail
was sent?
Ms. Crumpler. I believe it was in the month of May.
Mr. Greenwood. In the month of May. Was there----
Ms. Crumpler. Of last year, 2001.
Mr. Greenwood. 2001. All right. Was there much discussion
among the employees about this e-mail and whether they should
take their money out of Global Crossing?
Ms. Crumpler. We all were under the illusion that this
company was going to take us into the future. Perhaps our 100-
year old company may be a 200-year old company. Joe Clayton had
a plate on his--license plate on his car saying that, $100,
that is where it was going to go. So we believed them totally
to the bitter end.
Mr. Greenwood. Okay. Let me ask you, Ms. Smith, if I could,
in your opening statement you discussed the fact that at a
kickoff meeting in June 2000, to celebrate the merger between
Qwest and US WEST, Joe Nacchio said that Qwest stock would be
selling for $75 a share. I don't know whether he had a $75
license plate by the end of 2000.
What was the stock price of Qwest and US WEST stock at the
same time of the merger--at the time of the merger?
Ms. Smith. I don't know the exact figure, but it was
trading at around I would say $50, $55 a share.
Mr. Greenwood. And did the stock price reach $75 by the end
of 2000?
Ms. Smith. No. I believe the highest price it ever reached
was around $62 a share, though I am not exactly sure that that
is correct. But it was a little over $60 a share.
Mr. Greenwood. Okay. Back to you, Ms. Crumpler. How did
Global Crossing provide you, as an employee with significant
investment in the company, with information about what was
happening with your investment?
Ms. Crumpler. We were constantly getting e-mails from Mr.
Joe Clayton. He was the one that really sold us when they first
made the bid in March 1998, I believe, to purchase us, and he
kept flying out to California, Beverly Hills.
And he would always send us these long, long e-mails
telling us that it was definitely the way to go, that it would
be like a trillion dollar marriage between Frontier and Global
Crossing. So he always sent very, very long letters, and they
were always encouraging letters that we were doing the right
thing.
Mr. Greenwood. So let me ask each of you, at what point in
the process did you begin to have doubts? At what point did you
start to think, ``oh, my gosh, this is not going to--stock is
not going to not only go to $100, or not go to $75, but it is
going to go down?'' And at what point did you begin to feel the
floor fall from beneath your feet?
Ms. Smith. I know from my recollection it was not through
direct company information, but through basically the daily
reports in the paper where we started learning about the fiber
optic swaps and the way that they were accounting for that
revenue, and the fact that that revenue was not fairly
accounted for.
And then, so basically we started learning that the numbers
were incorrect, that they were deceptive, and they were
basically created to impress Wall Street. And then, when Wall
Street--I believe it was Morgan Stanley--started questioning
those figures, kind of the light bulb went off, uh-oh, we could
really be in trouble because we haven't been getting the facts.
These are not the real numbers. This has all been a falsehood.
And so then I started--and many other people started
reckoning or reconciling themselves with the fact that there
may not be a recovery.
Mr. Greenwood. And that your options to get--to bail out
were not----
Ms. Smith. By then, stock was so low it was--I just kind of
gave up on it. I thought, well, maybe something will turn
around. You know, I still kept hoping something would turn
around. I thought they would recover somehow.
Mr. Greenwood. And were either of you aware that executives
had been selling their stock at the same time that they were
encouraging the employees that everything would be fine and to
stay the course?
Ms. Smith. Yes. Again, most of my information came through
the Denver newspapers, Rocky Mountain News or Denver Post. And
basically we read about Joe Nacchio cashing in on stock
options, something like 28--over a period of 28 months, he
would be cashing in daily to the amount of about $200,000 or
$300,000 a day in his stock options. It was just an
unbelievable number, but he was cashing in his stocks, and he
was spreading them over a long period of time.
Mr. Greenwood. How about you, Ms. Crumpler? Were you aware
that executives of the company were selling while you were
losing money?
Ms. Crumpler. Yes. In the last quarter of 2001, the
department that I worked in is Engineering and they--some of
the Engineering fellows, they were talking, and they showed me
how to go on the internet and to actually look at the trader
information. And that is where I saw Mr. Winnick selling all
the stocks, as well as the other ones.
Mr. Greenwood. That is trader with a D, right?
Ms. Crumpler. Millions. Yes. Actually, it went all the way
back to 2000, so I could see it all. But as Ms. Smith has said,
the same thing. It was so low then, and I said, well, you know,
maybe it will go back up. It will go back up. I just kept
believing them.
Mr. Greenwood. Okay. Thank you.
Ms. Crumpler. That it couldn't happen to us.
Mr. Greenwood. Thank you. My time has expired.
The gentleman from Florida is recognized for 5 minutes.
Mr. Deutsch. Thank you, Mr. Chairman.
Thank both of you, and I would add, Ms. Crumpler, that both
of you are heroes. There might not be parades, but I think all
of us who have heard and listened to what you said completely
understand that. I think some of us have an appreciation--you
know, not just raising a family as a single mom, but just
raising a family. And, I mean, clearly caring about their
futures and believing in their futures, giving back to them. I
am sure your kids appreciate it and understand it.
You have suffered a great deal. I mean, and are suffering
now. And I think it is amplified literally by not just
thousands and tens of thousands and hundreds of thousands, but
literally by millions and even tens of millions of Americans at
this point in time, maybe not to the focus, maybe not to the
degree.
I referred to an optimistic Wall Street Journal article
from last week. Yesterday there was another front page story in
The Wall Street Journal not so optimistic. I don't know how
many other people have submitted it for the record as well, but
talking about in the article specifically a couple dozen of
WorldCom employees and other employees of bankrupt companies
and personal experiences that they are having, living in
garages, selling homes, just as you, Ms. Crumpler, described,
friends or people who you have talked about.
Let me mention that some of the anger, which is I think an
absolutely legitimate--and betrayal, not just of the system but
of individuals, really ought to be directed at us up on this
dais and at the U.S. Congress, because the reality is the
401(k) laws that you took advantage of, and were not protected
by, U.S. Congress passed.
And, in fact, some of the, you know, situations that you
have described, in terms of not being able to sell some of the
stocks statutorily, or the 55-year old restrictions, right
now--and, Ms. Smith, I mean, you so eloquently talked about the
future.
Well, incredible as it sounds, with all we know, with the
testimony that you gave today, the testimony that we have
heard, or examples that we have seen, at this point in time we
are literally days away from a journey--this Congress--and we
have not changed the 401(k) laws of the United States of
America. Incredible as that sounds. I mean, it is almost
incredulous, unbelievable.
I mean, I have introduced legislation, others have
introduced legislation, that literally would have protected
you. And it won't protect you now. It won't get you your money
back. Hopefully, some of it can be. But for those other
stories, in 5 years, and 10 years, and next year, and next
month, that could occur--the blockout periods, things like
that.
We have not, at this point in time--and by all of the
projections, you know, that we are talking about, this is not
the highest priority of the leadership of this House at this
point in time. It is not like we will not go home unless we
pass legislation protecting workers in America. And I will tell
you my perspective, and I think at least many of my colleagues,
not enough and not the leadership at this point, is that we
shouldn't go home. That the suffering and, you know, the
testimony that you gave today should--we can statutorily
prevent it.
I mean, as you are well aware, I am sure at this point in
time, there is no--if your 401(k)s were managed by a
professional pension manager, you are both aware that the
investments would not have been the way you had them. Are you
both aware of that? Ms. Crumpler? I mean, had your 401(k) been
managed by a fiduciary--you know, had you given your 401(k) to
a fiduciary and said, ``Invest my funds,'' are you aware that
they would not have been invested the way you invested them?
Ms. Crumpler. Yes, I now know what a fiduciary----
Mr. Deutsch. And, Ms. Smith, you are aware of that as well?
Ms. Smith. Well, my understanding is the board of directors
and the CEOs were the fiduciaries.
Mr. Deutsch. No. But your personal--in other words, the
overinvestment in one particular equity--if you had said to a
fiduciary, I mean, anyone at any brokerage house in America,
and they took your savings for the purposes that you described,
and they put 100 percent--in your case I guess 100 percent of
the stock in one company, and let us say what happened did
happen, and 90 percent or 100 percent of that equity
evaporated, and you had given it to a fiduciary, what would
have, in fact, happened is they would have broken their
fiduciary duty. You could have sued them for malpractice.
Ms. Smith. Right.
Mr. Deutsch. And, in fact, could have recovered from them
or from their insurance or from their company or something like
that. So, in a sense, I mean, what we have done in Congress is
allowed a system--and by not changing it, I mean, the tragedy
here is not just the tragedy that you have experienced, which
is untold.
I mean, I don't think any of us could experience what you
are going through, and I--in any way we can, you know, on a
personal level, I think all of us really wish we could do more
and hope we can do something. But I think we also legislate,
and we are--our failure at this point in time, with literally
days to go before the end of this Congress, we have not
legislated to prevent this from happening.
I yield back the balance of my time. Thank you, Mr.
Chairman.
Mr. Greenwood. The Chair thanks the gentleman, and agrees
with him that we do need to pass the 401(k) reform legislation,
and would note that I am a member not only of this committee
but the Education and Labor Workforce Committee. We passed that
legislation from that committee months ago. We passed it in the
House months ago, and we await action by the Senate.
The gentlelady from Colorado, Ms. DeGette, is recognized
for 5 minutes.
Ms. DeGette. Thank you, Mr. Chairman. And I think what my
ranking member, and also the chairman, have said about passing
legislation is right. However, what really hits me is what Ms.
Smith said about even if we pass all these laws it might help
future people. It might help some of those people in their
twenties. But people who are in their forties and fifties, like
all of us, it is not going to help. It is not going to get you
your money back.
And in 1995, before I got here, Congress passed a law which
made it harder for employees like you to sue accountants and
corporate boards. And it made all these requirements that made
it much more difficult to bring these lawsuits and to get
compensation. And the purpose of that law was to stop frivolous
lawsuits, but what it really did--it did stop some frivolous
lawsuits, but it also stopped folks like you from getting back
your money.
And so I think--and then, in 1997, not content to just make
that apply to Federal court, Congress passed a law that it made
all these cases be brought in Federal court, so people couldn't
bring them in state court. And so what I think we should do,
for Ms. Smith and Ms. Crumpler, for both of you, I think we
should reform some of those laws, so that you could use the
civil justice system to recover some of the money. You know,
these executives, they are sending their kids to private
schools, and you can't even send your kids to college.
And, I mean, I was sitting up here, because my kids are 8
and 12, and I was thinking about if I lost everything I had.
And I know exactly how you feel, and it is little comfort for
all those thousands of employees of both these companies, and
some of the other ones, to say not to worry, Congress might
pass some laws sometime that might help some people in the
future. You guys need help today, and so I hope that we work on
that.
And I also really hope that both of these companies and
other companies will try to find a way to compensate some of
their employees who have really lost everything, and who can't
send their kids to college or retire.
I mean, what you say really strikes all of us, and I just
want to thank you for coming here and let you know Members of
Congress recognize that whatever we may do legislatively won't
make you whole. The civil justice system is going to have to
also participate. And, hopefully, these companies, which are
really--you know, I know Qwest has new leadership. They are
trying to bring it back more like the old phone company was.
And what they need to do while they are doing that is think
about the thousands of former employees who lost their jobs who
now are just stuck.
So, anyway, that is my message, and I actually have some
questions. Ms. Smith, I wanted you to talk--you talked briefly
in your opening about the atmosphere at US WEST and how it was
the phone company, it was a solid community leader. I want you
to talk for a minute about the corporate culture and the
feeling at the company after the company was acquired by Qwest.
Ms. Smith. Well, it quickly became apparent that we were in
a new corporate culture, and what had been a long-standing,
stable telephone infrastructure, community service company was
now kind of the ride-the-light, fast-moving, fast-paced, moving
in the fast lane, high energy, aggressive kind of company.
And people--really, one of the first things that happened
is that Qwest started pulling out of some of their community
service involvements. We were involved with Habitat for
Humanity, Race for the Cure. They would match contributions
through their US West foundation, and they stopped the
foundation. And so a lot of the philanthropic involvement kind
of ceased to exist.
Some of the other things that happened were, you know, a
quick startup of projects, and then they would cancel projects.
They would bring in--for example, I had a new CEO or, actually,
the president of my organization, ITE--he came and he
implemented a new process, and within 8 months he was gone.
Everything was canceled.
So things were just turning so quickly, and new leadership
was funneling through like a revolving door. And so it was hard
to--our work felt like it was kind of like throwaway work. It
wasn't enduring. People started getting very discouraged,
demoralized about the value of their work, and we started
feeling very insecure about the future of our company,
especially when we saw we would put a lot of energy and work
and time into projects that were canceled, and all that energy
was gone.
So it was a completely different corporate culture. They
changed the retirement laws. That also impacted me
dramatically. I had just short of 20 years. There was a 20-year
rule, which I was just short of because I had been on maternity
leave. And, consequently, some of the retirement benefits I
would have been entitled to were cutoff, just because the new
management said, ``We can't cover you in your retirement.''
Ms. DeGette. And how long did it take for the corporate
culture to change like that?
Ms. Smith. Oh, I would say within a couple months. I mean,
it happened very rapidly. The old management left, most of
them, when the new management came in.
Ms. DeGette. Ms. Crumpler, did you see some of the same
things happen at Global Crossing?
Ms. Crumpler. They left the majority of the things in
place.
Ms. DeGette. So you didn't see a change in corporate
culture at all?
Ms. Crumpler. Things were changing, the fact that a faster
pace, that we would move on, you know, quickly into the 21st
century--you know, become a leader in the fiber optic network
and the broadband. So that was what they kept, you know,
feeding us, that we would be the leader, and there were very
few competitors out there that could compete with us.
Ms. DeGette. Thank you.
Thank you, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentlelady.
And the Chair very sincerely thanks both of our witnesses,
Ms. Smith and Ms. Crumpler, for traveling from your homes in
Colorado and New York to come here to this fairly intimidating
setting to tell us your story. You did a great job, both of
you, and we thank you.
And you are excused now. You are certainly welcome to stay
with us and listen to the rest of the hearing.
Ms. Crumpler. Thank you.
Ms. Smith. Thanks.
Mr. Greenwood. The Chair would then call the second panel
consisting of Mr. Gary Winnick, Chairman of the Board of
Directors of Global Crossing Limited; Mr. Jim Gorton, former
General Counsel of Global Crossing Limited; Mr. Dan Cohrs,
Chief Financial Officer; Global Crossing; Mr. Joe Perrone,
Executive Vice President of Finance of Global Crossing; and Mr.
David Walsh, former President and Chief Operating Officer of
Global Crossing.
You can do anything you would like. Do you want to change
the--Mr. Cohrs, would you move your name plate over in front of
you when you have an opportunity? And is Mr. Perrone with us?
Okay. We welcome each of you for--we welcome you, and we
thank you all for being with us this morning.
As you heard me advise the first panel, this committee is
holding an investigative hearing, and it is our practice when
holding investigative hearings to take testimony under oath. Do
any of you object to giving your testimony under oath this
morning?
Seeing no such objection, I advise you that pursuant to the
rules of this committee, and pursuant to the rules of the House
of Representatives, you are entitled to be represented by
counsel. Are any of you represented by counsel? Mr. Winnick?
Mr. Winnick. Yes.
Mr. Greenwood. If you would identify your counsel by name,
please.
Mr. Winnick. Gary Naftalis.
Mr. Greenwood. Okay.
Mr. Winnick. And David Frankel.
Mr. Greenwood. All right.
Mr. Winnick. Both of the same firm.
Mr. Greenwood. Very well.
Mr. Cohrs, are you represented by counsel this morning?
Mr. Cohrs. Yes, Mr. Chairman, I have counsel. It is Ralph
Ferrara and Jeffrey Kinnard from the firm of Debevoise &
Plimpton.
Mr. Greenwood. Very well.
Mr. Perrone?
Mr. Perrone. Yes, I am. Also Mr. Kinnard and Mr. Ferrara
from Debevoise & Plimpton.
Mr. Greenwood. The same as Mr. Cohrs.
Mr. Perrone. That is correct.
Mr. Greenwood. And Mr. Walsh?
Mr. Walsh. Yes, I am. It is Ralph Ferrara and Martin
Auerbach.
Mr. Greenwood. Very well.
And Mr. Gorton?
Mr. Gorton. Yes, I am. It is Mr. Larry Iaxson and Mr. Rob
Raddick.
Mr. Greenwood. Very well. All right. Well, if you gentlemen
would rise and raise your right hand, I will swear you in.
[Witnesses sworn.]
Okay. You are under oath, and I will ask if any of you have
opening statements that you would like to make. Mr. Winnick, do
you?
Mr. Winnick. Yes, I do, Mr. Chairman.
Mr. Greenwood. We will begin with you. Mr. Winnick,
whatever else happens this morning, I appreciate the fact that
you have agreed to take testimony rather than to exercise your
Fifth Amendment rights.
Mr. Winnick. Thank you for that.
TESTIMONY OF GARY WINNICK, 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., MADISON, NEW JERSEY; JOE PERRONE,
EXECUTIVE VICE PRESIDENT OF FINANCE, GLOBAL CROSSING LTD.,
MADISON, NEW JERSEY; AND DAVID WALSH, FORMER PRESIDENT AND
CHIEF OPERATING OFFICER, GLOBAL CROSSING LTD.
Mr. Winnick. Good morning, Chairman Greenwood and members
of the subcommittee. This is my first appearance before a
congressional committee. In a more perfect world, I could be
here to applaud our company's success in building the world's
greatest telecommunications network. But, of course, I am not
here to applaud success.
Rather, the devastation that has beset the
telecommunications industry during the past 12 months and my
own company's bankruptcy, have raised some very important
questions for this subcommittee. And I am pleased to respond to
any of the questions you put forward to me today.
As you said, Chairman Greenwood, I chose to testify today
for two very important reasons. First, I believe it is
important for the subcommittee, as well as the Congress and the
American public, to hear directly from Global Crossing's
executives, including its chairman, about the hard work of the
men and women who built this great company.
They include some of the very best executives, both past
and present, who join me on this panel today. All are people of
keen intellect and healthy ambition, and all have the drive to
make Global Crossing a success. I was proud to serve with them.
Most important, however, are the thousands of people across
the globe who helped build this company. These Global Crossing
executives and employees brought out dream to bright reality.
They shared our collective vision of revolutionizing global
telecommunications.
It was each one of them who put their careers and
opportunities aside to become part of the Global Crossing
family. And make no mistake--we were a family--in the face of
enormous financial risks in joining a startup.
Mr. Chairman and members of the subcommittee, I want to
express to them and to you as the elected representatives, my
profound sorrow at the impact of Global Crossing's distress on
their professional lives and their financial well-being, and my
sadness over the setback to our shared vision.
Second, I chose to testify today because I want to help you
distinguish the facts as I understand them, from fiction or
speculation, both with respect to Global Crossing and to me
personally.
When we began to construct our 100,000 mile fiber optic
network, it seemed as though there was simply not enough fiber
optic capacity to satiate the appetite of a world that would
become committed to transmission of ever-increasing and
enormous amounts of voice, data, and video traffic. As we all
know, the principal driver was the demand forecasts for the
explosive growth of the internet worldwide.
Our vision was one of innovation and competition--to be the
first company out of the gate in building a global network to
meet demand and to provide the best possible service to our
customers. We set out to change the face of telecommunications
by competing directly with the traditional telecommunications
giants and by dramatically cutting the cost of
telecommunications to our customers and their customers around
the globe. And, for the first several years, we were very
successful.
Neither our bankruptcy nor the global telecom meltdown that
precipitated it is unique to our company. Others in the
industry either have filed for bankruptcy or are concerned that
they may have to at some point in the future. A $300 billion
industry that is the backbone of our nation's capacity to
communicate with each other is in jeopardy. Indeed, our very
freedom to speak our minds will be of little value if we no
longer have the facilities and the access to be heard.
Before responding to your questions, may I first observe
that all too often Global Crossing has been mentioned along
with a number of companies as among the great corporate
scandals. I do not have the knowledge of the facts and
circumstances relating to other companies, other than what I
read, and I cannot comment on them.
But Global Crossing's bankruptcy, based on the facts known
to me, is not a result of fraud, but of a catastrophe that
befell an entire industry sector. I don't offer this as an
excuse, because it is certainly not an acceptable excuse. It is
an explanation that I hope will take on greater meaning as our
discussion proceeds here today.
You have interviewed many past and present Global Crossing
employees, and you have reviewed tens of thousands of e-mails
and other documents from our company. I have only my
recollection with me here today, and I request the opportunity
both to review the transcript of these proceedings and to
provide clarifying comments so that your record may be
complete.
Thank you, Mr. Chairman.
Mr. Greenwood. You will have both of those opportunities.
Mr. Winnick. Thank you, Mr. Chairman.
Mr. Greenwood. Thank you.
Mr. Cohrs, do you have an opening statement?
Mr. Cohrs. No, Mr. Chairman. I will answer questions.
Mr. Greenwood. Very well.
Mr. Perrone, do you have an opening statement?
Mr. Perrone. No, I do not.
Mr. Greenwood. Mr. Walsh, do you have an opening statement?
Mr. Walsh. No, I do not.
Mr. Greenwood. Mr. Gorton?
Mr. Gorton. No, I do not.
Mr. Greenwood. All right. The Chair then recognizes himself
for 10 minutes for purposes of inquiry and notifies the members
that this will be a 10-minute round.
And, Mr. Winnick, as you might suspect, I am going to start
with you. We have just heard from Lenette Crumpler, a Frontier
employee who lost her entire retirement savings. She has
testified that she believed in Global Crossing. She believed in
the executives who told her and other investors that the
company would ``weather the storm.''
And yet while she did not sell her stock because she had
faith in the company and its leadership, you sold almost 10
million shares and reaped $123,512,549 in proceeds from that
sale in May 2001.
When you sold those shares in May, you knew that the
financial projections for the company showed that Global
Crossing may not meet its numbers for the quarter, isn't that
correct, Mr. Winnick?
Mr. Winnick. When I sold the stock in May--May 23, 2001, to
be exact--the company had just completed, as I recall, an
analyst call reporting its quarterly numbers, on May 10, I
believe, or May 11. The company--in fact, I was I believe in
Asia at the time, but I read the report and our CEO had
reconfirmed along--he was on the call with Dan Cohrs, our Chief
Financial Officer, reconfirmed guidance, both for the quarter
and for the year.
So the suggestion that I sold stock, based on information
that was not readily available, is not correct, sir.
Mr. Greenwood. All right. Well, I am going to ask you to
turn in your notebook there to Tab 10. And Tab 10 consists of
the notes from a management meeting held on the 16th of April
of last year. I am sorry. Let me correct that. Let me correct
that. I am sorry.
Tab 15. These are the notes of the Office of the Chair
Minutes from May 16, which was exactly 1 week prior to your
sale of the $123 million worth of stock. And if you would turn
to page 2, at the top of that page, you will see a handwritten
word that says, ``Highlights.'' And then it says, ``The
forecast for second quarter is $285 million, which is about
$360 million light.''
So, clearly, 1 week before you sold your stock you knew
that you were--the company was in fairly horrendous shape, that
you were going to be $360 million short of your revenue
projections for the quarter. Isn't that not correct?
Mr. Winnick. Well, I don't have the specific recollection
of this forecast, and I am reading this now. But I can tell you
my reaction to this particular meeting on May 16, as well as
other Office of the Chairman meetings, which we conducted at
least once a month and many times twice a month.
The business cases, the numbers that were being created for
the presentation in the--these are notes of the meeting,
Chairman Greenwood. There was a--as I recall, from most of the
Office of the Chairman meetings, there would be a book prepared
for that, which I don't have the benefit of having here in
front of me, so I am just looking at the notes.
Whatever you see here are just highlights, and they are, in
my estimation, very preliminary. As you probably know, the
company did make its numbers for the second quarter of 2001,
notwithstanding----
Mr. Greenwood. The quarter was half over at this point, so
I am not sure how preliminary they are. But you had revenues of
$285 million. I think the note was you are $360 million short.
Is that--that sounds to me like an earthquake, not a
preliminary glitch.
Mr. Winnick. I think if you look back, Mr. Chairman, in the
history of this company, which I had been involved in from the
very inception, there was always a great deal of uncertainty
during the quarters. And, in fact, it is an anomaly, but we
really never knew what the final result of the quarter would
look like until the end of the quarter. It was the nature of
the business.
So to the extent that there is a highlight here that the
numbers are light halfway through the quarter doesn't really
give me any indications of what they were going to do about it.
Tom Casey, who was the CEO at this time, had a variety of
initiatives in place in the company, both cap ex reduction,
capital expenditure reduction, cost reduction, head count
reduction, and the company was very much focusing and shifting
from a pure wholesale IRU model to an outsourcing model.
For example, during this timeframe in May, as I recall,
Deutsche Telecom was doing a significant amount of due
diligence on the company, not for purposes of acquiring the
company, which obviously we would not have objected to at the
time, but looking at the company in terms of its network
capabilities.
One of the things that has been lost in this myriad of
press is what this company was about. We built----
Mr. Greenwood. Well, let me--I am going to have to--I have
limited time, so I am going to have to stick with the line of
questioning.
Mr. Winnick. Oh, I am sorry.
Mr. Greenwood. I would like you to turn to Tab 10, if you
will, which are the management meeting minutes for April 16,
2001. And if you look on the second page, about halfway down,
it says--and this is Tom Casey speaking. ``We do not have room
for more reciprocal deals.'' Would you interpret that for us?
And in the context of that, would you tell us how frequently
you communicated with Tom Casey?
Mr. Winnick. Sure. Well, it is certainly easier for me to
tell you how much I communicated with Tom than what Tom's
intent was in some statement here. I spoke to Tom frequently. I
spoke to him--he spent a fair amount of the week back in New
Jersey. I was in Los Angeles. I probably talked to Tom at least
once a day.
Mr. Greenwood. Okay. So you talked to Tom once a day. So
he--here he is, on April 16, saying, ``We do not have room for
more reciprocal deals.'' He is talking about missing revenue.
He says, ``The company is missing revenue, running at an
expense rate that is ridiculous.''
Mr. Winnick. Well, he----
Mr. Greenwood. Did he share that with you?
Mr. Winnick. Well, he did----
Mr. Greenwood. Those concerns with you?
Mr. Winnick. Well, he certainly shared with me that he had
a variety of cost reduction initiatives in place. Absolutely.
Mr. Greenwood. That is not what I am asking you. I am
asking you, did he say to you that the company is, ``missing
revenue, running at an expense rate that is ridiculous''? Not
in so many words, but did he indicate to you that that was the
dire situation that he was seeing?
Mr. Winnick. I don't believe----
Mr. Greenwood. Back in April 2001.
Mr. Winnick. I don't come out with the same interpretation
as you do, Mr. Chairman.
Mr. Greenwood. Well, what is your interpretation?
Mr. Winnick. That anything is dire. I look at this Tab 10,
and I see a note here that says, ``David,'' and I can't make
out the word next to it. It looks like ``carrier,'' but I am
not sure. I assume that is David Walsh.
And at the same time in this memo that--there is some
notation of perhaps--well, let me find that first. I do see
here that there is a notation on this management committee
meeting, which, as you could see by the heading, I am not part
of, and I was not----
Mr. Greenwood. All right. That is why I asked you if you
talked to Tom Casey regularly, and you explained you talked to
him daily. So I am assuming that he was not hiding this kind of
information from you. But you assume otherwise?
Mr. Winnick. Well, that would be unfair, because when I
said I spoke to Tom, he didn't have a lot of time. He had a lot
of pressure. He had a lot of responsibilities.
Mr. Greenwood. So would you characterize your
communications with Tom Casey as one in which he was not
forthcoming with the important matters that affected Global
Crossing?
Mr. Winnick. No, I wouldn't say that at all.
Mr. Greenwood. Okay.
Mr. Winnick. But I think it is important to recognize that
Tom was the CEO of the company during this period of time and
had a lot of responsibilities and took those responsibilities.
He is a very competent person.
Mr. Greenwood. Okay. Well, I think that is probably true.
If you look at the last page of that memo there, again, this is
quoting Tom Casey who is very competent. He says, ``Theme for
today: must fix this! Missing revenue. Running at expense rate
that is ridiculous.''
Now, there is someone you have just described as very
competent describing the situation at Global Crossing in April
of last year. And you began by telling me that you thought in
May, when you sold your stock, that the company was in great
shape. And here he is a month ahead of time communicating with
you daily and indicating that the company is missing revenue,
running at an expense rate that is ridiculous.
Mr. Winnick. Well, first of all, the--it would be the wrong
assumption, Mr. Chairman, to suggest that by having some
conversation with Mr. Casey, which I think for the most part I
spoke to him daily, but they were sound bytes. They were brief.
There might be something he wanted to mention to me or
something I wanted to mention to him, not necessarily always
related to Global Crossing, I might add.
His notation--this notation here about missing revenue, I
would expect Tom to put as much fire under his leadership team
as he needed to to run the business the way he felt was
appropriate.
Mr. Greenwood. Let me, finally, ask you to turn to Tab 8.
Mr. Winnick. May I make one other comment, though, sir?
Mr. Greenwood. Certainly.
Mr. Winnick. Going back to this tab, one of the things that
is not being raised is that David--and I assume it is David
Walsh--indicates here that he has $1.7 billion in
opportunities. And I assume those are transmission
opportunities in some form.
Mr. Greenwood. Or swap opportunities. It is not made clear.
Mr. Winnick. Well, and he also notes here $678 million
focused primarily in Global accounts. So I can't tell you what
is meant by this memo, which I didn't receive. But I can tell
you as it relates to my May 23 sale.
Mr. Greenwood. Well, let me--since my time is expiring, let
me ask you to turn to Tab 8.
Mr. Cohrs. Mr. Chairman, would it be permissible for me to
add a bit of context to these notes? May I make that request?
Mr. Greenwood. You may. We will get to all of you, and you
can insert that into your responses.
But are you at Tab 8, sir?
Mr. Winnick. Yes.
Mr. Greenwood. This is, again, Tom Casey, you have
characterized as speaking to you daily, as very competent. He
says, ``We need to treat this as a crisis.'' Oh, I am sorry.
This is on page--this is the third page of that document.
He says, ``This revenue shortfall is a crisis. The company
is a billion dollars off on revenue and a billion dollars off
in expenses.'' Is it your opinion that the crisis was, in
fact--the company was, in fact, in crisis at that time?
Mr. Winnick. Absolutely not. No, it is not.
Mr. Greenwood. So even though Mr. Casey, whom you have
described as someone who spoke to you daily, was very
competent, he says, ``We need to treat this as a crisis. We are
a billion dollars off on revenue, a billion dollars off on
expenses,'' you--is it your testimony here this morning that he
did not convey that to you? Or is it your testimony that you
think that he was in error with regard to this assessment that
the company was in crisis?
Mr. Winnick. Well, this April 9 meeting was a management
committee meeting, and I don't know the origin. But there is--
again, the heading here has at least 10, maybe more,
executives, many of which are sitting here on this panel with
me today.
Mr. Greenwood. I understand that. But I am addressing your
attention to where Mr. Casey says, ``We need to treat this as a
crisis. We are a billion dollars off on revenue and a billion
dollars off on expenses.'' And my question to you is: is it
your testimony this morning that a) Mr. Casey was wrong, and,
in fact, it wasn't a crisis, and you weren't a billion dollars
off on revenue and weren't a billion dollars off on expenses?
Or is it your testimony that he was correct and he just didn't
share that information with you?
Mr. Winnick. I don't have any recollection of Tom conveying
that to me. And, in fact, there is a great inconsistency to
this, because, as I said before, in May both Tom and Dan
reconfirmed the guidance. So I don't know what the origin of
this was, but certainly had Tom been concerned, or the rest of
the management team been concerned about a revenue shortfall--
--
Mr. Greenwood. But that is exactly the point here. You went
out publicly and assured everyone in the public--your
investors, your employees--that things were in good shape,
while at the management meeting the company is described as in
crisis with these billion dollar shortfalls. And you are
sitting here this morning telling us that you were not aware of
this, even though this guy reported to you and talked to you
daily. That is hard for us to follow.
Mr. Winnick. Well, when I said--when you asked me the
question regarding Tom talking to me, we did speak regularly,
and almost daily, but it may be just a very small sound byte.
Tom reported to me as the chairman. He ran the business. He was
the CEO.
In fact, when Tom was asked whether he wanted to be the CEO
of this company, Tom had a condition attached to it, which was
a very reasonable condition. He wanted the autonomy to run the
business. He wanted the autonomy to have all of the people in
the company report to him.
Mr. Greenwood. Well, did Lod Cook report to you from these
meetings?
Mr. Winnick. Lod didn't report to me. We worked together as
chairman and co-chairman.
Mr. Greenwood. All right. My time is way over, and I am
going to give the same amount of leeway to the ranking member
as I have given to myself to get through this line of
questioning.
But here is what concerns me. If you look at Tab 6, this
was April--these were the management minutes of April 2, 2001.
You had just gotten the first quarter results back.
Mr. Winnick. I am sorry. Chairman Greenwood, which one,
please?
Mr. Greenwood. Tab 6, first page of that. There is an
indication there that says, ``Cannot continue running the
business with IRU sales to counter losses on current service.''
And then it says, ``Reminder: No one to talk about performance
until we get our numbers published. Be careful. Do not comment
on the market either. Formal earnings release will be in middle
of May. We remain comfortable with our guidance,'' which is
what you have assured us here this morning, that you were
relying on guidance.
And what it sounds--what it looks very much like to us is
that while it was clear to the management in the company at
this time that you were in a hell of a situation, that you were
billions of dollars short in revenues, that you were
experiencing ridiculous losses, that your message to the public
was, ``Pay no attention to the man behind the screen. All is
well.'' And advice to the rest of the management team to be
quiet, be careful, and don't let this--don't let the public in
on the truth. How would you--would you interpret this
otherwise?
Mr. Winnick. I would interpret it quite--very different
than that.
Mr. Greenwood. Well, we are all ears, Mr. Winnick.
Mr. Winnick. Okay. First of all, as I indicated before,
Chairman Greenwood, I did not participate in these management
meetings, and I am not even noted here as being in the
meetings, which was part of my understanding from----
Mr. Greenwood. But you didn't--and no one reported to you
about these meetings?
Mr. Winnick. Whatever discussions Tom Casey had with his
senior leadership team, which--all of which are sitting here at
this table, so perhaps they could answer this question better
than I.
On May 9, I believe it was, Joe Perrone, notwithstanding
this as being April, and which is, in fact, after the quarter,
the first quarter, Joe Perrone had prepared a schedule for Tom,
which I had the benefit of seeing in preparation of coming here
today, sir, that Tom used, and Dan used I believe, as the basis
of their analyst call on May 10 or 11. I am not sure on the
date, and where they, again, reconfirmed their guidance.
The business--we were a young company. We didn't have the
benefits, as many major companies have, in terms of having
reserves that they could bring back into the quarter when they
have shortfalls. We had to, in our company, go out and get the
business. Our network was coming online. We were adding more
facilities.
The demand and traffic studies, whether they were right or
wrong, which turned out to be wrong in many cases, were almost
unanimously very, very bullish and positive on the accelerating
demand for transmission services because of new types of
applications that were coming on stream.
Mr. Greenwood. We know that was the general mood in the
telecom industry. But the chronology that we have just outlined
here--and I have to stop, because my time has expired, and I
apologize for that. But the chronology here is that there is
crisis at the management level. There is direction to keep mum.
There is bullish guidance given to the public, and soon
thereafter there is recognition that things are pretty bad. And
that is what this hearing is all about.
The Chair recognizes the gentleman from Florida for 20
minutes to compensate for the extra time that I took.
Mr. Deutsch. Thank you, Mr. Chairman. I appreciate it.
Mr. Winnick, you know, I would like to follow up on a
number of things that Mr. Greenwood mentioned. And, obviously,
you know, the inference is that the sale that you made on May
23 that yielded $123 million was a sale based upon insider
knowledge. I mean, that is clearly the inference that he
questioned you about.
I would be curious about a couple of things. One is, at
that point in time, May 23, could you give us an approximation
of how much stock in Global Crossing you owned?
Mr. Winnick. Yes. If I may, Congressman Deutsch, I can come
at it a little bit differently. Over my tenure with the
company, which is about five and a half years at this point, I
have sold a total of about 30 percent of my holdings in the
company. I still maintain 70 percent of my holdings, even
though it doesn't have a lot of value today.
So the suggestions that anyone might have, particularly in
some of the articles I have read, that I have bailed out and
cashed out, is just absolutely false. In the--which, by the
way, the 70 percent relates to I still own about 80 million
shares in equivalent. I have sold about 30 million shares from
the inception of the company. Does that answer your question?
Mr. Deutsch. Yes. I mean, just--it would be easier also if
you could mention--you have mentioned the share value. But as
of May 23, in Global Crossing stock--I mean, obviously, you
didn't sell the majority of your shares, you sold a fraction.
Just to give us a perspective of how much you sold, you know,
you sold what percent of your holdings at that point in time,
in that sale?
Mr. Winnick. In May?
Mr. Deutsch. Or, I mean, you sold $123 million worth of
Global Crossing. How much did you own----
Mr. Winnick. I sold 10 million shares. I still----
Mr. Deutsch. And you owned 90 million at the time?
Mr. Winnick. Yes.
Mr. Deutsch. So you had about a billion dollars,
approximately a billion dollars, in Global Crossing stock at
that point?
Mr. Winnick. More than that.
Mr. Deutsch. So literally, at that point in time, you sold
approximately 10 percent of your shares?
Mr. Winnick. Ten, 11 percent. That is correct, sir.
Mr. Deutsch. Okay. And the reason I pursue this--not--I
really don't like to get into personal anecdotal stories. But I
think it actually relates to the last panel where people who
had 100 percent of their holdings--and, obviously, the scale of
the holdings was much smaller--but 100 percent of their
holdings in a particular stock.
You know, at that point in time, of your--you know, I mean,
again, if you don't feel comfortable, I wouldn't answer it. But
how much of your net worth at that point would be in Global
Crossing stock? 80 percent of it? 90 percent of it?
Mr. Winnick. Most of my net worth has come from a result of
Global Crossing.
Mr. Deutsch. And so what you were doing at that point in
time would be really doing what any prudent investor would be
doing and diversifying a little bit?
Mr. Winnick. Well, actually, more significant than that, I
was not a big seller of stock in the company. In fact, at the
time we had a deal with US WEST to merge. Part of the
transaction which I negotiated was to have US WEST buy 10
percent of Global Crossing. This is pre-Frontier.
At the time, I owned 20 percent of Global Crossing, because
this was pre-dilution to Frontier. Effectively, we created a
$3.5 billion cash tender for the stock of Global Crossing,
which I don't believe any telecom company, or at least emerging
telecom provider, ever had for the benefit of their
shareholders. And this gets lost.
In fact, this is never written about. I was entitled at
that time of that tender to take out 20 percent of the proceeds
of $3.5 billion, which effectively was $700 million, for me and
my family. And I only elected to take half and left the balance
for the benefit of the other shareholders. So, effectively, the
shareholders were able to prorate a much bigger percentage.
Mr. Deutsch. Let me, you know, go back to that specific
sale, because that really seems to be a lot of the focus of the
previous testimony. Is there--I mean, at that point, is that
something, I mean, you were planning on selling? I mean, was
that something that your personal, you know, financial advises
you personally--I mean, what made you sell at that particular
point in time?
Because clearly the inference is that you knew something
about the company that others didn't know, and that is why you
sold, while others were holding on and while there were public
statements about how good the company was doing.
Mr. Winnick. Well, I thank you for the question. Obviously,
some could look at it as if I decided on a given morning to
sell. That is not the case.
And factually, and the documentation will support, what I
am about to say to you. At the time that Global Crossing was
created, I had my own personal investment group called Pacific
Capital Group, which I still have. Pacific Capital Group had a
line of credit that had been drawn down almost equal to the
exact dollar amount of the sale proceeds.
It was Pacific Capital Group that sold the stock or entered
into this financial transaction referred to as a collar on May
23. And it was something that had been worked on for a few
months in terms of all the legal documentation and dealing with
the investment dealers to see who could do a better job on it.
We decided to pull the trigger, however, in May, but this had
been contemplated for quite some time.
Mr. Deutsch. I mean, any particular reason why that
particular day in May, or why in May?
Mr. Winnick. It was just, you know, I was getting good
advice from my financial team at Pacific Capital that it was
prudent to reduce or eliminate the line of credit. The window
was open. Shortly after the earnings release on May 10 or 11,
the window was open by the company. And I was very cautious and
very careful about the execution of selling stock.
First of all, I was the largest shareholder of the company,
and obviously that sends a message, and I didn't lose sight of
that. I rejected the notion about selling stock into the market
every day as most people do when they are insiders in the
company, and then their filing requirements are 10 days or 2
weeks later. I wouldn't do that, so I wanted it all done at one
time.
And, in fact, I insisted with the investment dealer who
handled that transaction that it be disclosed within 2 days,
because I didn't want rumors and information being in the
marketplace. But I sold the stock solely for the purposes of
eliminating an indebtedness, and the window was open, and we
documented everything relating to what was appropriate and
legal during that period and sought all of the necessary
approvals.
Mr. Deutsch. Let me go back to, again, some of the
questions that you have already heard. Obviously, you know,
again, we have really a truly I think incredibly competent
staff in terms of going through records and trying to really
put together and piece together incredibly complicated puzzles
in terms of historical things that have happened at different
companies.
And, you know, I mean, they have done a great job again in
this hearing. And they have gotten--you know, put together in
really useful order minutes of meetings that you can question
about. I mean, first of all, let me just be clear, and so I
understand.
You did not attend any of these meetings that--the
documents that you--that we have talked about--the Tab 8, the
Tab 15, these are executive committee meetings that you would
not have been----
Mr. Winnick. If they were management meetings, I did not
attend. If they were Office of the Chairman----
Mr. Deutsch. Okay. So these are management--MMM would be
management meetings?
Mr. Winnick. Management meetings I did not attend.
Mr. Deutsch. Okay. So you did not attend any of the
meetings of these notes?
Mr. Winnick. No.
Mr. Deutsch. Okay. And so your information about what
occurred at those management meetings would occur how?
Mr. Winnick. Generally, it wasn't reported to me.
Mr. Deutsch. I mean, you obviously wanted to know what was
going on in the company. How were you keeping track of what was
going on in the company?
Mr. Winnick. You know, I talked to Tom enough that I was
generally informed on the company at a very high level. I
mean----
Mr. Deutsch. Like how often a week, I mean, would you be
talking to him?
Mr. Winnick. Well, I said to Chairman Greenwood that I
think I spoke to Tom very frequently. If it wasn't every day, I
spoke to him at least 3 or 4 days during the week, and, in
fact, he was in L.A. a couple of days during the week, so I
would have a chance to see him for, you know, a small amount of
time.
Most of our conversations was more in corporate development
and strategy as opposed to sales and things of that nature,
although I did certainly help and involve myself in some sales
activities.
Mr. Deutsch. So, I mean, is it your testimony that the
specific things discussed--the billion dollars in shortfall in
sales, or the billion dollars over in expenses--you would have
no personal knowledge of that?
Mr. Winnick. Tom was always very confident that he would
make his numbers and did not involve me in the minutia of--and,
frankly, billion dollar shortfalls, I think, is certainly
something that would be very relevant, and you would assume he
would come to me. So I don't believe he believed it. I don't
believe his management team believed it. And I don't know the
basis of why these are in the management meeting notes, but I
didn't get copies of the management meeting notes.
Mr. Deutsch. So what you are telling us, then, is that even
though it says it is a billion dollar shortfall it might have
just been a way to motivate people? You have used that term
previously, that things are worse than they look. I mean,
trying to give us a feel of what was actually going on.
Mr. Winnick. Well, you know, the notation of a shortfall is
a notation in the absence of the future business opportunities.
You know, as I said before, in one of the notations that
Chairman Greenwood referred me to, it showed a shortfall, or a
notation of a shortfall I believe, and then it showed $1.5
billion, $1.7 billion, of business opportunities.
Mr. Deutsch. So it is kind of how we use numbers on
deficits. I mean, a shortfall really isn't a shortfall. A
shortfall is a shortfall based upon what the projection was,
hopefully in an optimistic way, going to be.
Mr. Winnick. To me, all of these numbers that I would get
to see at the Office of the Chairman, notwithstanding the
management, because the origin of that--there are people here
who can certainly address that much better than I--were
preliminary. The Office of the Chairman information was high
end, and then bottom line, so that there wasn't a lot of meat
to the middle of it.
Mr. Deutsch. What about the comment, you know, in the
minutes ``treat it like a crisis''? I mean, is that--again, I
mean, is it a crisis? Treat it like a crisis? I mean, what is
going on in this company? Is there a crisis in the company that
you are aware of? Or are we treating it like a crisis to
motivate people to try to make the sales at the end of the
quarter?
Mr. Winnick. Well, at the risk of troubling anybody, I
believe that from the very inception of this company, even
before it was a public company, every quarter was a crisis. We
didn't have a foundation to draw from.
Whatever business we did, and whatever business got booked
in that quarter, is business that we went out and sought, and
in many cases it was business that was taken away from the
incumbent phone companies that totally dominated the landscape
of telecom, and, unfortunately for all of us, will dominate the
landscape of telecom in the future because of the demise of
companies like ours.
Mr. Deutsch. I mean, you talked about making his numbers at
the end of the quarter. I mean, you know, the major focus of
what we have looked at is this, you know, so-called sham
transaction, the swaps that really had no business purpose. I
mean, what was your knowledge, or what is your level of
knowledge, in terms of the details of a specific transaction?
Mr. Winnick. Okay. I take issue with the comments that are
used of swaps and hollow transactions and terms of that nature.
Our company--actually, from the very beginning of the company,
did reciprocal transactions. So it wasn't a new revelation. But
there were very specific procedures in place.
First and foremost, there needed to be a business case that
had a justifiable business purpose--not a manufactured business
purpose, but a justifiable business purpose. And that was just
one level of check and balance.
The second level of check and balance would be the sign-
offs of the various department heads throughout the company--
network services, network engineering, sales, financial. Joe
Perrone is a very experienced chief accounting officer and was
a senior partner at Arthur Andersen, which obviously is not a
name today that people want to be proud of, but was the gold
standard in this industry.
Dan Cohrs is a Ph.D. and very capable, and he is very smart
and very capable, and he is the CEO--the CFO of this company
and remains in that position, as well as Joe, notwithstanding
the crisis that we have been living through here for the last 9
months.
They, too, needed to approve and sign off on the deals, the
reciprocal transactions. The CEO was required to sign off on
the business transactions. And then before--it was my
understanding before anything was booked in the company it
required Arthur Andersen's sign-off. And in some cases, these
transactions went to the audit committee, and in some cases
those transactions came to my door because of the threshold of
dollars that were involved in it. So----
Mr. Deutsch. You know, what I actually just asked our staff
was just examples of some of the transactions that have
obviously raised questions to us, but also to our staff. You
know, what was your level of knowledge on the 360 transaction,
in terms of swaps or reciprocal?
Mr. Winnick. I had a fairly good knowledge of the
transaction at the time it was brought to me.
Mr. Deutsch. And in terms of trying to defend it as a
business purpose, could you get--I mean, could you--still in a
position to defend that it is a business purpose?
Mr. Winnick. Could I defend it today?
Mr. Deutsch. Today.
Mr. Winnick. Knowing what I know today?
Mr. Deutsch. Well, obviously, not hindsight.
Mr. Winnick. Right.
Mr. Deutsch. But at the time.
Mr. Winnick. It is a little difficult, because the company
did file for bankruptcy. My job was not to defend or reject the
business purpose, business cases, which I had no involvement
with in terms of the operations of the company.
I remember the 360 transaction. And, in fact, it was a
business case that was presented, and the reason it was brought
to me, and then the executive committee of the board, was
because of the dollars involved. And, frankly, I was surprised
when Tom Casey told me about the transaction before our
executive committee meeting, that part of the transaction
involved us acquiring capacity in the Atlantic, because it was
my assumption that we had ample capacity in the Atlantic, but I
wasn't involved in the details of that.
And the business case was very much supported by all of the
operating people that were on the call. The only issue of
question with 360 was the financial instability that I think
all of us perceived as the primary risk factor in doing
business with them at that time.
Mr. Deutsch. Mr. Perrone, would you want to comment on the
business purpose of the 360 network transaction? And could you
defend it, you know, in a more specific way? Again, at the time
when it was made.
Mr. Perrone. Well, I mean, I can comment generally. I was
responsible for putting the process in place by which the
various functions in the company approved the business cases.
But from my general knowledge, as an example, I was in the
budget meetings many months before that.
Mr. Deutsch. In that case, before you answer, is anyone
else here in a position to, you know, basically give us the
background of why, you know, from your perspective that that
was--Mr. Cohrs?
Mr. Cohrs. If I may, Mr. Deutsch, the 360 transaction
originated from a need for Atlantic capacity at Global
Crossing. We had, as Mr. Perrone was just about to mention, in
the budget meetings in the fall, we had extensive presentations
from our product management and network engineering people who
ran those departments, that we had needs based on our forecasts
at the time.
Now, this was based on the forecast at the time--that we
had needs in the very near future for additional capacity in
the Atlantic. Partly it was because the demand forecasts were
very robust at that time. Partly it was because of the network
configuration we had in the Atlantic. We had built our own
cable.
We had purchased or co-built with Level 3 half of another
cable, and we were projecting that we would have a level of
demand sufficient to fill up our own cable, which meant we
would have no redundancy and no backup available in the
Atlantic. And it was critical for us to obtain redundant
capacity in the Atlantic to provide for that demand that we had
projected.
We were at a point at this time in the spring when it was
actually too late, based on those forecasts, to construct the
capacity, and it was both more timely and more economically
efficient to purchase the capacity.
Mr. Deutsch. If I could follow up something specifically, I
think, and this is--this is from our previous hearing, which
hopefully I am sure you have been briefed on, if not watched.
But Mr. Joggerts told the hearing, and the staff as well, that
that deal would not have been entered into if it wasn't for
falling short of first quarter revenue. Is that correct?
Mr. Cohrs. I don't believe that is correct, sir. I think
that the reasons I just described were the primary reasons for
doing that transaction. It is true that that deal contributed
significantly to our financial results, but it is certainly not
the only reason that transaction was done.
Mr. Deutsch. If I could just one--just follow up to that
question. Mr. Gorton, apparently I guess you shot down the
deal. I mean, would that be your assessment as well?
Mr. Gorton. Obviously, it still flew. I was opposed to the
transaction.
Mr. Deutsch. And could you describe the business purpose?
Mr. Gorton. I think----
Mr. Deutsch. Because really, again, the premise is--and our
premise really is that--well, not our premise, but what we are
really investigating, is the issue of sham transaction. There
was not--because that is the key thing. If there was not a
business purpose, a legitimate business purpose that is
defensible, then I think we get into literally criminal
activity at that point, because then the markets can't--there
is not transparency.
So, I mean, was your--what were your objections to it? I
mean, at that time.
Mr. Gorton. Well, I had heard many of the executives tell
me what the business purposes of the transaction were, and I
believed that those were good business purposes. The problem is
the transaction as structured, to me, presented too much risk
to the company. And the legal risk associated with a 360
bankruptcy, to me, outweighed any business purpose that you had
for the transaction. So I believe that the company should not
have entered into that transaction.
Mr. Greenwood. The time of the gentleman has expired. We
will be doing another round, and we certainly want to explore
that line of questioning.
The Chair recognizes the gentleman of the full committee,
Mr. Tauzin, for 10 minutes.
Chairman Tauzin. Thank you, Mr. Chairman.
Mr. Gorton?
Mr. Gorton. Yes, sir.
Chairman Tauzin. When last Enron was here, Mr. Skilling
gave us a similar line, that he hadn't sold all of his stock
after all, so he couldn't be held responsible for knowing
anything or dumping stock at the detriment of the Enron
employees or the general investing public. In fact, he said he
had more stock left after he made his sale. He sold, we were
told, $190 million worth of stock, netted $112 million, but sat
near where you are sitting saying, in effect, ``But I didn't
sell it all, so that was okay.'' Now you are the general
counsel of the corporation. And Mr. Winnick comes to you and
says, in effect, in this open window on May 23 when he decides,
according to his words, to pull the trigger on a $123 million
sale of Global Crossing stock, you had some responsibility in
advising him on whether that sale was appropriate, I suspect.
Is that correct?
Mr. Gorton. Well, I had the responsibility to maintain the
window inside the company and determine whether the window was
open or was not open. Mr. Winnick----
Chairman Tauzin. Is that all? Suppose Mr. Winnick had come
to you and said, ``I want to sell 70 percent of my stock,''
instead of 30, on that date, or ``100 percent of my stock''?
Would you have had any responsibility to the company and the
corporation to advise him, ``Mr. Winnick, that would kill the
corporation? If the head of the company sells 70 percent or 100
percent, this company is gone tomorrow on the stock market.''
Would not that have been your advise?
Mr. Gorton. I don't believe that would have been my
responsibility. But if I--first of all, I don't know that I
knew the size of Mr. Winnick's transaction.
Chairman Tauzin. Right.
Mr. Gorton. But if I had been told he were going to sell
100 percent of the stock, obviously, that would have a real
impact on----
Chairman Tauzin. In fact, selling as much as he did had a
negative impact, did it not?
Mr. Gorton. It struck me that the market did not react
favorably to----
Chairman Tauzin. It reacted negatively, did it not?
Mr. Gorton. Right.
Chairman Tauzin. And had he sold 40 percent or 50 percent,
or 70 or 100 percent of his stock in the company, on May 23,
right after on May 10 his executives have told the investment
community everything is okay, ``We are within our plans. And by
the way, we are not making any--we didn't make any swaps in the
first quarter.'' Tom Casey actually said that on May 10; I will
quote it for you in a second.
On May 23, he sells 30 percent of his stock. Had he chosen
to sell 70, 90 percent, or 100 percent right after on May 10
the heads--the offices in this company--Mr. Cohrs, you were on
that conference call, and I want to talk to you about it--
actually told the investing public, ``Everything is okay. We
are within our plans.'' You know, keep investing in Global
Crossing, in effect. Had he come to you and offered--with a
plan to sell more than 30 percent, significantly more, wouldn't
that have had disastrous effects upon the stock of that
company?
Mr. Gorton. If he had decided to sell 100 percent of his
stock, I believe my judgment would be that the market would not
have reacted favorably to that.
Chairman Tauzin. It would have caved. You know it. So this
excuse that ``I am keeping 70 percent. I only sold 30 percent.
Therefore, everything was all right'' is a little weak.
I want to go to you, Mr. Winnick, on this, because it is
important for us to know what you did know on May 23 when you
pulled the trigger on this $123 million share. Did you know,
for example, that on April 5--on April 5, Mr. Perrone--let me
go back further than that--April 2. Mr. Perrone had reported
first quarter results at the manager's meeting that day, that
there would likely be a half billion dollar shortfall in
revenues.
Did you know that that information had come out at the
manager's meeting on April 2, and that Joe Perrone was going to
investigate the causes of this half billion dollar shortfall?
Did you know that?
Mr. Winnick. I have no recollection of that.
Chairman Tauzin. You didn't know that. Did you know that on
April 5 Mr. Perrone made his report? This is it here on Tab 5--
Tab 7, rather--indicating that it was going to be a billion
dollar shortfall. Did you know that?
Mr. Winnick. Did that document come to me, sir?
Chairman Tauzin. I am asking you. Did you ever see it? Did
you know that Mr. Perrone made such a report?
Mr. Winnick. I don't believe that document ever came to me.
Therefore, I don't----
Chairman Tauzin. I understand the document may not have
come to you. Did you know that Mr. Perrone issued a report
following the April 2 manager's meeting indicating that the
shortfall would be a little over a billion dollars?
Mr. Winnick. No, I am not familiar with that.
Chairman Tauzin. You didn't know that? You already talked
about this with the chairman. But on April 9, at a manager's
meeting, Tom Casey now reports to the managers, at which the
Office of the Executive was there--Lod Cook was there, Tom
Casey is reporting that the Office of the Chairman was there--
that we need to treat this as a crisis, that it is a billion
dollars off on revenue. Did you know that was reported at the
manager's meeting?
Mr. Winnick. Just to comment, if I may----
Chairman Tauzin. Yes.
Mr. Winnick. --Chairman Tauzin, you indicated before that
I--on May 23, I sold 30 percent of my stock. I sold 10 percent
of my stock.
Chairman Tauzin. On that date.
Mr. Winnick. Yes. I had sold----
Chairman Tauzin. You had sold some before that?
Mr. Winnick. [continuing] 20 percent of my stock going back
to I think it was March 2000, and then----
Chairman Tauzin. And that is fair.
Mr. Winnick. [continuing] periods before that period.
Chairman Tauzin. So it is not quite as big a chunk. It is
10 percent. Did it have a negative impact on the market?
Mr. Winnick. I think the stock went down a little bit, yes.
Chairman Tauzin. Suppose you had sold 30 percent, 50
percent, would it have gone down even more?
Mr. Winnick. Well, I will tell you----
Chairman Tauzin. The likelihood?
Mr. Winnick. [continuing] I was very sensitive to how this
would be done. I mean, I think one of the issues here which is
at some point--should be--actually, I think it has been dealt
with here, the disclosure requirements of when you need to--as
a major executive in a company, when you need to disclose your
sales.
As I told you, when I entered into the collar transaction,
it was really a financial transaction. I didn't actually sell
physical stock in----
Chairman Tauzin. Well, yes, but you sold $123 million worth
of stock.
Mr. Winnick. No, I sold 10 million shares in the company.
Chairman Tauzin. Ten percent of your holdings.
Mr. Winnick. Right.
Chairman Tauzin. And the point I am making--and disagree
with me freely, if you want to--executives like you don't have
the freedom to sell all your stock any time you want. You don't
have the freedom to sell the great majority of the stock any
time you want. You know doggone well how Wall Street would
treat that, wouldn't it?
Mr. Winnick. Well, nor did I try.
Chairman Tauzin. And you didn't try.
Mr. Winnick. That is correct.
Chairman Tauzin. So you sold what you could sell.
Mr. Winnick. No. I sold what I--what was appropriate to
sell to reduce a line of credit that had been drawn down.
Chairman Tauzin. Okay. And what I am doing now is I am
exploring what you might have known, or did know, on that date
when you sold that substantial block of shares. And $123
million is not chump change. It is a pretty big----
Mr. Winnick. It is a significant amount, sir.
Chairman Tauzin. Let me add, on that date, May 23, did you
notify all of the employees that they ought to sell 10 percent
of their shares that day?
Mr. Winnick. Well----
Chairman Tauzin. Did you notify anybody that they ought to
sell? ``I am selling; you better sell, too''?
Mr. Winnick. Well, my job is not to tell people to----
Chairman Tauzin. No, but you didn't do that.
Mr. Winnick. [continuing] sell or buy.
Chairman Tauzin. Right. You didn't do that.
Mr. Winnick. But----
Chairman Tauzin. So did you know----
Mr. Winnick. [continuing] that is not my----
Chairman Tauzin. [continuing] on April 9----
Mr. Winnick. Excuse me, Chairman Tauzin.
Chairman Tauzin. Yes, sir, please finish.
Mr. Winnick. Let me answer that, please.
Chairman Tauzin. Yes, sir.
Mr. Winnick. When I sold--when they entered into this
collar transaction, which effectively sold stock, it was during
a window period. I had a conversation with Tom Casey relating
to did he still feel comfortable with his guidance for the
quarter, and was he still comfortable with his year. And he
said to me, yes, he was. I relayed that conversation----
Chairman Tauzin. Tom Casey did not tell you at that point,
``We are going to be a billion short''?
Mr. Winnick. I asked him if he was comfortable--first of
all, the billion short is--I don't know where this comes from,
because as we said before in May, May 9 I think it was, Joe
Perrone had given updated information to both Tom Casey and Dan
Cohrs, so that they could have--be fully informed when they
were having their analyst call the next day or two, where they
reiterated their guidance for the quarter and for the year.
Had there been, in their view, a significant shortfall,
notwithstanding this billion dollar number, sir, that you use,
but certainly even less than that would be more than
sufficient, then it would have been inappropriate to confirm
the guidance on the May call.
Chairman Tauzin. I should think so. And we are going to
talk about that in a second, because I want to know what you
knew about that May call, and what Mr. Cohrs knew, and what
actually happened that day. But I want to specifically ask you:
did you know or not know that on April 9, at the manager's
meeting, that Tom Casey reported there would likely be a
billion dollar shortfall in revenue?
Mr. Winnick. No, I can't say to you that I had----
Chairman Tauzin. You did not know that on May 23 when you
sold your stock?
Mr. Winnick. I don't have--and I would have, I believe, a
clear recollection of that. I have none.
Chairman Tauzin. All right. Let us go to the--to Tab 10,
where on April 16 Tom Casey states, in effect, that we do not
have more room for these reciprocal deals.
Mr. Winnick. Where are we looking now?
Chairman Tauzin. He is sending a clear warning on Tab 10.
Mr. Winnick. What page?
Chairman Tauzin. Tab 10. I am not sure of the page. But it
is, again, another manager's meeting on April 16, where Tom
Casey states that these--that the commitments made in the first
quarter had ``a material impact on cash plan and k-pac, and we
do not have more room for these reciprocal deals.'' Were you
aware of that? That is on page HEC40147 of the manager's
meeting that day.
Mr. Winnick. Chairman Tauzin, what page are you looking at
on that?
Chairman Tauzin. It doesn't have a page number. It had----
Mr. Winnick. I mean, just--I mean, it is----
Chairman Tauzin. It is the manager's meeting April 16, Tab
10, and it is marked ``Confidential, GX HEC40147,'' Tab 10.
Mr. Winnick. 4047?
Chairman Tauzin. 40147. It has a list of those present, and
then discussion items, and then you have a report from Tom
Casey indicating that these first quarter reciprocal deals had
``a material impact on cash plan and k-pac budget. We do not
have room for more reciprocal deals.'' Were you aware that Tom
Casey made that report to the manager's meeting of April 16?
Mr. Winnick. I don't have a recollection of that. But I
don't think Tom was----
Chairman Tauzin. Again, you speak to him daily, and you did
not know he was making that report to the manager's meeting?
Mr. Winnick. No.
Chairman Tauzin. Had you known that, had Casey told you
that. ``We don't have room for any more of these deals,'' would
you have participated in trying to get any more of these deals?
Mr. Winnick. Well, again, I can't tell you in the context.
I think, Chairman Tauzin, it is a little unfair to--for me to
paraphrase a conversation----
Chairman Tauzin. I am just asking you if you knew about it.
Mr. Winnick. Well, there were people on this panel that
were on this call.
Chairman Tauzin. I realize that. I am asking what you knew.
I want to know what you knew from Tom Casey. Tom Casey is
talking to you every day, but he is making these rather
incredible statements at manager's meetings that the company--
you have to treat this as a crisis. It is going to be a billion
dollars down.
Joe Perrone is issuing the report saying it is going to be
a billion--it went from a half billion to a billion in just a
matter of days. And you are telling me you were totally unaware
of this, that Casey never told you this, and that you were
never made aware that you couldn't do any more of these deals
because it was so negatively impacting the ability of the
company in terms of its cash and its capacity? You were not
aware of that?
Mr. Winnick. I was there to help and assist any of the
executives in any way they could, or I could. Tom did not tell
me he didn't have more capacity to do reciprocals. I do not
have any recollection of anyone giving me information relating
to shortfalls of a billion dollars or cost excesses of a
billion dollars.
Chairman Tauzin. So you didn't know that. Tab 14 now. Go to
Tab 14. Tab 14 is a confidential memo from Kurt Rossi to Joe
Perrone.
Joe, are you following along with us? Tab 14. This is a
memo to you.
It is from Hank Milner, and it is addressed to Gorton, Jim,
etcetera, Mr. Perrone, and Mr. Cohrs. Mr. Cohrs and Mr.
Perrone, do you remember receiving this memo from Frank Milner
as an e-mail?
Mr. Perrone. Yes.
Chairman Tauzin. Mr. Cohrs?
Mr. Cohrs. I have reviewed this in preparation for the
hearing.
Chairman Tauzin. Do you remember it?
Mr. Cohrs. No. At the time--I actually didn't see at the
time, but I remember--I have reviewed it in preparation for the
hearing.
Chairman Tauzin. The subject is--Mr. Cohrs is on it. So you
got it. You are on the list of receiving the e-mail, so you did
get it.
Mr. Cohrs. I understand. I was not in the office at----
Chairman Tauzin. The subject is Debt Covenants and Capacity
Sales. It is, again, a dire warning. This is May 17. It says
that additional debt from these categories could be significant
and result in covenant violation. What is a covenant violation,
guys? What does that mean?
Mr. Perrone? You were with Arthur Andersen. What is a
covenant violation?
Mr. Perrone. That just relates to the requirement of
financial performance under our various loan agreements that we
were required to maintain.
Chairman Tauzin. Yes. In fact, it goes on--the memo goes on
to say, ``The consequences of violating this financial covenant
are severe.'' That is highlighted--severe--big words. ``And the
time period to which--in which to fix it is short,'' again
emphasized. So time to fix it is short. ``First quarter
financial statements are due to the banks on May 30, 2 weeks. A
violation would be immediate, in the event of default, with no
cure period.'' It goes on to say, ``Global Crossing would
immediately lose the ability to borrow.''
It says, ``The lenders would either terminate their
commitments under the facility and make the loans immediately
due and payable, or both.'' It goes on to say that lenders
would accelerate their loans, which would be a cross
acceleration of Global Crossing's $3 billion of senior notes.
This is a pretty dire set of warnings, is it not?
Mr. Cohrs. Chairman Tauzin, if I may, this memo did not
forecast a violation of loan covenants. It was based--it was
also based on imprecise estimates as it says in this memo.
Chairman Tauzin. That may have been wrong.
Mr. Cohrs. When the actual certificate----
Chairman Tauzin. That may have been wrong, but it was a
pretty dire----
Mr. Cohrs. If I may finish.
Chairman Tauzin. Finish.
Mr. Cohrs. The actual certificate of compliance that was
filed, the ratio that was estimated here as 4.71, which was
close to the requirement, was, in fact, reported to the banks
as 3.54, which was not close to the requirement.
Chairman Tauzin. Would you go to the next page?
Mr. Cohrs. This memo was based on incorrect and imprecise
and preliminary estimates that, in fact, did not forecast a
violation of loan covenants.
Chairman Tauzin. Would you go to the last page, Mr. Cohrs?
Mr. Cohrs. Yes.
Chairman Tauzin. Did you write this e-mail back? This is--
--
Mr. Cohrs. No, actually, I wrote that e-mail before----
Chairman Tauzin. Sent May 12. Did you send this e-mail?
Mr. Cohrs. [continuing] before the prior e-mail.
Chairman Tauzin. Right.
Mr. Cohrs. Yes, I did send that e-mail.
Chairman Tauzin. And doesn't this e-mail basically say
that, ``We will be tight on our bank covenant as we go through
this year''?
Mr. Cohrs. This e-mail says, ``We will be tight on our bank
covenant as we go through the year.'' This was based on the
same information that Mr. Milner wrote his subsequent e-mail
on, which, as I just said, was preliminary and imprecise and
turned out to be significantly too pessimistic compared to the
actual results that were filed when we completed it and closed
the books.
Chairman Tauzin. All right. But this was what you knew at
the time, is that right? On May 12----
Mr. Cohrs. That is correct. That is what I----
Chairman Tauzin. [continuing] you said it was going to be
tight.
Mr. Cohrs. This----
Chairman Tauzin. On May 16----
Mr. Cohrs. [continuing] is what I knew at the time.
Chairman Tauzin. --Mr. Milner says, ``This could be
significant.'' We don't know.
Mr. Cohrs. Milner, unfortunately, as we know, had very
preliminary, imprecise information, which it says in his e-mail
is based on imprecise estimates.
Chairman Tauzin. Given all that----
Mr. Cohrs. You can look at it in his e-mail.
Chairman Tauzin. Given all that, Mr. Winnick, are you aware
of these e-mails, these concerns about covenant violations in
the numbers, and the debt growing too fast?
Mr. Winnick. No.
Chairman Tauzin. You were not aware of that either?
Mr. Winnick. I have no recollection of a problem with
covenants.
Chairman Tauzin. Let us go to----
Mr. Winnick. By the way----
Chairman Tauzin. Go ahead.
Mr. Greenwood. Please pull the microphone forward. Thank
you.
Mr. Winnick. --Chairman Tauzin, one of my obligations as
the Chairman of the Board of this company is if there was
something remotely resembling a violation of a covenant, would
be to bring it to the board's attention immediately,
notwithstanding management's position. It is not something that
we would ever take very lightly. It is the heart and soul of
the business.
Chairman Tauzin. So do you know whether these concerns were
brought to the attention of the board?
Mr. Winnick. I know, in fact, they weren't.
Chairman Tauzin. So you----
Mr. Winnick. By me, because they weren't brought to my
attention.
Chairman Tauzin. All right. Let us go to the 360 deal, Mr.
Gorton. You called Dan Cohrs and Joe Perrone to go over the
financial perspective on this call, and you opposed it. Why did
you oppose it?
Mr. Gorton. I believed that the transaction, as it was
structured, posed too much legal risk on Global Crossing and
economic risk on Global Crossing, if 360 were to file for
bankruptcy.
Chairman Tauzin. Did you think 360 was a candidate for
bankruptcy?
Mr. Gorton. Oh, I did. I think everybody thought 360 was a
possible candidate for bankruptcy. I do want to say that that
risk was something that wasn't settled law. The structure of
these transactions were IRU transactions, and you couldn't
really get any lawyer to give you an opinion as to whether that
is a service contract on the one hand or an asset purchase on
the other.
Chairman Tauzin. Right. But the bottom line was this was
the last day to do this deal----
Mr. Gorton. I think that was maybe----
Chairman Tauzin. [continuing] when it was done, right?
Mr. Gorton. [continuing] the day before the last day, I
think.
Chairman Tauzin. That was right down to the wire if you are
going to get it in the first quarter, right?
Mr. Gorton. That is correct.
Chairman Tauzin. Did either Mr. Cohrs or Mr. Perrone tell
you that if the company was going to make their first quarter
numbers this deal had to go through?
Mr. Gorton. Yes, that was mentioned to me on the call.
Chairman Tauzin. Do either one of you guys want to
challenge that statement? Mr. Cohrs?
Mr. Cohrs. Chairman Tauzin, as I said earlier, the numbers
that we generated with that transaction, which was for good
business reasons, were important to us making our numbers.
We also knew at the time--we suspected at the time that if
we didn't make that transaction in the first quarter that it
might not be available to us in future periods, and that 360
may not do the transaction on the same terms, which we thought
were quite favorable to us and we needed the capacity on very--
with very short lead times, as I testified earlier.
Chairman Tauzin. Now, Mr. Perrone, did you also recall
basically saying that, if you are going to make numbers, you
have got to do this deal?
Mr. Perrone. I don't recall that specific comment, but I
think----
Chairman Tauzin. Do you deny it?
Mr. Perrone. No. I think it was generally known that we
would--that size of a deal would be needed to make the numbers
for the quarter.
Chairman Tauzin. And, Mr. Gorton, do you remember Mr.
Winnick telling Bill Conway in the conversation in the meeting
that in order to make the numbers they have to approve the 360
transaction?
Mr. Gorton. That was at the executive committee conference
call, which was the following day, I believe.
Chairman Tauzin. The following day.
Mr. Gorton. Yes, sir.
Chairman Tauzin. And you recall that.
Mr. Gorton. Yes, sir.
Chairman Tauzin. Mr. Winnick, do you recall that?
Mr. Winnick. Well, I recall for--not as you stated,
Chairman Tauzin.
Chairman Tauzin. How do you recall it?
Mr. Winnick. As a matter of disclosure to Mr. Conway that
this was a transaction that was included in the quarter, and
that was disclosure, not for, as has been suggested, any other
reason.
Chairman Tauzin. I want to go--and, actually, this deal is
done. Now, Mr. Winnick, people were invited to leave the
conference call at some point before the deal was approved.
Were you the one that asked people to get off the phone? Who
did that?
Mr. Winnick. I don't remember, but I will take the credit
for that.
Chairman Tauzin. Okay. Who was invited to get off the
phone?
Mr. Winnick. Well, first, it is important to--sir, to set
up how this one was done. I was asked by Tom Casey to convene
an executive committee of the board, which was made up of four
people--myself, Lod Cook, Tom Casey, and Bill Conway. Lod, I
believe, as I found out subsequent in terms of preparation for
today, was not there that day, which, in fact, would have
required that any vote would have been unanimous. We would have
needed a unanimous vote on this transaction.
Tom briefed me on the transaction. I, too, shared Jim's
concern that 360 was a little dicey as a credit risk. There was
not a lot of concern in terms of the business case. But more
specifically to your question, management, which is--there
were, I don't know, half a dozen, a dozen people on the call,
with Tom Casey and Bill Conway and myself--made a presentation
on the deal. And they never would have convened an executive
committee of the board to approve a deal that, in fact, they
weren't interested in approving.
As Jim Gorton has pointed out, and I think Jim is a--served
Global Crossing extremely well and is extremely competent and
thorough--had indicated that there was some financial risk. And
I said the same thing, and Bill Conway said the same thing.
So it was after the management team made their presentation
that I thought it appropriate--and it was--by the way, there
were suggestions on how we could mitigate some of this risk. It
was appropriate that the executive committee would go into
closed session, which I don't want to be as formal about it as
it sounds, so Bill Conway could talk to Tom and myself openly
about his concerns.
Bill, as I recall, approved the transaction. And for those
who know Bill Conway, he is a very serious businessman, and he
does not--he does not succumb to pressure. He is principled and
moral, and he will do what he thinks.
Chairman Tauzin. Mr. Winnick?
Mr. Winnick. He approved this transaction.
Chairman Tauzin. I am going to have to--the chairman is
signaling me. I am going to have to wrap up, and I want to do
one more thing.
Mr. Winnick. Okay. I am sorry.
Chairman Tauzin. I just want to make the case--make a
couple of questions, if you will just answer them quickly for
me. Did you characterize Mr. Gorton's position on this deal
during this call as being signed off on it?
Mr. Winnick. It didn't require Jim's approval.
Chairman Tauzin. I don't know whether it did or not. But
did you characterize him as signing off on the deal?
Mr. Winnick. We didn't take a vote of the management team.
Chairman Tauzin. Mr. Gorton, did Mr. Winnick characterize
you as signing off on the deal?
Mr. Gorton. My recollection is that in response--after the
management presentation of the transaction, Mr. Conway asked a
question relating to the legal issues surrounding the deal.
Chairman Tauzin. Yes.
Mr. Gorton. And Mr. Winnick had indicated that Jim Gorton--
me--who was on the line had worked on the transaction and had
signed off on the deal. I don't know if he got to finish that
statement, because I actually stepped in and cut him off and--
--
Chairman Tauzin. You stepped in and made it clear that you
didn't think the deal should go through.
Mr. Gorton. Well, I stepped in and really set forth the
legal concerns that I had about the transaction.
Chairman Tauzin. But before I yield, I just want to do one
quick thing now, because I want to take you to that May 10
conference call. And, Mr. Cohrs, you are on it. This is the
call with the investors, right? May 10, Mr. David Tecata asked
the question--you didn't talk on this conference call about I
guess--I forgot your term--the kind of--the regional swaps of
capacity by some of your carrier customers.
Specifically, Mr. Casey responds--this is, by the way, Tab
13, if you want to follow. Mr. Casey responds, ``Okay, Dave.
First, with respect to regional swaps, we did no swaps of
capacity back and forth between carriers.'' Was that a correct
statement?
Mr. Cohrs. Chairman Tauzin, the question specifically asked
about regional swaps. Earlier in that conference call, there
had been a question about what we call global network offers,
which gives our customers the right to purchase capacity and
then exchange that capacity from one part of our network to
another.
The fact that he asked about regional swaps, in particular,
indicated to us that he was asking about that type of
transaction. Now, the statement about swaps in general I think
I should address, however, because the word ``swap''----
Chairman Tauzin. But you had done regional transactions in
the first quarter, had you not? You had done regional swaps.
Mr. Cohrs. No, not to my knowledge.
Chairman Tauzin. Reciprocal--you had done reciprocal
transactions in the first quarter, right?
Mr. Cohrs. We had not done what would be referred to as
regional swaps, which is my understanding of what the question
addressed. With respect to the term ``swaps''----
Chairman Tauzin. Yes.
Mr. Cohrs. [continuing] in the context it was normally
used, referring to these concurrent transactions, swaps is an
accounting term. And we were advised specifically by our
independent auditors that the transactions that we were doing
were not swaps, that they were accounted for at fair value----
Chairman Tauzin. You were on the phone call. Did you see
any need to clarify that point to the people on the phone?
Mr. Cohrs. Not in response to a question about regional
swaps. No, sir.
Chairman Tauzin. Now, later on--I will wrap it--Mr. Cohrs,
you said, at some point, with reference to the capital spending
commitments and their effect on revenue, ``It actually fits
into our business plan.'' That is your quote on the third page
of this, in the middle of this conversation.
Mr. Cohrs. I don't see the transcript in front of me, but--
--
Chairman Tauzin. Tab 13. This is your quote when talking
about the spending commitments during the quarter and how it
affected revenue. You said, ``It is really--actually fits into
our business plan.'' When you made that statement, were you
aware of all of the warnings about threats to the company
because of the''----
Mr. Cohrs. Could you help me find the--I am just trying to
find the reference.
Chairman Tauzin. Page 3.
Mr. Cohrs. Page 3?
Chairman Tauzin. It is the--wait, I will find it for you. I
think it is the last page, the last page of Tab 13. You were
being asked about capital spending commitments in the quarter
and how they would affect revenue, and you said, ``It actually
fits into our business plan,'' which was a--which sounds like
an assurance to consumers or to investors that these challenges
presented by these swaps and these agreements were actually
part of your business plan and everything was okay. Were you
aware that Tom Casey and Mr. Perrone were predicting a billion
dollar shortfall when you made this statement?
Mr. Cohrs. Chairman Tauzin, if I may, I would like to
address the billion dollar shortfall, which I think is getting
a lot of attention.
Chairman Tauzin. That will be the last, Mr. Chairman.
We want you to do that, Mr. Cohrs. But also, if you
address----
Mr. Cohrs. If I could answer your question----
Chairman Tauzin. I want you to address the billion dollar
shortfall, but then I also want you to answer the question as
to whether or not you were aware of those warnings when you
made the statement that everything was okay, that----
Mr. Cohrs. Well, sir----
Chairman Tauzin. Because you were in those meetings. Would
you go forward, please.
Mr. Cohrs. Sir, the question from Luanne Surlow, as I am
looking at it here, asked--I believe her question essentially
was asking, as we acquired these assets in the reciprocal
transactions, were we increasing our revenue forecast? My
response was, ``No. These fit within our business plan.'' That
is, we are not increasing our revenue forecast as a result of
these transactions. That is what that exchange meant.
Now, as to the billion dollar shortfall, the billion dollar
shortfall, which is in these notes from April 9, April 16,
etcetera----
Chairman Tauzin. Yes.
Mr. Cohrs. [continuing] is a reference to shortfalls from
our budget, not from our public guidance. At this time, our
budget was significantly higher. Our revenue budget was
approximately $700 million higher than our external guidance.
In other words, our external guidance was much more
conservative than our budget.
In these meetings, it is very clear to me that Tom Casey
was referring to shortfalls from the budget, not from external
guidance.
Chairman Tauzin. But if I can----
Mr. Cohrs. It is also clear to me----
Chairman Tauzin. If I can wrap, Mr. Chairman----
Mr. Cohrs. [continuing] that in the May 9 meeting, the
David Walsh forecast that suggests a billion dollar shortfall
had not been reviewed by anyone, because I asked him a
question, which is in these notes. And I asked him, ``How much
of that forecast is service revenue, and how much is IRU?'' It
is very clear to me that that forecast was coming from David
Walsh alone. It had not been reviewed by the finance
organization or anyone else. It was a very preliminary
forecast, and it was a reference to shortfalls from budget, not
external guidance.
Chairman Tauzin. Mr. Chairman, if I can wrap, what concerns
all of us--and, Mr. Winnick, that is why I asked you what you
knew of all of this, is that you had all of these warnings, and
whether they are preliminary or whether they are accurate or
not, you had all of these warnings, and they reach people at
least as close as Lod Cook and Tom Casey. They get all that far
up the line, and they come in the form of reports.
They come in the form of notes at management meetings. They
come in the form of e-mails and warnings. And yet the head of
the company is here today saying he didn't have any
recollection of any of that, didn't know any of that. He just
decided to pull the trigger on May 23 and sell 10 percent of
his holdings in the company stock.
I have got a graph of the stock, Mr. Winnick, if you will
look at it with me.
Mr. Chairman, this is it.
Mr. Winnick. I can't see that from here.
Chairman Tauzin. You have got a hard time seeing it. I will
try to depict it for you. But this is the graph of Global
Crossing's stock, and it was going up at this point, and that
is the date you sold. And it started a down slide, and it has
never recovered. It just went down and stayed down, continued
going down from the date you sold this amount--when you pulled
that trigger on May 23 and sold your stock.
And the burning question out there that I still have not
gotten a good answer to. I wish Mr. Casey were available. I
wish he could be here to help us understand it.
Mr. Winnick. Well, we wish----
Chairman Tauzin. Of course. But how Mr. Casey was aware of
all of these dire warnings, and how so many other people in the
corporation were sending e-mails and concerned about the
covenants being violated, even though those were preliminary
numbers, and the head of the corporation, who is about to make
a sale that theoretically at least had a pretty nasty effect on
the company's stock for all of those who invested in it,
including those employees we heard from--the head of the
company never hears any of those warnings, doesn't know,
doesn't recall, can't remember, wasn't at those meetings. Tom
Casey never told me that, and nobody ever told me that. It is a
little hard for us to understand how a corporation can function
like that, and how you, Mr. Winnick, could be at the head of
this corporation and be so out of the loop.
I have run out of time. But when we come back, I am going
to take you through some documents which indicate that you
really were in the loop, that you were actively participating
in these deals, in these swaps, and actually encouraging
everyone else to make calls and try to make these swaps occur.
And I will get you to comment on that.
Thank you, Mr. Chairman.
Mr. Winnick. I look forward to that.
Mr. Greenwood. The time of the gentleman has expired.
The Chair is going to recess the committee for 5 minutes.
Members have been here for a long time, and we will give you a
5-minute rest break, and then we will convene with--we will
return with Ms. DeGette's questions.
[Recess.]
Mr. Greenwood. The committee will come to order. Guests
will please be seated. And the Chair recognizes the gentlelady
from Colorado for 10 minutes to inquire.
Ms. DeGette. Thank you, Mr. Chairman.
Mr. Winnick, you started Global Crossing in 1997, if I am
not mistaken, correct?
Mr. Winnick. Yes.
Ms. DeGette. And before that, you were running an
investment firm called the Pacific Capital Group, which I guess
still exists, from what I have been told.
Mr. Winnick. That is correct.
Ms. DeGette. Now, when you started Global Crossing, your
vision, as I understand it, was to create a global
telecommunications company, correct? Would that be a fair
characterization?
Mr. Winnick. Not initially.
Ms. DeGette. Okay. Why don't you tell me what your initial
vision was.
Mr. Winnick. Initially, we--my partners and myself financed
an undersea cable across the Atlantic Ocean.
Ms. DeGette. Right.
Mr. Winnick. And it was from that, and the early success of
that, which had not been done privately in some 125 years, that
brought us into an opportunity to build a global platform.
Ms. DeGette. And, really, your vision, though, was to have
a global telecommunications company at that point, correct?
Mr. Winnick. That is what we built.
Ms. DeGette. Right.
Mr. Winnick. Yes.
Ms. DeGette. I mean, that was your vision, and then that is
what you built.
Mr. Winnick. Right.
Ms. DeGette. And you acquired some other telecommunications
companies, and then, in 1999, you acquired Frontier, correct?
Mr. Winnick. I believe Frontier may have been our first
transaction. Is that correct, Dan?
Ms. DeGette. Okay. Oh, all right. But you also acquired
some other companies.
Mr. Winnick. Yes.
Ms. DeGette. And all of that was part of your vision to
create kind of a global telecommunications company, right?
Mr. Winnick. It was to be part of that, yes.
Ms. DeGette. Okay. I am not trying to give you trick
questions.
Mr. Winnick. No, no, no. I understand that.
Ms. DeGette. Okay.
Mr. Winnick. I understand that.
Ms. DeGette. And Frontier, as I understand it, was a local
telephone company that served the Rochester area, and also had
some contracts for wire around the United States in some other
markets. Is that accurate?
Mr. Winnick. Well, Frontier was really a few businesses, if
I may.
Ms. DeGette. Right.
Mr. Winnick. It had started as Rochester Telephone over
some hundred years ago.
Ms. DeGette. Right.
Mr. Winnick. And it had what they referred to as a local
exchange business.
Ms. DeGette. Right.
Mr. Winnick. Telephones in the local markets.
Ms. DeGette. Right. They were the local telephone company.
Mr. Winnick. They were like--as Qwest is in Denver.
Ms. DeGette. Right. Exactly. Qwest took over US WEST, which
took over Ma Bell is what we called it, which was the local
telephone company.
Mr. Winnick. But Frontier, unlike other ILECs, also made an
investment in building a U.S. terrestrial fiber optic network.
Ms. DeGette. Right. That is what I was just saying in my--
--
Mr. Winnick. Yes.
Ms. DeGette. [continuing] lay person's terms.
Mr. Winnick. Yes.
Ms. DeGette. And so, really, this was part of your vision
not just to have the undersea cable, but really to have a
presence within the United States with local phone service and
long distance phone service, right?
Mr. Winnick. That is correct.
Ms. DeGette. Similar to Qwest, right?
Mr. Winnick. That is correct.
Ms. DeGette. And let me ask you, when--I guess during the
timeframe we are really dealing with, the 1999 to 2001 type of
timeframe, how big was your board of directors?
Mr. Winnick. Twelve, 15 people.
Ms. DeGette. And as I understand it, every person at this
table was on that board of directors at some point. No?
Mr. Winnick. There is no one----
Ms. DeGette. Mr. Cohrs is shaking his head.
Mr. Winnick. Well, many of the people at this table were
invited to board meetings. Certainly, Jim Gorton, our general
counsel, would be there, and Dan Cohrs would be there.
Ms. DeGette. Okay. Who was on the board? Who sitting here?
Mr. Winnick. None of the members of this table, outside of
myself, were board members.
Ms. DeGette. I see. So your board of directors, they were
all outside directors?
Mr. Winnick. No, there were some--there were some inside
people.
Ms. DeGette. Okay. Who were the inside people?
Mr. Winnick. The CEO.
Ms. DeGette. Okay.
Mr. Winnick. And they changed, as you know, but----
Ms. DeGette. Right. Like four of them in 5 years, as I
understand.
Mr. Winnick. Maybe five, because I was the CEO for this
company before it was a public company.
Ms. DeGette. Okay. Five in 5 years. Okay.
Mr. Winnick. But the CEO; my co-chairman, Lod Cook; Joe
Clayton, who had been the CEO of Frontier Corporation----
Ms. DeGette. And what was his----
Mr. Winnick. [continuing] was a board member.
Ms. DeGette. He was a board member. And what was his title
within the company?
Mr. Winnick. He was the President of--I believe of North
America. Maybe David could help me on that, but I believe he
was the President of North America. And then at some point he
also became Vice Chairman of the Board.
Ms. DeGette. Okay. So how many outside directors did you
have? People who were not also employed by the company?
Mr. Winnick. The majority of the people were certainly not
employees.
Ms. DeGette. Mr. Chairman, I would ask unanimous consent if
I could ask Mr. Winnick to supplement the record with the lists
of everyone who served on the board from 1999 until the present
and what--and if they worked inside the company, what their
title was.
Mr. Greenwood. Mr. Winnick, can you do that for us?
Mr. Winnick. Do you mean from memory?
Ms. DeGette. No, no.
Mr. Greenwood. No, no, no.
Ms. DeGette. If you could supplement the record and provide
us with that information.
Mr. Greenwood. We are asking that subsequent to today's
hearing----
Mr. Winnick. Just send it to you? Oh, absolutely.
Absolutely.
Mr. Greenwood. The staff will formulate that question----
Ms. DeGette. Thank you very much.
Mr. Greenwood. [continuing] and document and----
Ms. DeGette. Thank you, Mr. Chairman.
Mr. Winnick. If you get that to Mr. Ferrara at Debevoise,
we will certainly make that available.
Ms. DeGette. Great. Thank you.
Now, I would like to talk particularly about the audit
company--I am sorry, the audit committee of your board. Who was
the chairman of the audit committee of your board in 1999?
Mr. Winnick. I believe it was Bill Conway. Oh, no, no, I am
sorry. There were two principal audit committee chairmen. One
was a gentleman from Loew's Corporation, who was one of the
original investors in the company.
Ms. DeGette. Okay. And who was that?
Mr. Winnick. His name was Hillel Weinberger.
Ms. DeGette. And what was his term as chairman of the audit
committee?
Mr. Winnick. From the inception of the company, as a
private company----
Ms. DeGette. Right.
Mr. Winnick. [continuing] up until I think maybe February/
March, sometime in that timeframe, 2000. Is that right?
Ms. DeGette. And then who was the chairman of the audit
committee?
Mr. Winnick. He was the chairman of the audit committee.
And then, when he left the board----
Ms. DeGette. Right.
Mr. Winnick. [continuing] and the reason he left the
board----
Ms. DeGette. Okay. I don't need to know that.
Mr. Winnick. Okay.
Ms. DeGette. I only get 10 minutes.
Mr. Winnick. Okay. I am sorry.
Ms. DeGette. Who succeeded him?
Mr. Winnick. And then I believe Bill Conway----
Ms. DeGette. Bill Conway?
Mr. Winnick. [continuing] a senior partner of the Carlisle
Group.
Ms. DeGette. And how many members of the audit committee
are there?
Mr. Winnick. At least three.
Ms. DeGette. Okay. Now, I was thinking about something as I
was listening to Ms. Crumpler and Ms. Smith's testimony about
working for the phone company for 20 years or longer, and
working there for a long time, and it is the phone company. And
then, all of a sudden, new people come in and it changes.
And what I was thinking about is, what was similar with
Qwest and Global Crossing, and maybe some other companies, is
you all were coming in, you were trying to kind of bring the
local phone company into the new era of communications. Would
you think that would be fair to say?
Mr. Winnick. No.
Ms. DeGette. No? Okay. I mean, because Frontier or Mountain
Bell, they didn't have international wire. They didn't provide
long distance phone service around the world, did they?
Mr. Winnick. No, and they weren't permitted to.
Ms. DeGette. Exactly. And so after the Telecom Act, what
happened was new companies came in, and they wanted to really
update and expand the services of the old companies, and that
is what you were trying to do, isn't it?
Mr. Winnick. Yes, and certainly, as you point out, lower
the cost to the consumer.
Ms. DeGette. Right.
Mr. Winnick. Which was an end product.
Ms. DeGette. So when for whatever reason--and you and us,
we might have disagreements why--when the telecommunications
industry started to go south and lose money, thousands of
people at your company lost their jobs, people like Ms.
Crumpler, isn't that so?
Mr. Winnick. Well, as--and let me say to Ms. Crumpler that
I sat here and I heard her very loudly, and I am very saddened
by this tragedy that has fallen upon her and other hardworking
people of the company. And it has not gone unnoticed by me.
Ms. DeGette. Well, hang on a minute. I know you feel bad,
and I can sense that you really do. But--and Ms. Crumpler
didn't lose her job, but others did lose their jobs. Ms.
Crumpler only lost her retirement, and I guess my question to
you is: what does the company now intend to do for all of these
thousands of employees who thought they were working for the
phone company? But, as Ms. Smith said, they thought it was a
solid local citizen, and it turned out to be a really edgy
place to work.
Just as an aside, we have had--as you know, we have had a
lot of startup telecom around my district, most of which is
either bankrupt or out of business now. And I knew a lot of
people that went to work for those companies. And what they
said is, ``Look, you know, to a person''--the people I knew,
they said, ``Look, I know this is a risk. You know, either I am
protected through some other way; I have had another job.'' Or
they said, ``I know that I could lose everything, and I
prepared to take that risk.'' And now they have taken the risk.
But these folks--Ms. Crumpler and Ms. Smith and these other
people--they weren't that way. You know, they thought they were
working for the phone company. Aside from feeling sorry, what
is it that you intend to do to make them whole?
Mr. Winnick. Well, Ms. DeGette, I wasn't intending on doing
this at this particular hearing, but I need to speak from the
heart on this, if I may----
Ms. DeGette. Thank you.
Mr. Winnick. [continuing] and make a comment here that is--
gives me a chance to make a point.
Ms. DeGette. Thank you.
Mr. Winnick. And a statement. This is not about money. This
is about people. It is always about people. My whole life, it
is always about empowerment of people. Yes, I made a lot of
money. But when I went into this venture, building a cable
across the Atlantic, I had no contemplation that this thing
would turn out to be what it was. I am both proud and I am
saddened by it.
You can't take the money with you. As you know, I am living
in an environment that is very litigious, to say the least.
There are over 70 lawsuits filed against me and my colleagues
and associates. There is a number of government investigations,
in addition to our own internal investigations conducted by our
special committee.
And they will all come to a determination of what the facts
were and what the facts are. And that is here, and that is
important, and the findings of this committee are important.
But the only legacy that I am going to leave this planet
with is my name and the name I have given to my family, my wife
of 30 years, who is with me in Washington today, and I asked
her not to come to this hearing because I didn't want her to
see me beaten up and grilled and embarrassed and things said
about me that are not true. And I appreciate this committee's
conduct with me today, which has been very professional and
very above board.
But at the end of the day, I came here to testify in front
of this committee because you need to hear from me. Whether you
like the answer or you don't, that is your determination. I
need to tell you what I feel and think.
Ms. Crumpler, as well as these other people that worked in
our company, whether they worked there for 2 days, 10 years, or
30 years, they were part of our family. And as the head of this
company, I let them down. Not because we engaged in fraud, not
because we engaged in insider trading, not because we engaged
in chicanery. We ran our business, and we ran into a very
difficult economic period.
In fact, Mike Armstrong, on The Charlie Rose Show over the
summer, talked about how the world came to an end for him and
his company in the summer of 2001. That was the period that our
company got hung up, in the third quarter. And, in fact, there
were three or four transactions that would have put us well
over the quarter--reciprocal, call them what you may--and they
were all rejected, and they did not meet business purposes.
But I want to go back to Ms. Crumpler. And I think my
numbers are accurate. And this is just the beginning. Since the
time of the acquisition of Global Crossing of the Frontier
Corporation, 14,000 men and women around the world contributed
$25 million to the 401(k) plan of the company. I discussed this
with my wife. She is in complete support. I am personally,
along with my family, going to guarantee $25 million to the
people who have lost their money in their 401(k) plan. They had
nothing to do with the loss.
I call on chairmen and CEOs of every other company--Qwest,
XO Communication, McLeod--every one of these companies has
strong and viable partners, whether they are chairmen, CEOs, or
just significant shareholders, and I call on every other
chairmen and CEO and significant investor in any company in
this country where employees lose money, step up and write a
check, because the only thing you are going to leave in this
world is your legacy of who your name is.
So today I make a commitment to every employee of Global
Crossing who committed and contributed to the 401(k), which the
number I am told is just a little bit shy of $25 million, I am
personally, along with my family, going to write a check to the
administrator of that plan, so that the Ms. Crumplers and
others of the world who worked hard for this company do not go
unnoticed.
Ms. DeGette. Mr. Winnick, I don't think there is much more
that needs to be said. And I can tell you are speaking from the
heart. I can tell Ms. Crumpler and her colleagues will
appreciate this. And I yield back my time.
Mr. Greenwood. The Chair thanks the gentlelady, and the
Chair recognizes the significance of that statement, Mr.
Winnick. It is magnanimous. It is one of leadership. And I
think you have just shocked a lot of people, and you ought to
be proud of that.
However, the hearing goes on, because there are other
issues at stake. The fact of the matter is that it wasn't just
the employees who lost $25 million. It was investors who lost I
think $54 billion as a result of the collapse of Global
Crossing.
And it is the function of this committee, the purpose of
this committee, to try to understand how that happened, so that
it doesn't happen in the future, and so that we don't have Ms.
Crumplers and others in the future in this kind of a situation.
So I do have some additional questions to ask, and I want
to address them, first off, to Mr. Perrone. And I would like
you to turn, Mr. Perrone, to Tab 87, if you would. And Tab 87,
as I understand it, on the front page is a profit and loss
statement that you produced, and that was dated May 9, 2001. Do
you see that, Mr. Perrone?
Mr. Perrone. Yes.
Mr. Greenwood. Thank you. If you look down at recurring
service EBITDA, which I believe stands for earnings before
income taxes--interest, taxes, depreciation, and amortization.
We are going to refer to that as earnings for short, but we
know what it means.
And as you look across those columns for the quarters, it
shows a negative number in each one of those columns, is that
correct?
Mr. Perrone. That is correct.
Mr. Greenwood. Okay. So the EBITDA, which we will call
earnings, was going to--was negative in quarter after quarter.
Then, if you look down at the IRUs, which is what we are
referring to as swaps or capacity exchanges, we see positive
numbers in each one of those columns. And then, below that, we
see the recurring adjusted earnings are positive.
So what this seems to me to indicate is that this company
was going to be losing--showing that its earnings were negative
quarter after quarter after quarter, except for the IRUs. Is
that a--it brought it out of the red and into the black. Is
that a fair statement?
Mr. Perrone. I don't think that totally encompasses what
this schedule depicts. If I can explain----
Mr. Greenwood. Please do.
Mr. Perrone. Okay. And I think some of this will help to
shed some light on the earlier conversation on the billion
dollar shortfall, and I will try--I know you have limited time.
I will try and go through this as quickly as I can.
But fundamentally, when you refer to EBITDA, that is a
term--it is a calculation in accordance with generally accepted
accounting principles, and the term ``adjusted EBITDA,'' which
included the IRUs, was a calculation related to the loan
covenants and the way the analysts looked at the business that
Mr. Cohrs referred to.
In doing our forecast, which this was the--the first
forecast we did for the year 2001 started with my April 5
presentation that was referred to earlier, and culminated with
this view of our business for the rest of the year, which
reflected the forecast as best we knew it at that time.
And there are really three components to the business the
way we looked at it. First of all, there was our--what we
called our recurring service business. Then, as today, we have
a multi-billion dollar worldwide business of recurring service
revenue. So one of the things that we attempted to do was to
look at the run rate for that recurring service business, and
then, of course, the next step in the process was our operating
expenses.
The net of those two would give you the EBITDA number that
you referred to. And then, of course, we had our IRU business.
So there was a lot more to this business than just the IRUs.
Now, if you were to look at the back part of my April 5----
Mr. Greenwood. But the rest of it, shy of the IRUs, was
negative, correct?
Mr. Perrone. It was on the April 5 forecast, and this is
the important point I want to make. If you look at the back of
that presentation, we had put together--when I say ``we,'' it
was myself and my finance team, and I don't have that
presentation in front of me, but I am sure it is in there.
There was a set of action items, and those action items
primarily focused on margin. In other words, the margin on the
sales, the recurring revenue that we had, and operating
expenses.
And part of what I was doing with Mr. Casey when I made
that presentation to him and several other members of the
management team was to say we needed to focus on cost, because
the EBITDA was negative and we needed to get it back to break
even.
And what this chart that you are looking at does, the
middle column reflects primarily cost reduction measures that
we put into place in order to begin to attack that issue. And
that is what Mr. Casey was referring to in those management
meetings when he said expenses are out of control, and we are
going to--we are losing a billion dollars.
Now, I do agree with Mr. Cohrs that he was comparing it to
budget, and the shortfall from our guidance was significantly
less.
Mr. Greenwood. Let me cut right to the chase here, what I
think this whole issue is about, what I think this hearing is
all about. Okay? I have no question that Mr. Winnick was a
visionary guy who wanted to--who could see where the
telecommunications world was going, that laying cable under the
oceans and around the world and around the globe was an
exciting business opportunity for the employees of the company,
for the investors of the company, and that is all good. And a
lot of other people got into that business.
And what seems to me pretty clearly to have happened--I
think this is--everybody understands this--there was a glut.
There was more fiber optic cable running around the planet than
there were customers using. And the go-go projections that this
was going to double and quadruple and go on and on just weren't
coming true.
So that is not your fault. It is not your fault that other
companies got in this business and decided to make these
investments as well. But here is where I think things started
to go wrong for the employees and the investors of the company.
When it became clear that because there was this glut,
because prices were going down, that you weren't going to
make--that it was going to be very difficult for you to make
the numbers, and we have document after document after document
that demonstrates how the internal management of this company
was deeply concerned and worried about the fact that you
weren't going to make your quarterly revenue expectations, that
that was going to drive the price of the stock down.
Okay. Still, nobody has done anything wrong. That happens
in business. It can happen to any company. But what strikes us
as problematic, and what we don't--we have to figure out how to
legislate about--is that when you got to the point--and I think
the evidence is absolutely clear that you got to this point--
where the only way to make those numbers was to engage in
transactions in which you essentially acquired a surplus
capacity from other companies, not because you needed it, not
because it was consistent with any business plan, but because
that was the only way they would buy surplus capacity from you.
And that is what I call a sham transaction. That is like if
they had a bad Christmas season, and Macy's and Woolworth's are
showing negative--or looking at negative numbers, and before
the quarter ends Woolworth sells its inventory to Macy's, and
Macy sells its inventory to Woolworth's to make the numbers
look sound, that is a--that creates a false image for the
investor.
So the investor, not aware of the complexity of these
transactions, continues to invest. And employees continue to
stay invested in their 401(k)s, in the company stock. And that
is the fraud. That is what was dishonest about these practices.
Now----
Mr. Cohrs. Mr. Chairman, could I----
Mr. Greenwood. Yes. I am going to ask you to comment on
this.
Mr. Cohrs. Okay.
Mr. Greenwood. And we have document after document after
document where the sales people were saying, ``This sale makes
no good. Who on God's earth would be buying more capacity in
Scandinavia when we have already invested $80 million and we
have no customers?'' So that is, to cut to the chase, what
concerns us, and what we don't want to see happen in the
future, whether the commodity is fiber optic cable or whether
the commodity is anything else.
And, Mr. Cohrs, why don't you respond to that.
Mr. Cohrs. Thank you very much, Mr. Chairman, because it is
very important, just as it is in the context of talking about
these management notes, to keep these--to have some perspective
and some context on these things. And there are also some
inaccuracies and misperceptions that continually get repeated
about these numbers.
In Tab 87, first of all, just to address the inaccuracies,
the fact is that this line called IRUs is not all what you
refer to as swaps, or we would call concurrent transactions. We
had--in the history of Global Crossing, most of our IRU cash
revenue came from cash deals, not from either concurrent
transactions--or the term you use is swaps, which has a
particular meaning that we don't----
Mr. Greenwood. Mr. Cohrs, I learned the word ``swaps'' by
reading Global Crossing's internal documents.
Mr. Cohrs. I understand it was used in those documents
inaccurately and imprecisely.
Mr. Greenwood. So it is not just that I referred to them.
It is that your company referred to them.
Mr. Cohrs. Fair enough, sir. And I acknowledge that. But I
would also say----
Mr. Greenwood. But didn't--I didn't hear that
acknowledgement a moment ago.
Mr. Cohrs. I would also--well, I would also say that
publicly the senior executives of this company consistently
used the term ``swaps'' to refer to an accounting treatment for
a transaction in which the transaction would have been booked
on a historical basis as opposed to fair value, which would
have meant no recognition of cash revenue--publicly, and the
senior executives attempted to consistently do that. I
understand that there were e-mails where the term was used
somewhat sloppily.
But if I could go back to the numbers here. You stated that
we were generating losses had it not been for the IRUs. The
fact is we generated losses, period. Our GAAP numbers generated
losses throughout this period. We did not recognize this--these
IRU transactions as GAAP revenue. We reported our GAAP numbers,
as required, which meant that when we sold an IRU----
Mr. Greenwood. How did you report your pro forma numbers?
Mr. Cohrs. And we reported--I am about to get to that, if I
may.
Mr. Greenwood. Sure.
Mr. Cohrs. We reported our GAAP numbers as required,
amortizing the IRU cash receipts over the life of the contract,
which meant if we sold $20 million of capacity we would
recognize $1 million per year on a 20-year contract, which
meant that our GAAP numbers consistently reported losses. IRUs
did not transform losses into gains.
We reported pro forma metrics that were supplemental to our
GAAP numbers. Those pro forma metrics were originally developed
in conjunction with our underwriters and our bankers as we
negotiated our bank covenants. In other words, our underwriters
and our bankers agreed that adjusted EBITDA was a more accurate
measure of the cashflow coming into the company and a better
basis on which to calculate loan covenants. This is not
something that----
Mr. Greenwood. Okay. But what would have happened to your
relationships with the banks if your EBITDA numbers were
negative without the IRUs? And if it weren't for the IRUs, you
would have been in trouble with the banks, is that not correct?
Mr. Cohrs. If it had--if you were to hypothesize that we
had no IRUs, we would have had significantly less adjusted
EBITDA. The banks lent to this company based on projections of
our IRU business. And so they were fully aware, from the very
beginning, from the beginning of this company, our original
business was 100 percent IRUs. The banks lent to this company
on the basis of----
Mr. Greenwood. Well, let me interrupt----
Mr. Cohrs. [continuing] forecasts and generating the IRU
revenue in the future.
Mr. Greenwood. [continuing] you for a second. And I am
looking at Tab 6, which is the management meeting minutes for
April 2. Okay? And if you look in the center of the page, I am
not sure who was saying this. Was this Casey saying this?
It is not clear who is saying this, but from the minutes it
says, ``Cannot continue running this business with IRU sales to
counter losses on current services. Where is the negative
EBITDA coming from? Reminder: No one to talk about performance
until we get our numbers published. Be careful. Do not comment
on the market either. Formal earnings release will be in middle
May. We remain comfortable with our guidance.''
Now, I would like you to explain what that all means, and
why we shouldn't conclude that this company was in trouble
financially, that it was using the IRUs to mask its losses in
earnings, and why this was not--this does not--shouldn't be
interpreted as something other than trying to keep that
information from the public.
Mr. Cohrs. First of all, what this is referring to, as I
said earlier, all of the comparisons are with respect to our
budget, not to our public guidance, which had significant
differences. I think we have to keep that in mind.
At this time period, what Tom Casey and the senior
management team were focused on was that we had expense budgets
for operating expenses which then developed in the fall, and we
were spending at levels consistent with our budget. In other
words, spending at levels consistent with revenues that were
higher than our public guidance.
As we went through this time period, we were seeing that
our revenues were below budget, but still consistent with our
public guidance on the whole. And because we were spending at
the budgeted levels and generating revenues at the levels of
public guidance, it meant that our service EBITDA, the number
you referred to in Tab 87, was projected to be more negative
than we expected.
At the same time, I believe it was in the July--the April
16 notes, we had David Walsh talking about $1.76 billion of
opportunities in the IRU business. So, in other words, we were
still looking at very robust demand for IRUs, and so what this
is talking about is service EBITDA, which was always expected
to be negative.
In this time period, it was more negative than we had
budgeted for, because of what I just described. And, yes, at
this time, we were looking at the IRU business as making up the
difference.
This culminated in this period in a forecast that was done
on May 9, where we actually had time to have the finance
organization and the sales organization do some work to
construct a forecast that we could support, and that May 9
forecast showed that we were--our forecast was consistent with
the lower end of our range for public guidance, and that was
the basis on which--on that conference call on May 10, I
believe, we affirmed guidance for the year, based on that
forecast.
Mr. Greenwood. Is it your testimony that all of these
capacity swaps, all of these capacity trends, all of these
capacity swaps, these deals, were all done for business
purposes and were not done simply to meet--there were no
transactions that were done to try to book revenue to meet your
street--the numbers that the street was expecting?
Mr. Cohrs. Yes.
Mr. Greenwood. They all had business purposes.
Mr. Cohrs. These transactions were all----
Mr. Greenwood. They all had business reasons.
Mr. Cohrs. [continuing] bought and sold from our carrier
customers----
Mr. Greenwood. When I see this----
Mr. Cohrs. [continuing] for business purposes that were
documented, and we projected acceptable rates of return on the
assets we were purchasing. There were separate contracts. That
is, once we signed the contract to purchase and sent money to
the carrier for the purchase, that was a separate contract.
There were no cross defaults.
Mr. Greenwood. Did you watch the hearing last week?
Mr. Cohrs. Yes, I absolutely watched the hearing.
Mr. Greenwood. Okay. Let me ask you this.
Mr. Cohrs. And if I may just--there were no separate--there
were no cross defaults in those contracts. Once we sent the
cash to our customer, to the carrier we were purchasing from,
had they defaulted, we were still on the hook for that cash.
And these were non-refundable----
Mr. Greenwood. But explain why Mr.----
Mr. Cohrs. [continuing] separately documented transactions.
Mr. Greenwood. All right. Well, explain why Mr.
Fitzpatrick, in an e-mail dated September 27, 2001--this is to
Joggerts, is that right?
Mr. Cohrs. I am sorry.
Mr. Greenwood. Or is it the other way around?
Mr. Cohrs. This is the dated--an e-mail dated--I am sorry?
Mr. Greenwood. It is Tab 52. Ryan Fitzpatrick says, ``I
received a call this a.m. regarding the Qwest deal,
specifically regarding our interest for swap capacity in
Helsinki. I wanted to make sure we are all operating from the
same place. We do not''--capital N-O-T--``need any capacity
into Scandinavia. We currently have invested $80 million plus
into this region and have no customers. To tell ourselves we
will take this capacity into inventory will add value to our
efforts of yielding return on the investments we have already
made is not what we want to do.''
Now, I need you to square that up with your previous
statement which is that all of these transactions had a
legitimate business purpose and were not just done in order to
book revenues.
Mr. Cohrs. Yes, sir. This is a transaction that we did not
do. In fact, this e-mail is dated on September 27, 2001, 3 days
before we closed the third quarter.
Mr. Greenwood. But why would it have been contemplated?
Mr. Cohrs. As we had previously testified----
Mr. Greenwood. Why would----
Mr. Cohrs. [continuing] in the first quarter, we refrained
from doing transactions that would have allowed us to make our
numbers with Wall Street, but we did not do transactions that
were available to us precisely because they were bad business
deals. So we didn't do this transaction.
Mr. Greenwood. And 3 days before the--if it was so obvious
to Mr. Fitzpatrick that it was a crazy deal, why was it
contemplated 3 days before the end of the quarter?
Mr. Cohrs. Well, there are lots of deals that are
contemplated, but if they are bad deals we reject them. And at
the end of the third quarter, we rejected many deals. Mr.
Winnick testified earlier, which is absolutely correct, on
September 30, we had before us transactions that, if approved,
would have allowed us to meet our Wall Street numbers. We did
not approve those deals, because we concluded that they were
bad business deals.
My testimony is that prior to that, or my testimony is that
the deals that we approved in the first quarter, second
quarter, and third quarter, when we approved them, they had
valid business purpose. We had business cases that were
developed by the organization in product management, sales,
network engineering, finance, that they all had financial
projections that made the acceptable rates of return and that
the assets that we were selling were being sold at prices that
were consistent with good business reasons. That is my
testimony.
Mr. Greenwood. And 4 days after the end of that quarter,
when in a memo from Joe Becchi to--I am sorry, from Wesley
Winkler to Joe Becchi, and he says, ``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,''
again, you think that was----
Mr. Cohrs. I am sorry. Did I----
Mr. Greenwood. [continuing] those would have been pursuant
to business plans?
Mr. Cohrs. Could I be referred to that, so I can look at it
and know the date?
Mr. Greenwood. I am sorry. I will share the document with
you. It is not in your binder. It is from last week's hearing.
The question is: why would sales people be referring to
capacity that was obtained in a reciprocal transaction as junk
if, in fact, it was acquired pursuant to a sound business plan?
Mr. Cohrs. This e-mail from Wes Winkler was written on
September 4, 2001.
Mr. Greenwood. Right.
Mr. Cohrs. Late in the third quarter. By that time, we had
started to understand that demand was falling off in the
industry. And by this time, we had gone through a process of
revising some of our projections, understanding that some of
the capacity that we bought, as well as much of the capacity
that we had built, was not going to be fully utilized as we had
earlier projected.
Now, I don't necessarily endorse the use of the word
``junk,'' but it was certainly the case that by this time in
the year we were looking at disposal of excess assets that were
no longer projected to be needed in the network.
And this is hindsight, looking at this now. But we now know
that we were at the beginning of one of the most spectacular
collapses in any industry in American history in terms of fall
off in demand, something to be----
Mr. Greenwood. Well, this will be my last document I am
going to ask you to look at, because my time has long since
expired. But if you would look at Tab 44, this is from--I am
sorry. This is from last week's binder, but--oh, it is Tab 44
in your current binder, if you would look at that.
This is considerably earlier. This was written in August
2000, August 29, 2000, and it is from Robin Wright to Gary
Brauninger. And it says----
Mr. Cohrs. Who was that?
Mr. Greenwood. Pardon me?
Mr. Cohrs. I am sorry. Who was that to?
Mr. Greenwood. The question is for Mr. Cohrs, but it is
written from Robin Wright to I believe it is Gary Brauninger.
It is in Tab 44. And she writes, ``As you know, prices are
dropping fast, and to some extent we are our own worst enemy.
When saddled with an unreasonable revenue expectation, 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 will
need to do another deal at the end of the next quarter.'' And
then she cites a case in point.
Again, people in the company referring to these deals as
crazy deals, as ridiculous deals, as unnecessary deals, and
clearly saying it is for the purpose of meeting quarterly
numbers.
Mr. Cohrs. Well, first of all, Mr. Chairman, I will never
apologize for attempting to achieve targets. That is the way
American business runs. In the particular case of this e-mail,
this was written in August 2000. At that time, and from the
beginning of the company, from the first business case ever
prepared at Global Crossing, we always projected prices to be
declining. That was the nature of our business.
Mr. Greenwood. Always projected what?
Mr. Cohrs. We always projected prices to be declining. The
nature of our business was that every business case ever
prepared in the history of Global Crossing showed declining
prices for capacity because of technological advances. And so
the typical business case would have annual price declines of
from 15 to 30 percent per year. That was expected in this
business.
The fact that prices were dropping was no surprise to
anyone. At this time----
Mr. Greenwood. But that is not the critical issue here. The
critical issue is, why would Robin Wright talk--say, ``When
saddled with an unreasonable revenue expectation, we do the
crazy deals at the end of the quarter''?
Mr. Cohrs. It was not uncommon for people in the sales
organization to resist some of the targets. We always had
challenging targets. We had challenges to build the network,
finance it, and challenges to sell. But it was not at all
unusual for sales people to characterize their targets as
challenging or aggressive.
The fact is, these targets were benchmarked against what
our competition was doing. They were benchmarked against the
original business cases that were constructed--that were put
together when we built these assets. And those business cases
were built on independent forecasts from outside consultants
that provided demand forecasts, and we benchmarked targets
against information like that.
Mr. Greenwood. Well, one would expect there to be tension
between the sales force and the top office, if, in fact, deals
are being done to generate revenues when there is no--there are
no customers to use that capacity. That--I don't know how
anything could be more clear than these consistent memos that
indicate that the sales force is rejecting these deals because
they don't make business sense, and the corporate guys at the
top are saying, ``Do it anyway, because we need to meet these
numbers.''
And that--the concern that we have with that is that it
created the impression that the revenue stream was in good
shape when, in fact, it was a shell game.
Mr. Cohrs. Mr. Chairman, I don't see, in this particular
memo, an assertion that there was no business purpose. And, in
fact----
Mr. Greenwood. Crazy deals--if someone in the sales
department calls a crazy deal--something a crazy deal that is
done for the purpose of meeting unreasonable revenue
expectations, how else would you characterize that?
Mr. Cohrs. My understanding is that she was referring to
the price at which we were selling this capacity. In her view,
perhaps these prices were low. But the fact is that when we
were selling capacity, we were always benchmarking our prices
against--not only against our list prices, which the sales
force tended to start with, we were also benchmarking against
the cost of new capacity, which in our case was very low,
because we had the network with a lot of capacity to sell, and
our incremental cost of selling it was very low.
So it is not always the case that the sales person really
understood the economics of this business. At this time, there
was work that my staff was performing that indicated that we
were selling--on our systems we were selling at prices that
were lower than we originally forecast in the business cases,
but we were selling capacity at much faster rates.
So, in other words, prices were lower than we had
projected. Volumes were much higher. More cash was coming in
faster, and the net present value of our investments, in fact,
was higher than we had forecast based on higher prices. It is
not clear to me that the sales force understood that analysis,
and there was no need for them to understand that type of
analysis.
Mr. Greenwood. My time has long since expired.
The Chair recognizes the gentleman from Florida for 10
minutes.
Mr. Deutsch. Thank you, Mr. Chairman.
Mr. Winnick, I assume you were here in my opening comments,
and I mentioned last Thursday's Wall Street Journal front page
story about another industry at another point in time, the
railroad industry in the 1870's. Could you comment on that
article and the implications for your industry?
Mr. Winnick. Well, I think, you know, in--Congressman
Deutsch, the short answer to that is that the early mover in
the railroad industry, in the latter part of the 19th century,
had a big first mover advantage. And a lot of people came along
in building spurs, smaller routes, in other parts of the
developed parts of the country, and they all started to
compete.
I can't relate to what the economic climate was during that
period of time, but many of those railroads went bankrupt.
The telecom business is not, in my view--and I am certainly
not going to dispute a noted journalist from The Wall Street
Journal, who I believe we have one sitting back here today. The
telecommunication industry is very different.
One of the things that is lost in the discussions that we
are having today and you had last week with other
representatives of our company is that 50 percent of the cost
of completing a phone call goes out in a bounty to the local
phone companies around this country and internationally.
So that a cost of delivering a call across the Atlantic
Ocean, Global Crossing changed the paradigm of pricing in our
initial Atlantic crossing system by reducing the price to 20
percent of the incumbent price. So that the unit price is 20
cents of the old dollar that was once being charged.
But once you get onto land, and you work your way into the
city through some what they call back haul, and you go into a
collocation facility, for example, in London, that is where the
bounty begins. And the same thing applies here in the U.S.
The biggest cost that we had in our company outside of the
network costs--and David could address this, because I know it
was a big frustration for David, what they referred to as the
local access cost, and I know we had conversations on this over
the summer at some point about a year ago. For us, on $3
billion of revenue going out approximately in the local
service, $1.5 billion is going as a bounty to the local phone
companies.
And what is going to happen is that is not going to change,
because it was companies like us who try to compete, and the
large incumbent tel-cos did everything they possibly could to
prevent companies like ourselves being competitive in terms of
the local access to the consumer or the commercial customer.
Very different dynamic than in the railroad industry.
So, yes, as a--in gross, as an industry, they failed. But
we have had these 25-year floods in this country every 10
years. We had the hospital industry implode in the 1980's. Not
one hospital company, but every hospital company. Tenant Health
Care, Humana, HCA, they all imploded. We had the real estate
industry in the early 1990's implode.
What I find, Congressman Deutsch, very unfortunate is that
our company, who worked very hard in building something that is
very unique, that whoever the buyer is of our company, whether
it is Hutchinson One Power, Singapore Technologies, or it turns
out to be somebody else, is going to make an incredibly good
acquisition, because we built a worldwide platform that cost us
over $12 billion.
Mr. Deutsch. I guess the question related to the article,
though, was that the overcapacity issue--and, again, hopefully
that is--you know, in terms of the access charges, is something
that we can deal with, you know, in our position as oversight
of the telecom industry.
But I guess the question of the capacity--I mean, at this
point in time, even with different changes of capacity, and the
overcapacity of the railroad system, obviously was used at a
relatively short period of time. I mean, what this chart is
showing is that within about a 4-year period of time, the
stocks crashed, the railroad stocks crashed. They ended up
having, you know, a statistically amazing significant increase
in a relatively short period of time.
And I guess, you know, that was really the question in
terms of the overcapacity, the $12 billion that you billed. I
mean, I just--from my own perspective, I just envisioned that
hopefully that capacity is going to be used, and we are going
to need to be using more in a relatively short period of time,
because all of the projections that we talked about, in terms
of video on demand and other issues, still are not there yet. I
mean, there are still other uses for that capacity that we
still have not touched in any shape, manner, or form.
Let me jump to a couple----
Mr. Winnick. I might add----
Mr. Deutsch. Okay.
Mr. Winnick. --Congressman, I totally agree with your
analysis as it relates to capacity.
Mr. Deutsch. Let me jump back, because it really--in a
sense, you know, I mean, the focus, as you have been asked by
several members who have been here, really, the transaction on
May 23. And I really want to talk about it a little bit more.
And, you know, the--let me refer--and you don't need a
copy, because I am going to mention enough of it--a Newsweek
article that was in this week's Newsweek. And the spokesperson
for this committee is quoted as saying, you know, and I will
quote, ``Is Winnick a choir boy, or did he steal from the
church's collection plate?''
And it refers to, let us see, documents that suggest
Winnick was well aware of Global's financial troubles, even as
the company was preparing to present a rosy picture to Wall
Street. And, specifically, at a February 26, 2001, meeting that
we have referred to earlier, according to documents obtained,
obviously obtained through--more than likely through us, I
assume, ``us'' being the committee, documents obtained by Time,
when it learned that Global was $200 million short of the first
quarter target set by Wall Street.
That is actually the first document--Document 1. I mean, if
you can refer to it in the tab. And, again, it is the Office of
the Chairman meeting of February 26, a document that was given
to Time for them to write the article that they wrote. And it
talks--there are--specifically, it brings us $200 million short
of quarter target.
I mean, do you have a specific recollection of that
discussion in the meeting?
Mr. Winnick. Well, I don't have--I think I was asked that
question by Chairman Tauzin on the February 26. I don't have a
specific recollection of that Office of the Chairman. I
certainly would not deny that I was there, if it is stated that
I was there. So I don't have any issues with that.
The bigger issue is that the company did make its quarters
for the first quarter ending in March. The company did disclose
to the Board of Directors sometime in mid-April that it had
made its numbers, and we believed, notwithstanding opinions
here or e-mails that may suggest something different, it is my
understanding that every transaction that was done in this
company was done for legitimate business purposes, and there
were a lot of safeguards to make sure that would not be
violated by any one person.
Mr. Deutsch. Let me just go back again, because, clearly,
the inference in the article that I am referring to in Newsweek
is that this May 26--I am sorry, is it Time? I am sorry. He
knows who he gives the information to, so it is Time magazine.
I am sorry. Time magazine.
So the article refers to that meeting of February 26, and,
clearly, it then goes on to, you know, report that, you know,
the company gave its--which we have talked about--the first
quarter, the analyst phone call, and then going on to May 23
selling--you know, you were selling the shares, which is
really, you know, the focus of really most of the--or a great
deal of questioning here today.
And I guess what--I mean, would your position, then, be
that, No. 1, it was irrelevant in terms of that, because you
actually met the quarter projections? So the discussion, if
there was a discussion, in a sense became irrelevant anyway
because you made the quarter projection?
Mr. Winnick. Well, also--yes. The answer is yes, but I also
didn't sell the stock until 3 months after this particular
date. And there were a lot of things that happened between that
date leading up to the time of our sale.
Mr. Deutsch. Let me follow up on the May--yes, go ahead.
Mr. Cohrs. These notes say that the funnel of existing
opportunities brings us $200 million short. It doesn't say
anything about what happened in the remainder of the quarter.
This says, ``Existing opportunities as of February 26.''
Mr. Deutsch. Okay.
Mr. Cohrs. So it doesn't say--it doesn't--this is not a
forecast.
Mr. Deutsch. So, I mean, can you elaborate what that
actually, then, would mean? Because clearly, again, the
inference is, you know, from this article and from some of the
questioning that the company was, at that point in time,
inside--I mean, clearly, let us talk about what the inference
is. The inference is that the insiders knew that the company
was basically vaporizing and----
Mr. Cohrs. I can understand----
Mr. Deutsch. And, you know, you as well as Mr. Winnick and
others here today transacted insider trades, you know, cashed
out hundreds of millions of dollars, and that is the inference.
I mean, that is clearly the inference that people on this dais
have made, the inference from this article. And, you know, I
mean, I am trying to give you an opportunity to say what your
perspective is on that.
Mr. Cohrs. I can certainly understand the inference,
because that is the inference that is typically made when this
information is provided out of context and interpreted out of
context. This note says ``funnel of existing opportunities.''
It is dated February 26.
As Mr. Winnick said, by the time we got to the end of the
quarter, we made our numbers for the quarter. And so between
this date and the end of the quarter, we found new
opportunities. This is not a forecast. It is not presented as a
forecast.
I think Mr. Perrone earlier spoke to the process of going
from a very preliminary forecast to a forecast on May 9. The
senior management was ready to endorse. We used that forecast
with respect to affirming guidance on May 10, and, you know,
the notes taken----
Mr. Deutsch. Let me go back, because again I seem----
Mr. Cohrs. [continuing] does not constitute a forecast.
Mr. Deutsch. I am trying to wrap up. I see, you know, my
time has expired on this. But let me just wrap up with a couple
of followups on this.
That the May 23 sale--and I really want to focus on that. I
mean, have you provided the committee, I mean, with the
documentation that you talked about, that this was not a sale
you just came up with, that there is a sort of, you know,
literally several month transaction that actually just occurred
on May 23? That it very well might have occurred on May 15 or
June 1 at that--I mean, have you provided that information to
the staff?
Mr. Winnick. I am just about to find out what was supplied
to the committee from my lawyer. He is what I have been told.
Everything requested by the SEC relating to this particular
matter has been supplied to the committee. I can't certify
that, but that is what I am being told.
But if I could make one point about this sale, which I
appreciate your spending the time and getting into this. I went
to Tom Casey and asked him--and told him I was contemplating
selling, and was he okay in terms of the company's numbers,
because I would not have sold if I was told anything different.
I had to rely on Tom Casey at at least the first juncture.
I then went to my general counsel, who was a partner at
Skadden Arps, and told him of my conversation with Tom Casey,
and I said to him, ``Brian''--his name is Brian McCarthy, and I
said to Brian, ``Would you please have an independent
conversation with Tom Casey,'' you know, and, again, I am not
privy to his conversation, ``and would you also check and talk
with Jim Gorton,'' which I am told he did. And that is also
additional backup behind that.
So, as I said earlier, every T was crossed, and every I was
dotted. And I was very----
Mr. Deutsch. And, again, let me----
Mr. Winnick. And I was very careful in terms of the sale.
Mr. Deutsch. Let me--and you know what? I am going to
compel myself to really stop at this point with one final
question, and it relates to your comments regarding your
employees. And I think all of us heard what you were saying,
and I think it really came from the heart, and I think each of
us felt that it came from the heart.
And I am sure people will follow up and ask you after the
hearing about this. But if I can understand, then, what you
have said, and that you will follow up, and, in fact, do, is
that every employee that worked for Global Crossing, that put
money into a 401(k), that has lost money based upon their
purchase of stock in Global Crossing, you are going to make
them whole, at least on their initial investment, is that what
you----
Mr. Winnick. Yes. Let me--again, I am not going to try to
fine tune it for this committee.
Mr. Deutsch. Right.
Mr. Winnick. Because I wasn't intending on making this
statement here today. I was going to do that in my own time and
place shortly after this.
I am told roughly, slightly less, but that is almost
irrelevant--I am told from our H.R. people, Human Resource
people at the company, from the time Global Crossing merged
with Frontier Corporation, the combined companies, all of the
employees through that period have contributed out of their own
paychecks or their pocketbook, however money came into the
account, $25 million.
I am going to guarantee that $25 million. I am going to
give $25 million out of my own personal monies to the plan
administrator and have him deal with the distribution of that
to the Ms. Crumplers of the world and every other person that
lost their money. And I also think that other people should
take that leadership role in companies where their people were
hurt in their pension plans.
Mr. Deutsch. Thank you.
Mr. Greenwood. The Chair thanks the gentleman from Florida
and recognizes the chairman of the full committee, Mr. Tauzin,
for 10 minutes.
Chairman Tauzin. Thank you.
Mr. Winnick, I wonder who has the billions, however, to put
into some trust fund for all of the pensioners and 401(k)
holders of stock in America who have lost money because of
failures of corporate responsibility in the last several years.
And as the chairman said, I am not sure there is enough
money around anywhere except perhaps in the Federal treasury to
do that, and that would bankrupt the government here.
We have got--when we left last visiting, you were telling
me how you--Tom Casey had not informed you of some of these
warnings, and not informed you of what might be wrong with the
company. But you did receive an interesting memo back in June
2000. That is like almost a year before the events we just
described, right?
Mr. Winnick. What memo was that?
Chairman Tauzin. It is Tab 20. It is from the then CEO, Leo
Hindery, of Global Crossing. Would you turn to that memo?
First, why don't you tell us who Leo Hindery was. How long was
he your CEO?
Mr. Winnick. Leo Hindery was the CEO of one of the
divisions of Global Crossing called Global Center from January
2000 to September 2000, I believe. He also became the CEO of
Global Crossing in March 2000 timeframe.
Chairman Tauzin. Okay.
Mr. Winnick. Approximately.
Chairman Tauzin. And then he left in October, I think?
Mr. Winnick. Yes, thereabouts.
Chairman Tauzin. You have the memo in front of you now,
right?
Mr. Winnick. Yes, I do.
Chairman Tauzin. This is a memo dated June 5, 2000, to Gary
Winnick, Tom Casey, and Lod Cook. And it is self-explanatory.
It has been written about in the press, but it basically
describes the fact that of the four notable participants in the
telecom industry niche in which Global Crossing found itself
that interestingly--in fact, he describes it rather striking--
that all are now willing to have its ownership change, read
acquired.
He goes on to say that ``The stock market can be fooled but
not forever. And it is fundamentally insightful and always
unforgiving of being misled.'' And in the very next sentence,
``The stock market is every day realizing more the perilousness
of the access transport strategy over the long term despite
very profitable outcomes in the near.''
On page 2, he describes a plan of action to you. And the
third part of his plan of action is to talk publicly every day
about how better run Global Crossing is, and then meet or
exceed near-term financial expectations. And, No. 4, without
looking like we are shaking our booty all over the world to
sell ourselves quickly to whichever of the six possible
acquires offer our shareholders the highest value.
This is a memo basically advising you that this company
doesn't have a long future, and that you ought to be thinking
of--while you are telling the public everything is okay, doing
everything you can to sell. Is that right?
Mr. Winnick. No, that is not what it says.
Chairman Tauzin. Well, tell me what it says.
Mr. Winnick. Well, first of all, this is a cover-your-booty
memo, okay, as opposed to----
Chairman Tauzin. This is a what?
Mr. Winnick. This is a cover-your-booty memo.
Chairman Tauzin. Could you explain that to us?
Mr. Winnick. Okay.
Tom Casey had come to me sometime before this June 5 date
to tell me that Leo Hindery had gone to a major investment
banking firm--I will leave them unnamed for now--to talk to
them about selling the company.
Chairman Tauzin. Okay.
Mr. Winnick. And that was unauthorized. Obviously, one
should have that discussion with its co-chairman, vice
chairman, and, I would assume, the board of directors. So when
he was confronted by that, he wrote this memo.
Chairman Tauzin. And what did you do when you got this memo
from him?
Mr. Winnick. Well, I think Leo has--he is obviously very
gifted in terms of his writing capability. But what this memo
basically said to me is the following. ``I am a deal guy. Let
me sell your company. I am selling--trying to sell Global
Center,'' which we did. We had sold it to Exodus for about $6
billion in stock during that summer timeframe. ``And let me
sell it. Let me sell it for $45 to $50 a share,'' I think he
indicated in his memo here.
There are, in his view, a number of people out there who
would be interested. The world is getting competitive. And,
frankly, I think Leo is a very competent, very clever fellow,
but I don't think he had any passion to want to run this
company. And I think this memo was nothing more--an attempt to
say what he felt. However----
Chairman Tauzin. Did you take it seriously?
Mr. Winnick. Oh, yes, we had a discussion on this.
Chairman Tauzin. What did you tell him?
Mr. Winnick. I said, ``Leo''--first of all, we had already
known he went to a major investment banking firm on this. And
we confronted him with that, and he kind of said, ``Well, I am
having some discussions.'' And I said, ``Look, if you can get
an indication for this company of $45 to $50 a share''--I
assumed the stock was trading at a significant discount from
that at the time--``we will take it to the board. But we are
not formally putting the company up for sale.''
Chairman Tauzin. Okay. He sent you another memo--I have
just handed out a copy of it--dated June 14, 2000. If you will
look at it real quickly. And he goes on to say, ``I thought at
length about how to best describe my plan for the next phase of
the company, and would propose a brief summary of the following
for your approval.''
He says, ``Keep it quiet, confidential. The best way to
upset this plan is to talk about it on the outside. Spill the
beans and we spill every possible opportunity. Run the company
as best you can. Have these other guys give you a hand.'' And
then there are seven potential buyers. In effect, ``Abandon all
other strategic issues over the next several months.''
He is obviously following up on his initial suggestion to
you. Did you receive this memo?
Mr. Winnick. Chairman Tauzin?
Chairman Tauzin. Yes.
Mr. Winnick. Going back to the June 5 memo for a second----
Chairman Tauzin. Yes.
Mr. Winnick. [continuing] I clearly take issue with that
the stock market can be fooled, but not forever, and always
unforgiving of being misled. He was the CEO of the company. We
also had a shareholder meeting, I believe, that month. So this
memo would be very disingenuous for a CEO to address a
shareholder meeting and not tell them that the company is
misleading the investors, which I don't believe is true at all.
Chairman Tauzin. So you don't deny you said it. You just
take issue with----
Mr. Winnick. No. It is in the----
Chairman Tauzin. It is in a memo to you.
Mr. Winnick. But his memo really just deals with the
redundancy and the competitive environment that was developing
in the industry with Level 3 global aspirations and 360
networks.
Chairman Tauzin. I understand that. I understand that.
Mr. Winnick. I think that is what his memo relates to.
Chairman Tauzin. I understand that. But the point is that,
as early as June 2000, at least one of your CEOs is advising
you that the company may be in some real trouble up ahead, and
you had better be thinking about selling.
Mr. Winnick. No, I----
Chairman Tauzin. You just didn't buy it.
Mr. Cohrs. He was also opining that the value was $45 to
$50 per share.
Chairman Tauzin. I am sorry. Mr. Cohrs?
Mr. Cohrs. Mr. Hindery was also opining that the value of
the company was $45 to $50 per share.
Chairman Tauzin. Yes.
Mr. Cohrs. Which is not at all consistent with some view
that the company was about to disappear.
Chairman Tauzin. Okay. A year later, April 2001 now, we
have the minutes of the manager's meeting, which you, Mr.
Winnick, say again you didn't hear about, Casey didn't apprise
you of.
Mr. Winnick. Well, I am saying I don't have----
Chairman Tauzin. A memory of it.
Mr. Winnick. That is correct.
Chairman Tauzin. Did you watch last week's hearing, by the
way?
Mr. Winnick. Well, interesting enough, I tried to watch
what I could on Real Networks, but they have a bad carrier
provider, so it was out a lot.
Chairman Tauzin. That is life for you. Well, did you hear
Mr. Joggerst when I asked him if someone told Tom Casey
something, was that equivalent of making sure Gary Winnick knew
it, and he said absolutely? That telling Tom Casey something
was the equivalent of telling Gary Winnick that? Did you hear
that part?
Mr. Winnick. Well, after very aggressive questioning, I
heard it. Okay?
Chairman Tauzin. So you think I forced him to say that?
Mr. Winnick. And he said--please let me finish, sir.
Chairman Tauzin. Okay.
Mr. Winnick. And he said, ``I assume it.'' Now, he didn't
know it, but he was very aggressively questioned by your
committee to try to make that connection.
Chairman Tauzin. Well, I was just asking about your
relationship. I asked him if you and Tom Casey were very close.
He said yes, and you spoke every day. And I simply said,
``Would telling Tom Casey something be the equivalent of
telling Gary Winnick?'' He said absolutely, according to the
relationship, that is what he assumed.
Mr. Winnick. Well----
Chairman Tauzin. That is a bad assumption?
Mr. Winnick. That is a very bad assumption.
Chairman Tauzin. Okay.
Mr. Winnick. And----
Chairman Tauzin. So you said, again, that the management
meeting on April 16 in which Tom indicated ``we do not have
room for more reciprocal deals'' is something you have no
recollection of, and Tom Casey never made that clear to you?
Mr. Winnick. I just don't have any recollection one way or
the other on that.
Chairman Tauzin. How much did you engage--what role did you
play in these IRUs, these reciprocal transactions that Tom
Casey complained about on April 16, the company had no more
room for?
Mr. Winnick. Oh, I don't--I mean, I don't know what the
question is.
Chairman Tauzin. Let me try to restate it.
Mr. Winnick. Okay.
Chairman Tauzin. What was your role in these reciprocal
transactions? Were you aware of them? Did you participate in
them? Did you help make them happen? Were you part of a team
that tried to get these reciprocal deals constructed? Or was
this Tom Casey's problem, or somebody else's problem, and they
never told you about it?
Mr. Winnick. Well, the----
Chairman Tauzin. Let me----
Mr. Winnick. Okay.
Chairman Tauzin. Let me get something clear, Mr. Chairman.
Under our rules, attorneys may be here to advise their client
upon request, but lawyers cannot coach their witnesses, the
clients, on the----
Mr. Winnick. I don't need to be coached.
Chairman Tauzin. Well, I would hope not. I would just
remind----
Mr. Winnick. But I don't need to be coached on this.
Chairman Tauzin. I thank you, sir. Let me ask you again:
how involved were you in these IRUs, in pursuing them or
negotiating them?
Mr. Winnick. Well, let me take that in some pieces for
you----
Chairman Tauzin. Okay.
Mr. Winnick. [continuing] if I may. I would certainly be
involved in those IRU or reciprocal transactions that require a
certain dollar threshold of approval. And as I talked about, I
was very much involved in the 360 approval process. There was
another transaction that was done at the same time, and then
there was a Qwest transaction that Tom had come to me and asked
for my approval on, even though I found out afterwards, in
preparation for this, that it didn't even require my threshold
approval. But I did ask for the business case on it, which had
been presented to me.
I would, on occasion, talk to the sales team, toward the
latter part of the close of the quarter. Whether I initiated
the call, or it was David Walsh and--was hosting a call and
might come on, and just get a kind of top-level view of sub-C,
principally sub-C IRU transactions in the hopper without any
specificity to what they were or the genetic makeup of the
reciprocal transaction. That part of it was not at that level
of discussion with me.
I also tried on a number of occasions, one in particular,
to try to enlist the support of our board of directors, which
was made up of some very prominent people, who had I think a
very unique reach in terms of corporate leaders, not just U.S.
but other places, to help us from a top level down get in the
door, so we could then sell network services, not IRUs and
wholesale, but network services.
So I was involved at times. I wasn't involved on a regular
basis, but I put my nose into it every now and then.
Chairman Tauzin. Were you involved with the Qwest deal in
June 2001?
Mr. Winnick. I wasn't involved in the creation of the deal.
I signed the deal, because it had been presented to me by Tom
Casey saying it was a deal he wanted to do, it met all of the
business conditions, he had all of the necessary sign-offs, and
even with that I asked Tom to get me the business case. I
wanted to see it.
Chairman Tauzin. How about Flag?
Mr. Winnick. Not that I recall.
Chairman Tauzin. How about China NetCom?
Mr. Winnick. No.
Chairman Tauzin. Velocita?
Mr. Winnick. No.
Chairman Tauzin. I have a memo at Tab 32. Would you refer
to it, Mr. Winnick? By the way, how about SingTel? Were you
involved in that one? This is one that didn't go through, but I
understand there was heavy negotiations on it.
Mr. Winnick. Well, no, I wasn't involved in any business
deal with SingTel, although I did go to Singapore when our
cable--actually, when Asia Global Crossing signed their joint
venture with Singapore Technologies. But I wasn't involved in
the creation of----
Chairman Tauzin. Tab 32----
Mr. Winnick. [continuing] the deal.
Chairman Tauzin. Tab 32 is a confidential memo from Jim
Gorton to Gary Winnick.
Mr. Winnick. Yes.
Chairman Tauzin. Dated June 19. And it reads as follows,
``Gary, we have asked Patrick Joggerst to get us a list of
targeted customers for our board members to help us at your
suggestion.'' So that is what you are talking about where you
organized the board to go out and open the doors for some of
these deals. ``Patrick rightly believes the only deals that we
should focus on at this critical moment are the IRU deals on
the table.'' Is that right?
Mr. Winnick. This is very much out of sequence. If I may
take a moment here, Chairman Tauzin----
Chairman Tauzin. Sure.
Mr. Winnick. [continuing] just to kind of tell you what
happened here.
Chairman Tauzin. No problem.
Mr. Winnick. Because I think it is important----
Chairman Tauzin. You understand my chairman gets on me when
I use up too much time.
Mr. Winnick. Please give an extra minute or 2. Let me----
Mr. Greenwood. Barely, Mr. Chairman.
Chairman Tauzin. Okay. Because I want to ask you a few
other questions about other memos.
Mr. Winnick. Okay. In the May board meeting, I believe it
was, May or June board meeting of 2001, I had asked Tom Casey
and John Legere, who were--John was the CEO of Asia Global
Crossing at the time, and John--and Tom Casey the CEO of Global
Crossing.
If they could bring their network service people to the
board, where they could both have their people make
presentations to our directors, and showing them the unique
capability that this network that was close to completion would
create in terms of opportunities for our company as this--as we
were evolving from a wholesale to a more service model.
At the end of the presentation, I think most of the
directors, if not all, were pretty overwhelmed with what had
been created, myself included, because I never really got to
see this presentation. So it was pretty unique.
That stimulated a conversation with directors, if they
would find a way and be willing to help us get a foot in the
door with the major multinational type corporations and
enterprise customers--you know, the major auto companies, the
advertising companies, the food companies, the lodging
companies, and that type of thing, because many of our
directors had that type of reach. And they were all very
willing to do so.
And I asked Lod Cook, my co-chairman, if he would put a
book together, a list of prospects, circulate it to directors,
and have the directors come back and tell us who and where they
might have a relationship, and then we would organize the next
level of that pursuit of business.
This memo is probably a result of that discussion, but it
was not the intention of me or Lod Cook to have our directors
go out and sell wholesale services and IRUs. Their intention
wasn't to sell the specific product. They weren't selling
shoes. They were going to just try to get us the customer in
the store. Okay?
So this thing is out of context, but----
Chairman Tauzin. Let me put one in context. Tab 31. This is
a confidential memo from David Walsh to Tom Casey, and with
copies to yourself and others. There is a message from Nancy
Davidson, on behalf of Gary Winnick, to Tom Casey. Subject:
Tom, I spoke with Jeff Skilling, and there are three people
vying for the business. We are one of them. They are looking to
do something here by quarter end. I indicated 300 for assets,
900 for reciprocal business,'' right? That is one of these
trades, right? Indicated that people may want to do it. You
were involved with that one, were you not?
Mr. Winnick. Involved exactly as this states.
Chairman Tauzin. You didn't do that deal, did you?
Mr. Winnick. No, that deal was rejected.
Chairman Tauzin. But I have another memo at Tab 54 from Tom
Casey to you.
Mr. Winnick. By the way, Chairman Tauzin----
Chairman Tauzin. Go ahead. I am sorry.
Mr. Winnick. [continuing] on this memo 31, which I happened
to read today in the newspapers, the----
Chairman Tauzin. Mr. Winnick----
Mr. Winnick. [continuing] I was asked by David Walsh----
Chairman Tauzin. Mr. Winnick, I want to make a point for
the record. We invited you to come and discuss all of these
memos with us, with our investigators, time and time again. I
believe you offered to do this only with the condition that you
wouldn't have to come testify, but you understand we would have
loved to discuss all these memos with you in private at an----
Mr. Winnick. No, I am not disputing it.
Chairman Tauzin. [continuing] but we didn't have that
opportunity.
Mr. Winnick. I am not disputing it. But----
Chairman Tauzin. Right.
Mr. Winnick. [continuing] you know, for my wife to get up
this morning and to look at the newspapers----
Chairman Tauzin. Right.
Mr. Winnick. [continuing] and to see things here, it was
just a little unsettling, sir, before I came in, but----
Chairman Tauzin. Well, it is a little unsettling for us
when we--when people won't come in and just visit with us and
talk about these things either. But thank you, sir.
Mr. Winnick. I was asked by David Walsh--and I am sure it
came about through some discussion I had with David or in some
meeting somewhere--that David was working on a very sizable
transaction with Enron, and he asked me if I knew anyone there,
and I told him I had just met Jeff Skilling at some industry
conference for, you know, just walking by and saying hello. And
I said I would call him, and that is all I did here.
And I think I may have actually called him again, which he
may not have returned the call, but this Enron transaction that
the company had ultimately rejected in the third quarter of
2001, David Walsh could be better----
Chairman Tauzin. Yes. It was rejected. Tab 54, if you will
go to it.
Mr. Winnick. Okay.
Chairman Tauzin. This is a memo from Tom Casey to you. It
looks like his handwriting, apparently. It is a handwritten
message addressed to GW, and it reads as follows, ``Ken Lay
left a voice mail saying he had left--he had sent an executive
summary of the fund. He is willing to think creatively.'' It
says, in effect, ``He is in New York today and could meet if
you have the time and interest in talking.'' Did you receive
this memo?
Mr. Winnick. I don't remember seeing this memo, but I do
remember having a visit with Ken Lay in the summer of that
time, with Lod Cook and Tom Casey, when Ken Lay was--then
became the CEO of the company I guess around that time.
Chairman Tauzin. But it was in reference to this proposed
deal?
Mr. Winnick. I am sorry?
Chairman Tauzin. Was it in reference to this proposed deal
that you had discussed with Jeff Skilling?
Mr. Winnick. I think so, but, again, I don't--I don't have
a date.
Chairman Tauzin. Yes, I don't have a date on it either.
That is why it was confusing to us.
Mr. Cohrs. Mr. Chairman, if I may, there is no date here.
This refers to Bob Anunziata.
Mr. Greenwood. Move the microphone over, Mr. Cohrs.
Mr. Cohrs. This memo, at the bottom, there is no date on
this memo. It refers at the bottom to ``Bob,'' which is a clear
reference to Bob Anunziata, who was the CEO, and his term as
CEO ended in, as I recall, spring of 2000 or something--the
point is, this memo is from a much earlier time period. It had
nothing to do with----
Chairman Tauzin. Now many CEOs did you have at the company?
Because we have had----
Mr. Winnick. Which year?
Chairman Tauzin. I know. How many do you go through, Mr.
Winnick?
Mr. Winnick. Go through?
Chairman Tauzin. Well, how many have you had? How many----
Mr. Winnick. Was that a leading question?
Chairman Tauzin. No, I apologize. How many CEOs did you
have during this period?
Mr. Winnick. Let us see. Four or five approximately.
Chairman Tauzin?
Chairman Tauzin. Yes, I want to move to another tab.
Mr. Winnick. But just going back to this----
Chairman Tauzin. Go ahead.
Mr. Winnick. [continuing] this Ken Lay memo----
Chairman Tauzin. Yes.
Mr. Winnick. [continuing] I may be out of time on this, and
I don't remember this memo, but I did have a meeting with Ken
Lay and Lod Cook and Tom Casey around the time after Skilling
left the company----
Chairman Tauzin. Ah.
Mr. Winnick. [continuing] relating to a transaction that
David was----
Chairman Tauzin. So your testimony is you did meet with Ken
Lay reference to this deal you talked about with----
Mr. Winnick. No, not to this deal, just to----
Chairman Tauzin. Just to meet with him.
Mr. Winnick. Ken Lay was in New York. Lod knew him. Lod
invited him up to the office, and we met for the first time.
And there wasn't any specific transaction done, just a, you
know, meet and greet.
Chairman Tauzin. Let us go to Tab 42.
Mr. Winnick. Which tab?
Chairman Tauzin. It is the August 13--42--August 13, 2001,
set of e-mails, I suppose. And this is from David Walsh, again,
to Fitzpatrick, Brian; Joggerst, Patrick; copies to yourself
and others, to Casey, to Lod, to Winnick, to Gary, etcetera.
And it is entitled ``Big Deal Battle Plan.'' Patrick and Brian,
``We need to put a battle plan together on the accounts listed
below. Winnick wants to make sure we are putting the right
amount of energy in the right places. We need an overall plan
for each of the following A accounts,'' and then it lists a
whole bunch of them, including WorldCom, which has--assisted by
Gary Winnick and John Legore.
Mr. Winnick. Right.
Chairman Tauzin. Explain this e-mail to us.
Mr. Winnick. Sure.
Chairman Tauzin. Again, are you--what kind of battle plan
were you putting into effect, and what were these accounts?
Mr. Winnick. Well, these were large telephone companies,
both what we refer to as RBOCs in the U.S. and PTTs outside the
U.S.--France Telecom, Cable and Wireless, and so forth,
Deutsche Telecom.
The battle plan was really, now that the network was
virtually complete and it was a very unique set of assets, and
the capital markets are basically drying up around this
timeframe in terms of access to capital, both for small
companies and big companies, these companies still had large
transmission needs.
The forecast, notwithstanding what may have been happening
in the financial markets, really hadn't changed. And we wanted
to be the outsourcing partner for Deutsche Telecom. In fact,
our company had been working on a transaction with them for
probably a year or more, where we were hopeful that we might
get an outsource contract to be their backbone network
provider.
I had conversations with Dave Dormand at AT&T, who had been
installed as the President, with Tom Casey. We met with him for
dinner one night in New Jersey to try to find a way how we
could be the overlay to their network. No one had the reach
that Global Crossing's network had. And if you have it, you
need to use it. And it was a unique set.
WorldCom is here because John Legere, who ran Asia Global
Crossing, didn't know the WorldCom folks. And I had met their
CFO, Scott Sullivan, and their Director of Operations, Ron
Beaumont, once or twice before. So John just asked me if I
would help reach out to them. But it was--again, it was an
introduction.
These were the type of customers that we wanted our network
to overlay. Instead of them going out and building fiber and
cable stations and undersea cables, they didn't have to do
that. They could come to us. It was one-stop shopping.
Chairman Tauzin. Let me read the list--France Telecom,
C&W--Cable and Wireless--Telephonia, TeleGlobe, Bell South,
Verizon, WorldCom, and Deutsche.
Mr. Winnick. Right.
Chairman Tauzin. Were these potential swaps?
Mr. Winnick. I don't know specifically whether there was
any reciprocal nature to the transactions. I just don't--I
don't know.
Chairman Tauzin. You don't know? Is that your testimony?
Mr. Winnick. I don't remember. It is possible that might
have been some of it.
Chairman Tauzin. Was SingTel a potential swap?
Mr. Winnick. SingTel?
Chairman Tauzin. Yes.
Mr. Winnick. As opposed to SingTech?
Chairman Tauzin. We have SingTel Cable. Tab 25, if you will
go to that.
Mr. Winnick. Oh, okay.
Chairman Tauzin. It is a memo from John Legere to Gary
Winnick, and it is--it includes----
Mr. Winnick. Yes, SingTel.
Chairman Tauzin. [continuing] exchanges in which you are
basically saying, ``I will be meeting with B.G. Lee tomorrow
morning. Send additional information and comments for Nancy to
fax to me.'' Was that a swap--a potential swap deal? I know it
didn't go through, to my understanding.
Mr. Winnick. No, I don't--I don't think there was any deal
there. It was just I was in Singapore----
Chairman Tauzin. Okay.
Mr. Winnick. [continuing] around this timeframe. I was
there with the former Ambassador to Singapore, who knew B.G.
Lee, who was making the introduction for me.
Chairman Tauzin. Okay.
Mr. Winnick. And it was just, you know, a meet-and-greet
and kind of, ``Is there a way our companies could do business
with each other?''
Chairman Tauzin. Tab 30. This is a message, again,
confidential from Brian Fitzpatrick to David Walsh, but it is
entitled ``All Hands On Deck.'' And it reads to Patrick and
Brian, ``Tom will be traveling to Beverly Hills tomorrow to
update Gary and Lod on the outlook of the quarter. Right now--
right after today's call, could you prepare the update. I would
like the report to be organized as follows: completed,
contractually obligated, single deals, primary targets.'' And
then strategic big deals are listed WorldCom, Velocita,
Emergia, China NetCom, TeleGlobe, Flag, and Qwest. Was that a
list of potential swap deals as well?
Mr. Winnick. This memo is not addressed to me. David Walsh
is here. Probably perhaps he can put some better light on it.
Chairman Tauzin. But do you know whether or not those deals
were potential swap deals? Just to your knowledge.
Mr. Winnick. I can't say at this point.
Chairman Tauzin. It also says, ``We could use some help
from Gary and Tom on the Pay Tech deal.'' Did you assist in
that negotiation?
Mr. Winnick. Pay Tech is a small, very well run phone
company in Rochester. I have an investment in the company. My
understanding is that company had been doing business with
Frontier for some time in terms of the U.S. network. And I was
asked by somebody if I would reach out to the CEO, in terms of
him having an interest in buying capacity. I don't believe
there was any swap or reciprocal nature to anything there.
Chairman Tauzin. Okay. Tab----
Mr. Winnick. And it didn't happen.
Chairman Tauzin. I am sorry. Tab 32, this is dated June 28,
2001. This is a confidential memo from Virginia Covine.
Mr. Winnick. I am sorry. Which one? 32?
Chairman Tauzin. Tab 32.
Mr. Winnick. 32?
Chairman Tauzin. Yes.
Mr. Winnick. Okay.
Chairman Tauzin. And the subject is a Qwest conference call
in which you were involved, apparently, along with Mr. Cohrs,
Mr. Gorton, Mr. Casey, Mr. Walsh, and it deals with the--
apparently, a potential deal with Qwest, is that right?
Mr. Winnick. Chairman Tauzin, I don't think we are on the
same page.
Chairman Tauzin. I am sorry? I have Tab 32. Is that
correct? What is it? It is 37.
Mr. Winnick. Okay.
Chairman Tauzin. Seven looks like two here. I apologize. It
is a confidential memo from Virginia Covine regarding a Qwest
conference call in which you purportedly were involved with
Messrs. Casey, Walsh, Gorton, and Cohrs. Is that correct? Do
you recall that call?
Mr. Winnick. Honestly, I don't.
Chairman Tauzin. Were you involved in the negotiations on
Qwest personally?
Mr. Winnick. No.
Chairman Tauzin. You were not?
Mr. Winnick. I don't believe so. I mean, you know, the
definition of ``negotiation,'' as I indicated to you before,
Tom Casey did come to me with a Qwest deal and asked me to sign
it.
Chairman Tauzin. And you would sign off at the end on all
of these when they were finally negotiated, right?
Mr. Winnick. No. Actually, quite the contrary.
Chairman Tauzin. What happened?
Mr. Winnick. There were some deals that I wouldn't and
didn't support doing.
Chairman Tauzin. Well, I understand. But I am saying they
had to get your signature, your approval at the end?
Mr. Winnick. Only if it reached a dollar threshold.
Chairman Tauzin. A dollar threshold.
Mr. Winnick. Yes.
Chairman Tauzin. But here is my question at the end of all
of this. All of these documents seem to indicate at least that
you were giving instructions or commands, ``all hands on
deck,'' or, ``here is the battle strategy to get these deals
done,'' that you actually get named on some of these memos as
being responsible for one or the other of the contacts. All of
this between June and August.
All of this is occurring in the third quarter following the
series of dire warnings that we saw--that I quoted to you
earlier when we talked, that you say you never heard from Tom
Casey or from anyone else in the company, not the least of
which was an April 16 manager's meeting which said, ``We can't
do any more of these deals. We just can't do any more.''
And yet there is a host of information that literally puts
you and the other managers of this company on a track where you
are desperately--aggressively at least, not desperately--
aggressively trying to get these deals, many of which are
swaps, when according to the manager's meeting at least Tom
Casey told everybody, ``We can't do any more of these deals.''
And I am looking for an explanation.
Mr. Winnick. Okay. I would be happy to, and I think it is a
good point. But I think it is a very big stretch.
Chairman Tauzin. Try it.
Mr. Winnick. In June 2001, Jim Gorton had determined that
there was some information that was being generated by our
financial staff that would force the window to be closed
prematurely.
Chairman Tauzin. Window on what?
Mr. Winnick. Window on stock sales by executives.
Chairman Tauzin. All right.
Mr. Winnick. I was very upset about that, because I had
known I had sold stock a few weeks before.
Chairman Tauzin. And explain that just a bit for us. What
did that mean?
Mr. Winnick. What it means is that no other executives--no
executives of the company would be able to sell any stock,
because it had been determined that even though it was
preliminary in nature that there was going to be a variance
from what Tom Casey and Dan Cohrs felt was their appropriate
guidance.
Chairman Tauzin. So you----
Mr. Winnick. Please let me finish my point.
Chairman Tauzin. But explain----
Mr. Winnick. This is very--it is very important to get
this.
Chairman Tauzin. [continuing] who was threatening to close
the window early?
Mr. Winnick. It was threatened. It was----
Chairman Tauzin. What was it, exactly?
Mr. Winnick. Jim Gorton just came up to a meeting and said,
``I am closing the window.''
Chairman Tauzin. Wow. Okay. And you had just sold some
stock.
Mr. Winnick. Well, I sold stock a few weeks before.
Chairman Tauzin. Right. Maybe Jim Gorton can help us with
that.
Mr. Winnick. Can I just finish my point, because----
Chairman Tauzin. Go ahead, please.
Mr. Winnick. You see in this June period a little bit
more--the third quarter, a little bit more activity?
Chairman Tauzin. Yes.
Mr. Winnick. Because if you look back in prior periods you
will not see----
Chairman Tauzin. Quite as much.
Mr. Winnick. Well, you will see very little activity----
Chairman Tauzin. Okay.
Mr. Winnick. [continuing] on my part in sales.
Chairman Tauzin. Okay.
Mr. Winnick. I wanted to know what was going on. And I
requested from Tom Casey that I wanted to go back, and I wanted
to meet with David Walsh, I wanted to meet with another senior
executive in sales, and I wanted to meet the person who was
handling these local access--and I felt that my presence was
needed because the company was concerned it would not be able
to meet its numbers during this June period--I mean, in--not
the June period but the--I guess it was in June it came out.
And that is why you see me having a little bit more
activity and a little bit more involvement and trying to be a
little bit more creative about, how do we take this precious
asset that has been created, where billions of dollars have
been spent, and why are we just doing, you know, IRUs or
reciprocals? Let us become the heart and soul of these
international networks like Intel is to the computer, or as
WorldCom is to the internet, and still is to the internet.
How could we be this backbone transmission provider in a
global marketplace? And that is what more of my involvement was
like.
Chairman Tauzin. All right. I am going to have to move, but
I want to understand this. Mr. Gorton brings you this message
that they are going to close the window a little early. Is that
the first you hear from anybody that the company may not make
its numbers? Where did you hear that from?
Mr. Winnick. I heard it from Jim Gorton.
Chairman Tauzin. He is the only one who told you that? Tom
Casey never told you that?
Mr. Winnick. I have said it a half a dozen times today,
Chairman Tauzin, that the--I specifically went to Tom, and I
had my agents go to Tom and to Jim Gorton prior to the sale to
make sure everything was done according to procedure.
Chairman Tauzin. Mr. Chairman, I realize time is short, and
I apologize. But I think it is critical we hear from Mr. Gorton
on this.
What exactly happened here? What changed between right
before the sale on May 23 and in--right immediately in June?
Now you are telling him we are going to close this window
because we have got problems. What happened?
Mr. Gorton. In New York, at a management meeting--and I
believe it was June 4, it was a Monday or a Tuesday, June 4,
June 5--Tom Casey sometime in the early part of that management
meeting said that the company was going to have to take a
restructuring charge or head count reduction or real estate
consolidation, and he said, ``There is a problem with recurring
revenue that may make us--cause us to have to reduce our
guidance to the street down for the rest of the year.''
Chairman Tauzin. Is that the first time you heard that?
Mr. Gorton. That is the first time I heard that we were
going to have to revise our guidance down to the street, yes,
sir.
Chairman Tauzin. And you reported directly to Mr. Winnick
this problem?
Mr. Gorton. I don't recall that, actually. Instead, what I
did is I--it was either the next day or the next day I put in a
call to--because I was in New York, and my office was out in
Los Angeles. I put in a call to my assistant general counsel,
Liz Greenwood, who was the person who generally kept charge of
the window period, and I informed her that I felt we should
close the window. And so I don't recall----
Chairman Tauzin. You don't recall telling that directly to
Mr. Winnick?
Mr. Gorton. I don't recall telling Mr. Winnick that
directly. I did have a conversation with Mr. Winnick about that
at the board meeting which took place the following Wednesday,
which was June 13.
Chairman Tauzin. Mr. Winnick----
Mr. Winnick. Yes, sir.
Chairman Tauzin. [continuing] do you want to clarify this?
When did you first hear from Mr. Gorton that this problem
existed?
Mr. Greenwood. This will have to be the last response.
Chairman Tauzin. This will be the last one. I promise.
Mr. Winnick. You know, my--the best of my recollection is I
do recall Jim coming over to my offices, which were not in the
Global Crossing building, informing--it may not have been Jim.
It may have been somebody else, but I seem to remember it being
Jim--telling Tom Casey and myself, and I believe Liz Greenwood
was with Jim, but I could be wrong on this--telling us that
they had to close the window, that they had some variance.
I remember being very upset, rightfully so. I also remember
Tom being visibly shaken, and, in fact, turning white. And that
is the first I heard this.
Chairman Tauzin. Thank you, Mr. Chairman.
Mr. Greenwood. The gentlelady from Colorado.
Ms. DeGette. Thank you, Mr. Chairman.
Mr. Cohrs, I think you may have heard me talking earlier to
Mr. Winnick about the--several things, but one of them was the
number of players in the global telecommunications market
around the time of all the transactions. And as I understand
it, there were really only four or five companies that were
trying to do these global kinds of networks. Would that be
accurate? Would you know about that?
Mr. Cohrs. Yes, I would. I think in terms of actually
building global networks, there were perhaps three--Global
Crossing, TyCom, and 360. And the other network builders tended
to be more regionally focused.
Ms. DeGette. And that would have included Qwest, right?
Mr. Cohrs. Yes, they were focused mainly in the United
States and, well, in Europe----
Ms. DeGette. But they were also trying to get some
agreements to take them internationally as well, right?
Mr. Cohrs. That is correct. Qwest, in fact, purchased
significant amounts of capacity from Global Crossing.
Ms. DeGette. Right. Exactly.
Mr. Cohrs. My understanding was specifically so that they
could extend their network internationally.
Ms. DeGette. Right. Exactly. And I know that Global
Crossing was also interested in doing business with Qwest, and
I am wondering if you can tell me what Global Crossing's
business reasons for doing business with a company like Qwest
might be.
Mr. Cohrs. Well, Qwest--actually, the original business
with Qwest was when Frontier purchased an IRU for 12 fiber-pair
on the Qwest network in the United States. The Frontier network
that we acquired actually was a network that originally was
developed by Qwest.
Ms. DeGette. Okay. But you did additional deals after that
with Qwest.
Mr. Cohrs. That is correct. And as----
Ms. DeGette. And what was the business purpose for those?
Mr. Cohrs. As time went by, we had various business
purposes. We would buy capacity from Qwest in some cases to
extend our network to locations that it didn't reach, to
connect, you know, new locations.
In some cases, it was to--in the case of our U.S. network,
it might have been to add capacity on specific routes or to--
probably in the case of Qwest, it would have been to add some
redundancy, so that our network would be more robust and have
better backup capabilities, which made the network more
reliable as well as more efficient.
Ms. DeGette. Right.
Mr. Cohrs. In general, those would be the types of reasons
we would do business with them.
Ms. DeGette. And Qwest being one of the bigger players in
the industry, you were very eager to do deals with Qwest,
correct?
Mr. Cohrs. Well, Qwest was an important customer to us.
Ms. DeGette. Right.
Mr. Cohrs. That is correct.
Ms. DeGette. I mean, Robin Wright told us, you know, it was
important to keep that business relationship going and to do
those deals. Would that be fair to say?
Mr. Cohrs. It is certainly fair to say that it--yes, that
they were an important customer, and we both bought capacity
from Qwest and sold capacity to Qwest.
Ms. DeGette. Now, Mr. Perrone, I think you might be able to
answer this question best. But if someone else has a better
idea, I would like to hear it. Here is what we were told last
week--that when you all did business deals, and, in particular,
what we call swaps, which may not be the correct term of art,
according to Mr. Cohrs, but that is what we call them--where
you are doing a business deal with Qwest, your accounting
methods allowed you to amortize that deal over time because you
were characterizing it as a service contract.
So you didn't actually have to have anything delivered,
because you could characterize it as a service contract. Would
that be a fair characterization?
Mr. Perrone. Well, I mean, just broadly speaking, all of
our contracts were amortized over the life of the contracts.
Ms. DeGette. Right.
Mr. Perrone. We did not recognize any revenue up front.
Ms. DeGette. So you did not recognize the revenue up front,
correct?
Mr. Perrone. That is correct.
Ms. DeGette. But Qwest had an accounting system which
required it to recognize the income, the sales income, by
quarter, and so they had to actually have--they had to pay
money out and get something back for it, right?
Mr. Perrone. I am not really familiar with exactly what----
Ms. DeGette. Well, are you familiar with the Qwest deals
with Global Crossing?
Mr. Perrone. Generally speaking, yes.
Ms. DeGette. I mean, isn't it true that--I mean, didn't you
know that when you did a deal with Qwest they wanted to book
the income at the end of each quarter, and it had--so they had
to characterize the accounting transaction that way, as a sale?
Mr. Perrone. Generally speaking, yes.
Ms. DeGette. Okay.
Mr. Perrone. Yes.
Ms. DeGette. And, Mr. Walsh, did you know about that
distinction?
Mr. Walsh. I really didn't pay much attention to----
Ms. DeGette. Can you put the microphone up to your----
Mr. Walsh. Yes. I really didn't pay much attention to our
customers' accounting requirements and rules.
Ms. DeGette. Did Robin Wright or anybody else tell you
about that?
Mr. Walsh. Occasionally, you would hear that there was a
revenue recognition issue. That could be voiced in a sales
call. But we didn't spend a lot of time trying to understand
the rules and the accounting rules in the sales organization.
Ms. DeGette. Why not?
Mr. Walsh. From our perspective, in selling something, we
always add financial and legal support to ensure that all our
transactions were proper. But in terms of trying to understand
the financial rules, and how they account for things, at least
our customers, that would be of little interest to us.
Mr. Cohrs. Congresswoman DeGette, may I clarify the record
on this? The facts are that in the early part of 2001, it was
not disclosed by Qwest that they were booking sales type lease
revenue. And I believe the first disclosure of that came in the
Morgan Stanley research reports that were published in the
summer of 2001.
Ms. DeGette. When would that have been?
Mr. Cohrs. I don't recall the exact date, but I can
remember that Morgan Stanley research analysts--and this was
discussed at last week's hearing--published reports that
analyzed this issue. Prior to that, it was not known that----
Ms. DeGette. Well, once you knew it, did it change the way
you dealt with Qwest?
Mr. Cohrs. No.
Ms. DeGette. Okay. Mr. Walsh, you might want to take a look
at Tab 35 in your notebook.
Mr. Cohrs, you might want to look at it, too.
Mr. Cohrs. I am sorry. Which tab is it? 35?
Ms. DeGette. This is a memo from Robin Wright to Mr.
Joggerst. And, Mr. Walsh, you are copied on this memo. And what
it says is, ``I wanted to alert you to''--and this is in June
2001. Okay? June 25.
``I wanted to alert you to an issue that came up this
evening. It had to do with portability. Here is the deal. In
our deals with Qwest, any capacity dark fiber that we buy from
them has to be activated in order for them to get revenue
recognition. Since in many cases we buy a bucket of services,
they just activate what they can, and we, in turn, have the
right to port that to what we want once we decide what we want.
We have always agreed that the value of that is what we paid
for it, not fair market value.''
And then it goes on. Do you recall seeing that memo, Mr.
Walsh?
Mr. Walsh. I don't recall specifically seeing this memo.
But I do recall this issue being brought up.
Ms. DeGette. Tell me how you recall it being brought up.
Mr. Walsh. I don't specifically remember the forum for it,
but I do remember that portability with Qwest was something
that was an issue, and----
Ms. DeGette. And why was it an issue?
Mr. Walsh. It is an issue because when you buy services
ahead of demand, let us say, buy a product that you don't know
exactly who you are going to sell it to and what they are going
to need immediately, you like to have a feature called
portability. What that allows you to do is to turn that back in
exchange for something you might need.
Ms. DeGette. Right.
Mr. Walsh. So that flexibility was always something that we
were interested in as a buyer.
Ms. DeGette. And that is the nub of it, because you guys
wanted portability, so that you could shift what you needed in
the future, and that was just fine under your accounting system
because you were amortizing that over time. You didn't need to
recognize the purchase right then. You could have portability,
right?
Mr. Walsh. Yes. Well, I don't know--I didn't spend a lot of
time on the accounting rules.
Ms. DeGette. Okay. Well, Mr. Cohrs, would that be----
Mr. Walsh. But I do know from a business standpoint----
Ms. DeGette. Hang on. Would that be right?
Mr. Cohrs. I believe that is correct----
Ms. DeGette. Okay.
Mr. Cohrs. [continuing] as you described it.
Ms. DeGette. Okay. But--oh, go ahead.
Mr. Walsh. But from a business perspective, portability was
something that we always looked to try to get if we could.
Ms. DeGette. Right.
Mr. Walsh. And it was also a sales tool which allowed us to
compete against other carriers who didn't have the depth of
product that we had.
Ms. DeGette. Right.
Mr. Walsh. So portability was really a strategic weapon
that we had that we could use to compete----
Ms. DeGette. Right.
Mr. Walsh. [continuing] against other carriers.
Ms. DeGette. But for Qwest, this was a problem because you
had to--because since they were booking the income at the end
of every quarter, they had to say they were buying something
definite, right?
Mr. Walsh. It is entirely possible. Like I said, I wasn't
familiar with their accounting rules. I know there is a lot
of----
Ms. DeGette. Well, did you become--I mean, did you become
aware of the issues in this memo dated June 25?
Mr. Walsh. Yes. And I think our intention was we need
portability.
Ms. DeGette. Okay.
Mr. Walsh. And that has always been our intention.
Ms. DeGette. Now, did you become aware of side agreements
that Robin Wright and others entered--oral agreements that
Robin Wright and others entered into with Qwest, which
essentially said, ``Even though we are telling you that we are
selling you this, you can change it in the future''?
Mr. Walsh. The oral agreements weren't intended to change
the agreement. We had requested for specific language our legal
team, and we were not able to get the exact language we needed.
So we were working toward a compromise on the language.
And what happened was is since we couldn't get exactly what
we wanted, the account team in the group from Qwest said that,
``Look, we will give you our verbal assurances that we are not
interpreting this some other way. And this isn't intended to
hurt you or change the spirit of the agreement.''
So nothing we had from a verbal perspective was meant to
change our understanding of the written contract.
Ms. DeGette. But later on in your dealings with Qwest, you
had trouble with them because they weren't willing to give you
the flexibility that they had earlier said. Is that true?
Mr. Walsh. Well, later on, you know, each one of these
deals has a tendency to take on a life of its own when you
negotiate them. So the fact that in the next transaction they
might be looking for different terms is not unusual. In fact,
that is very customary, for us to have to, you know, make
modifications and----
Ms. DeGette. Well, yes, I understand what you are saying.
But you had problems later in the future with Qwest when you
tried to get that flexibility.
Mr. Walsh. Yes. You may be referring to a time after I was
out of the company. I don't know.
Ms. DeGette. Oh. That is a good point. When did you leave?
Mr. Walsh. I left just after the third quarter.
Ms. DeGette. Of 2001?
Mr. Walsh. Correct.
Ms. DeGette. So you don't know of any deals that had that
problem before that?
Mr. Walsh. No. I think--are you--I don't know if you are
referring to the fact when we asked to port, they didn't port.
I have heard that as an issue. But I wasn't there, I believe,
when those things happened. And if I was, I was not aware of
them.
Ms. DeGette. Okay. Mr. Cohrs, let me ask you, were you
aware of some of these issues I have been discussing with Mr.--
--
Mr. Cohrs. No, not at the time, I was not. I was----
Ms. DeGette. When did you become aware of those issues?
Mr. Cohrs. In the course of preparing for these hearings
and dealing with some of these issues in the investigations.
Ms. DeGette. Okay. If you could take a look quickly at Tab
40. And it says--I guess it is referring to a newspaper story.
It is from you to a bunch of people, and it says, ``The story
is that Qwest is booking sales type lease revenue as GAAP
revenue,'' which is what I am just discussing with these
others, ``and not breaking it out. At least we get credit for
breaking it out. The bad news is this is raising visibility on
the swap issue.'' What did you mean----
Mr. Cohrs. I would just like to clarify when I said I
wasn't----
Ms. DeGette. Yes.
Mr. Cohrs. I was talking about these portability issues
when I said I wasn't aware at the time.
Ms. DeGette. Okay.
Mr. Cohrs. But I was certainly aware of this.
Ms. DeGette. Sure. All right. Well, tell me what you meant
by that memo.
Mr. Cohrs. By this memo?
Ms. DeGette. Yes.
Mr. Cohrs. Well----
Ms. DeGette. The bad news is this is raising visibility on
the swap issue.
Mr. Cohrs. Well, this is--this really relates directly to
what I said earlier. Swap is a term that we were very careful
about how we used publicly. In other words, we were getting
questions about, are these concurrent transactions? Are they
swaps? The answer to that was no, they were not swaps. And it
was sort of an issue in the sense that it was being discussed,
and analysts and investors were asking us, are these swaps?
Ms. DeGette. What is the problem with swaps?
Mr. Cohrs. The answer to that is no. From an accounting
point of view, they were not swaps.
Ms. DeGette. Okay. What is the----
Mr. Cohrs. But it is not----
Ms. DeGette. What is the problem with swaps?
Mr. Cohrs. Well, because it is a substantive distinction,
not just an accounting distinction, because the fundamental
difference between what I would call a swap and what I would
call a concurrent transaction is that--is business purpose.
Ms. DeGette. Right.
Mr. Cohrs. In other words, when we did these transactions,
we had business purpose, business cases, justifications, demand
studies, financial forecasts, etcetera, that were carefully
prepared and approved that showed that we had good business
reasons for what we are doing.
Part of the importance of that was that those business
cases actually were important for determining the fair value of
the assets. Without such business cases, it was our policy, it
was our accounting policy, that these transactions would have
been booked at carryover basis, rather than fair value.
Ms. DeGette. I understand completely what you are saying.
My question is: what is the problem with swaps? Is it that in
the definition you are talking about and referring to in this
memo, Tab 40, that the swaps you are referring to would be
deals that have no business purpose?
Mr. Cohrs. If the deals we did were ``swaps,'' using that
term carefully, then you would say--if it was a swap, it would
be booked at historical value, meaning no revenue or no cash
revenue. But the reason, if you went back to, why would you
book it as a swap, the reason for that would have been no valid
business purpose. But, in fact, we had valid business purpose.
Ms. DeGette. Right. I understand. I kind of look at----
Mr. Cohrs. And that is the heart of the issue.
Ms. DeGette. Exactly.
Mr. Cohrs. And the heart of why we did not refer to these
as swaps.
Ms. DeGette. Right. But, I mean, in my lay person's view,
there can be legitimate swaps, if there is a legitimate
business reason, but what----
Mr. Cohrs. I agree with that. I just would not use the word
``swaps,'' but I understand what you----
Ms. DeGette. Because it is taking on a bad connotation?
Mr. Cohrs. Because it takes--because the word ``swaps''
then takes--the word ``swaps'' takes us into the accounting
definition of swaps, which means if it is an accounting swap,
it has no valid business purpose.
Ms. DeGette. Okay.
Mr. Cohrs. And that is what I am--why I am trying to be
very careful about not using the word ``swaps.''
Ms. DeGette. Okay. So getting back to my original question,
what were you meaning when you wrote this memo? ``The bad news
is that this is raising visibility on the swap issue.'' Were
you concerned as of August 3, 2001, about swaps?
Mr. Cohrs. Well, my concern was that people were confusing
the issue very much along the lines of the interchange we just
had. People were saying, ``Aren't these just swaps?'' and we
were saying, ``No, these are simultaneous purchases and sales
properly booked at fair value.'' We were relying on the
accounting policy approved by Arthur Andersen at the time to do
this accounting. By the way, approved by Arthur Andersen and
reviewed by every other major accounting firm.
At this time, my concern was not--had to do with the
characterization of these transactions as swaps. When this memo
was written, we had already disclosed in two press releases
that we were doing the transactions.
Ms. DeGette. Okay. But then you--but you say, ``The story
says that Qwest is booking sales type lease revenue as GAAP
revenue and not breaking it out.'' Is that why you were
concerned? Was this the first you found out that Qwest was
doing that?
Mr. Cohrs. I believe so, yes. I don't recall exactly, but
this----
Ms. DeGette. So you don't recall learning earlier from any
of your sales team that these--that transactions had to be
characterized in the agreements in a certain way, because Qwest
had to recognize its income in a certain way?
Mr. Cohrs. I don't have a recollection of that before this,
no.
Ms. DeGette. And so the first--so your testimony is the
first you found out about that was in August when you saw
apparently some kind of story?
Mr. Cohrs. To the best of my recollection, that is--yes,
that is my testimony.
Ms. DeGette. Okay. And what happened after this memo as a
result of your I guess I don't know--the e-mail? I don't know
what it was. It looks like an e-mail----
Mr. Cohrs. I believe it was.
Ms. DeGette. [continuing] to this team of people. Did you
guys discuss what you should do about the issue of this memo,
that Qwest is booking sales type lease revenue as GAPP, and
that it is raising visibility on the swap issue? What did you
do about that?
Mr. Cohrs. There was nothing required for us to do.
Ms. DeGette. Well, I mean, you were concerned about it,
right?
Mr. Cohrs. I wasn't concerned about how Qwest was doing
their accounting. I mean, that is----
Ms. DeGette. What were you concerned about?
Mr. Cohrs. Well, as I said, there was a discussion going on
at the time in which the term ``swaps'' was being misused and
misunderstood.
Ms. DeGette. And why were you concerned?
Mr. Cohrs. And I was concerned because the implication of
people who--people who--I am talking about Global Crossing now.
Ms. DeGette. Right. I understand, yes.
Mr. Cohrs. Because people who referred to our transactions
as swaps were--by using the word ``swaps,'' were implying that
the transactions had no good business purpose, in my--in the
way we were using the term at the time.
Ms. DeGette. So you felt that they were implying that
Global Crossing had no business purpose. You weren't worried
about Qwest.
Mr. Cohrs. Correct.
Ms. DeGette. And do you know, or any of the rest of you
gentlemen know, after August 3, 2001, did Global Crossing take
any measures in negotiating its deals with Qwest to alleviate
some of the issues raised here? In other words, to make it--to
make the transactions make--look more transparent, or to make
them look like there really was a business purpose, and that
they weren't just swaps with no business purpose.
Mr. Cohrs. When we were analyzing the business purpose, we
were concerned about the business purpose for Global Crossing
in these transactions.
Ms. DeGette. Okay.
Mr. Cohrs. And, you know----
Ms. DeGette. Let me try again.
Mr. Cohrs. Qwest accounting and----
Ms. DeGette. I am just trying to ask a simple question.
Mr. Cohrs. Yes.
Ms. DeGette. Did you, or any of the rest of you gentlemen,
take any action after August 2001 to make sure your contracts
with Qwest were transparent in terms of what was being bought
and what was sold, so it was clear that there was this
legitimate business purpose?
Mr. Greenwood. This will have to be the last question.
Mr. Cohrs. It is my understanding that the contracts always
made it clear what was being bought and sold. I don't--I am not
aware of any fundamental change that was made.
Ms. DeGette. Anyone else?
Thank you, Mr. Chairman.
Mr. Greenwood. Thank you.
One quick final question that I would like to address to
Mr. Gorton. It refers to Tab 41. On August 6, you received a
letter that was written by Roy Olofson, who----
Mr. Gorton. That is correct.
Mr. Greenwood. [continuing] testified last week he views
himself as a whistleblower. He raised a lot of questions about
how Global Crossing was conducting its business. He said this
is a very--in the last paragraph, he said, ``This is a very
complex issue that needs to be addressed. As an employee and a
shareholder of Global Crossing, I believe that a thorough
investigation of all of the facts should be undertaken and the
appropriate action be taken immediately to correct any
improprieties. I feel strongly that neither Dan Cohrs nor Joe
Perrone should be involved in this investigation. Furthermore,
Joe Perrone and Arthur Andersen may have a conflict of interest
inasmuch as he was the engagement partner on Global Crossing
prior to joining the company.''
I believe last night you told our investigators that you
were told not to take this letter to the audit committee. Is
that what you told our investigators last night?
Mr. Gorton. I had a meeting with----
Mr. Greenwood. Pull your microphone up close to you,
please, sir.
Mr. Gorton. I am sorry. We had a--after receiving this
letter, I think I got this letter on a Monday afternoon, and
there was going to be an audit committee meeting on the
Wednesday, which was 2 days later. And there was a meeting, and
I can't recall who the people were because--the reason I
remember is I asked the question whether this letter was going
to be presented at the audit committee meeting.
I had only been to one audit committee meeting in the
history of Global Crossing, and that was to explain some
litigation that we had just brought.
On the basis of hearing that they weren't going to take it
to the audit committee at that time--and I felt their reasons
were good. They said that they felt that they had just gotten
it, and it would be very quick to try to react to it at this
moment and give it to the audit committee.
I still felt, since I had already announced that I was
leaving Global Crossing, that it was important for the chairman
of the audit committee to know about this. So I actually went
to the audit committee meeting on Wednesday, and I saw a break
in the meeting, and I asked the chairman to come out into the
hall, at which point I told him that we had received this
letter.
Mr. Greenwood. When you left Global Crossing, did you
leave, in part, because you had concerns about the propriety of
some of these transactions?
Mr. Gorton. No. I had other reasons for leaving Global
Crossing.
Mr. Greenwood. Okay. Pardon me?
Mr. Gorton. Would you like me to----
Mr. Greenwood. I would appreciate it if you would expand
upon that.
Mr. Gorton. Okay. Principally, the people I had come into
the company with, the early founders of the company--Barry
Porter, Abbott Brown, David Lee--and the early CEOs of the
company--Jack Scanlon and Bob Anunziata--were all very close
relationships of mine, and they had all left.
And when they left, my role in the company really changed
from being one of--it was much more a consensus decisionmaking
process at that time, and I had had sort of a valued business
role. As time developed after they left, my role became much
more the person who headed the legal department. And while that
is a great job, it just wasn't the job that I was comfortable
with in Global Crossing. And that was the primary factor in my
going.
Mr. Greenwood. Very well. Thank you.
I want to thank all of you for coming. It has been 5 hours.
We all appreciate your willingness to be here and to testify,
and you are excused.
I would--for the benefit of us all, I would note that we
will now take a break until 2:30, at which time we will call
forward the Qwest panel.
The committee is in recess.
[Recess.]
Mr. Greenwood. The committee will come to order. Our guests
will please be seated.
And we welcome our panel for this afternoon. Let me
introduce them. They are Mr. Joseph Nacchio, the former
Chairman and Chief Executive of Qwest Communications
International. We welcome you, sir. Thank you for being here.
Mr. Afshin Mohebbi, the President and Chief Operating
Officer of Qwest Communications. We welcome you, sir.
Mr. Peter Hellman, who is the Chairman of the Audit
Committee of Qwest Communications. Thank you for joining us.
And Mr. Oren Shaffer, the Vice President and Chief
Financial Officer of Qwest Communications International.
Gentlemen, you are I think aware that this is--this
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 offering your testimony
under oath today?
Okay. Seeing no such objections, I should advise you that
pursuant to the rules of this subcommittee, and the rules of
the House of Representatives, each of you is entitled to be
represented by counsel.
Mr. Nacchio, are you represented by counsel today?
Mr. Nacchio. Yes, I am, sir.
Mr. Greenwood. Would you identify him by name?
Mr. Nacchio. Mr. Charles Stillman.
Mr. Stillman. Good afternoon, sir.
Mr. Greenwood. Good afternoon. Welcome, sir.
Mr. Mohebbi, are you represented by counsel?
Mr. Mohebbi. Yes, Mr. Chairman.
Mr. Greenwood. And who is that?
Mr. Mohebbi. Mr. Paul Grand.
Mr. Greenwood. And which one is he? Mr. Grand, welcome.
Mr. Grand. Thank you. And also, my partner Jack Tyke.
Mr. Mohebbi. And Mr. Jack Tyke.
Mr. Greenwood. And Mr. Shaffer, are you represented by
counsel?
Mr. Shaffer. I am, Mr. Chairman.
Mr. Greenwood. And that is?
Mr. Shaffer. It is Mr. Joseph Brenner.
Mr. Greenwood. Okay. Welcome, sir.
And Mr. Hellman?
Mr. Hellman. Yes, I am, Mr. Chairman.
Mr. Greenwood. And your attorney is?
Mr. Hellman. Jim Lyons.
Mr. Greenwood. Okay. And that is the gentleman right there.
Thank you. Okay.
In that case, if you would rise and raise your right hand,
I will swear you in.
[Witnesses sworn.]
Okay. You may be seated. You are under oath.
And, Mr. Nacchio, do you have an opening statement?
Mr. Nacchio. Yes, Mr. Chairman, I do.
Mr. Greenwood. You are recognized to give it, then.
Mr. Nacchio. Thank you.
Mr. Greenwood. For 5 minutes.
TESTIMONY OF JOSEPH P. NACCHIO, FORMER CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, QWEST COMMUNICATIONS INTERNATIONAL INC.;
AFSHIN MOHEBBI, PRESIDENT AND CHIEF OPERATING OFFICER, QWEST
COMMUNICATIONS INTERNATIONAL INC.; PETER S. HELLMAN, CHAIRMAN
OF THE AUDIT COMMITTEE, QWEST COMMUNICATIONS INTERNATIONAL
INC.; AND OREN G. SHAFFER, VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER, QWEST COMMUNICATIONS INTERNATIONAL INC.
Mr. Nacchio. Mr. Chairman, distinguished members of the
committee, my name is Joseph Nacchio, and I am the former Chief
Executive Officer and Co-Chairman of the Board of Directors of
Qwest Communications. I welcome this opportunity to assist the
committee in its investigation.
As the committee should know, I have made every effort to
aid the various investigations concerning Qwest. I am here
today voluntarily, and I spent a day with the SEC, and I
believe about 5 hours with the staff of this committee on
September 19.
When I became the CEO of Qwest in 1997, we set out to
create a world-class, national, and global telecommunications
network. We did by buying a telecommunications infrastructure,
initially digging trenches to lay conduit and fiber optics
cable along railroad rights-of-way. We also spanned gaps in our
network by acquiring capacity or facilities built by other
companies.
From the beginning, we were able to finance our activities
and defer construction costs by selling as much as half the
fiber in our network to other telecommunications companies. In
the late 1990's, technology made it increasingly practical to
sell permanent rights to the wave lengths or signals carried
over fiber optics networks rather than simply selling the fiber
itself. These rights are commonly referred to as indefeasible
rights of use or IRUs.
For Qwest, there were important reasons for selling IRUs
and for buying them. Selling allowed Qwest to raise capital and
expand the number of carriers and service providers operating
on our network. Buying IRUs allowed us to expand our network
quickly, more cost effectively, and without the regulatory
hurdles that came with building our own facilities. Sales of
IRUs never accounted for more than 5 percent of our annual
income--annual revenues.
While the individual transactions rarely warranted my
involvement as CEO, I believed each transaction was subject to
meaningful oversight and review by the relevant business units,
the finance department, and the legal department of Qwest. The
company relied on the advice of its outside auditors for proper
accounting treatment.
The CFO could bring any matter to the attention of the
board of directors, independent audit committee, of which I was
not a member. When Qwest was selling IRUs, we were informed by
our outside auditors that under the generally accepted
accounting principles the sales of IRUs, if they met certain
criteria, qualified as sales type leases that should be booked
as current revenues.
During my tenure as CEO, to my knowledge, every purchase of
capacity by Qwest was with the intent of furthering the
company's business plan. That plan was to build a truly world-
class national and fiber optics network. We have a map to my
left, to your right. That is what we were building.
The network was constructed to meet the forecasted demand
of the explosive growth in internet traffic, which the U.S.
Department of Commerce estimated to be doubling every 100 days.
Qwest's purchase capacity--had I been aware of any proposal
for Qwest to purchase capacity solely to induce a
contemporaneous sale, to inflate revenues, I would have vetoed
the deal.
I also want to tell you I had no reason to believe that
senior management at Qwest tolerated unethical conduct or
forced employees to meet unrealistic earnings forecasts. The
operating budgets, including revenue, were ultimately subject
to the review and approval of the full board of directors, to
whom I reported.
Once budgets were in place, neither I nor, to my knowledge,
did any senior manager ever suggest, tacitly or expressly, that
the company should attempt to meet its budget by ``cooking the
books or fabricating IRU transactions.'' Indeed, in late June
2001, in the one IRU transaction in which I recall personal
involvement, I killed a $680 million transaction because it did
not meet Qwest's business or financial goals. And I told three
board members that, as a result, I thought there was a
possibility that Qwest would not meet its budget for the second
quarter.
That same year, on September 10, 2001, I announced that
Qwest was lowering its guidance for the third quarter, and for
the balance of 2001, due to softening market conditions across
Qwest's entire business, including a foreseen drop in the
company's sales of IRUs.
Furthermore, I never suggested that unethical conduct of
any kind would be tolerated. During my tenure as CEO, I believe
all company employees from senior officers to sales personnel
were required to act in compliance with the Qwest Code of
Conduct. The Qwest Code of Conduct are guidelines demanding the
highest level of ethics and responsibility, including
responsibility against specific directives, against falsifying
financial records or using unethical or deceptive means to make
sales.
It is true that I earned significant compensation from the
sale of Qwest stock. The compensation I received as CEO was
honestly come by. I paid full taxes on it. I worked my entire
32-year career in the telecom industry as an engineer, a
marketing executive, and then as a senior executive. I was not
born into wealth.
I want this committee to know, as the press has seen fit to
ignore, that my stock sales derived from stock options granted
in 1997, that carried a five and a half year maturity, leaving
me with the choice of exercising options or losing them
entirely.
I sold my shares based upon advice of my financial advisors
in order to diversify my holdings, yet I have always remained
heavily invested in Qwest. Today, I still own--hold 470,000
shares. When I sold shares, I did so in full compliance with
all applicable regulations and with all necessary and
appropriate disclosures to the Securities and Exchange
Commission and to the Board of Directors.
Any time I sold Qwest stock, I believed the company's
financial statements represented a full and accurate picture of
its financial condition. I regret that I was unable to complete
the job of building Qwest into a global telecommunications
leader that we had envisioned. And I am truly sorry for any
losses suffered by Qwest share owners, but particularly for the
thousands of Qwest employees who have lost their jobs as the
telecommunication industry and Qwest has fallen onto hard
times.
I now appear voluntarily before this honorable committee to
answer all of its questions completely and to the best of my
ability.
Thank you.
[The prepared statement of Joseph P. Nacchio follows:]
Prepared Statement of Joseph P. Nacchio, Former Chief Executive Officer
and Co-Chairman, Board of Directors, Qwest Communications
Mr. Chairman, distinguished members of the Committee, my name is
Joseph Nacchio, and I am the former Chief Executive Officer and Co-
Chairman of the Board of Directors of Qwest Communications. I welcome
this opportunity to assist the Committee in its investigation. As this
Committee should know, I have made every effort to aid the various
investigations concerning Qwest: I testified before the SEC, I met for
hours with this Committee's staff, and I appear voluntarily today. I do
so out of respect for my government, and my own sense of
responsibility. It is with this same sense of respect and
responsibility that I served, until recently, as Chairman of the
President's National Security Telecommunications Advisory Committee and
as Chairman of the Federal Communications Commission's Network
Reliability and Interoperability Committee.
When I became the CEO of Qwest in 1997, we set out to create a
world class national and global telecommunications network. We did this
by building a telecommunications infrastructure, initially digging
trenches to lay conduit and fiber optic cable along railroad rights-of-
way. We also spanned gaps in our network by acquiring capacity or
facilities built by other companies. From the beginning, we were able
to finance our activities and defer construction costs by selling as
much as half the fiber in our network to other telecommunications
companies. In the late nineties, technological advances made it
increasingly practical to sell permanent rights to the wavelengths or
signals carried over fiber optic networks, rather than simply selling
the fiber itself. These rights are commonly referred to as indefeasible
rights of use or IRUs.
For Qwest, there were important reasons for selling IRUs and for
buying them. Selling IRUs allowed Qwest to raise capital and to expand
the number of carriers and service providers operating on our network.
Buying IRUs, on the other hand, often allowed us to expand our network
more quickly, more cost effectively, and without the regulatory hurdles
that came with building our own facilities. IRU transactions therefore
had strategic importance to Qwest, although financially they remained a
small portion of our business, with sales of IRUs never accounting for
more than five percent of annual revenue.
Qwest became a substantial purchaser and seller of IRUs at a time
when the demand for fiber optic capacity to build and expand global
networks was at record levels following the Internet boom of the late
nineties. We found that we could leverage our buying power by
persuading potential sellers of capacity to purchase their needed IRU
capacity from Qwest. As a result, many of the IRU transactions executed
by Qwest involved contemporaneous transactions''--what some have called
``swaps''--transactions where each party is both selling capacity in
certain areas and buying network capacity in other areas.
That is the context in which these transactions arose, and as
members of this Committee have acknowledged, there is nothing
inherently suspicious about the mere fact of simultaneous IRU
transactions. While the individual transactions rarely warranted my
involvement as CEO, I believe each transaction was subject to
meaningful oversight and re view by the relevant business units, the
finance department, and the legal department. With respect to matters
of financial accounting for these transactions, the company relied on
the advice of its outside auditors along with Qwest's financial staff
who reported to the company's Chief Financial Officer. The CFO in turn
could bring any matter to the attention of the Board of Directors
independent audit committee, of which I was not a, member. When Qwest
was selling IRU capacity, we were informed by our outside auditors
that, under Generally Accepted Accounting Principles, the sale of IRUs,
if they met certain define criteria, qualified as sales-type leases
that should be booked as current revenue. At the time, we had no reason
to doubt Arthur Andersen's advice, then one of the country's leading
accounting firms.
Today, I am of course aware of allegations that these
contemporaneous transactions were sham deals designed to inflate
revenues to meet earnings forecasts. I am in no position to comment on
the motives of other companies, such as Global Crossing, who are
alleged to have purchased capacity they did not need. I can tell you
that during my tenure as CEO, to my knowledge every purchase of
capacity by Qwest was with the intent of furthering the company's
business plan. That plan was to build a truly world class national and
international fiber optic network. Our plan was ambitious, but it also
sought to be selective. Had I been aware of any proposal for Qwest to
purchase capacity solely to induce a contemporaneous sale in order to
inflate revenues, I would have vetoed the deal. That is not the way
Qwest did business. That is not the way I did business.
I also want to tell you that I had no reason to believe that senior
management at Qwest tolerated unethical conduct or forced employees to
meet unrealistic earnings forecasts. The company's operating budget,
including revenue, reflected the collective knowledge of the entire
company, with input from individual operating units, coordination and
oversight by the CFO and the president, and approval by me as the CEO.
The operating budgets, including revenue, were ultimately subject to
the review and approval of the full Board of Directors, to whom I
reported. In addition, the compensation schedule derived from these
budgets were reviewed and approved by the Board's Compensation
Committee. Once budgets were in place, neither I nor to my knowledge
did any senior manager ever suggest, tacitly or expressly, that the
company should attempt to meet its budget by ``cooking the books,'' or
fabricating IRU transactions.
To the contrary, in late June 2001, in the one IRU negotiation in
which I recall personal involvement, I killed a $680 million
transaction because it did not meet Qwest's business or financial
goals, and I told three Board members that, as a result, there was a
possibility that Qwest would not meet its budget for the second
quarter. That same year, on September 10, 2001, I announced to our
investors and the analyst community that Qwest was lowering its
guidance for the third quarter and the balance of 2001 due to softening
market conditions across Qwest's business, including a foreseen drop in
the company's sales of IRUs. And I subsequently recommended to the
Compensation Committee on two occasions that we lower the financial
targets that were used to determine employee bonuses, because I did not
want to punish our workforce for a sagging economy.
Furthermore, I never suggested that unethical conduct of any kind
would be tolerated. During my tenure as CEO, I believe all company
employees, from senior managers to sales personnel, were required to
act in compliance with Qwest's Code of Conduct. The Qwest Code of
Conduct is a set of guidelines demanding the highest levels of ethics
and responsibility, including specific directives against falsifying
financial records or using unethical or deceptive means to make sales.
It is my understanding that in appropriate cases, employees found to
have engaged in unethical or illegal conduct were disciplined,
discharged, and in some cases referred to law enforcement authorities
for prosecution. Recent suggestions that Qwest's workers operated in an
ethical vacuum cast an undeserved stigma upon the company's 55,000 men
and women who built one of the most robust and diverse
telecommunications companies in the country.
It is true that I earned significant compensation from the sale of
Qwest stock. The compensation I received as CEO was honestly come by. I
paid full taxes on it. I worked my entire 32-year career in the telecom
industry as an engineer, a marketing executive, and then a senior
executive. I was not born into wealth. I want this Committee to know,
as the press has seen fit to ignore, that my stock sales derived from
stock options granted in 1997 that carried a 5-and-a-half year
maturity, leaving me with the choice of exercising the options or
losing them entirely. I sold shares based upon the advice of my
financial advisors in order to diversify my holdings. Yet I have always
remained heavily invested in Qwest, and today I still hold 470,000
Qwest shares. When I sold shares, I did so in full compliance with all
applicable regulations, and with all necessary and appropriate
disclosures to the SEC and the Board of Directors. I always believed in
the value of the company, and when I eventually implemented a daily
stock-selling plan, I placed a stop order at 38 dollars, a stop order
that I never lifted. As a result, once Qwest stock dropped below 38
dollars in May 2001, I never exercised my remaining options, roughly
two thirds of those I was granted from Qwest, and I never sold a single
share of Qwest stock.
At any time I sold Qwest stock, I believed that the company's
financial statements represented a full and accurate picture of its
financial condition. I regret that I was unable to complete the job of
building Qwest into the global telecommunications leader we had
envisioned, and I am truly sorry for any losses suffered by Qwest's
shareholders and for the thousands of Qwest employees who lost their
jobs as the telecommunications industry and the company fell into hard
times. I now appear voluntarily before this honorable Committee to
answer all of its questions completely and to the best of my ability.
Mr. Greenwood. Thank you, Mr. Nacchio.
Mr. Mohebbi, do you have an opening statement?
Mr. Mohebbi. Yes, I do.
Mr. Greenwood. You are recognized for 5 minutes.
TESTIMONY OF AFSHIN MOHEBBI
Mr. Mohebbi. Thank you very much, Mr. Chairman, ranking
member, and members of the subcommittee. My name is Afshin
Mohebbi, and I am President and Chief Operating Officer of
Qwest Communications International Inc. I would like to thank
you for inviting me to appear at this important hearing today.
Qwest has a state-of-the-art worldwide fiber optic network
running throughout the United States, Asia, and Latin America.
Our strategy in building our domestic network was to construct
facilities for our own use while, at the same time, building
facilities for sale to our customers. As we completed that
project, we sought to expand overseas. Qwest decided that it
would be more efficient to purchase rather than build its
international facilities.
It was in this context that Qwest entered into IRU
transactions with other companies. The purchase and sale of
IRUs were a major part of our consistent business strategy to
build a global network and create shareholder value. In some
cases, Qwest entered into IRU transactions where we bought and
sold capacity from the same customers at or near the same time.
These transactions were not sham transactions. I believe we
were buying capacity we needed and were selling capacity that
we had built to be sold. There are established policies and
processes at Qwest through which all large contracts that the
company enters into must pass prior to being finalized. Each
IRU contract is shepherded through the process by a team of
Qwest employees to ensure that it is both beneficial to Qwest
and meets all legal and accounting requirements.
Each team consists of employees from numerous departments,
including sales, engineering, accounting, finance, and legal.
It is these specialists who made the determinations as to how
transactions would be booked and how the contracts would be
finalized.
At the hearing last week, a question arose as to whether
Qwest's policies and procedures had been undercut by secret
side agreements. Since I joined Qwest, the company has entered
into hundreds of transactions. I know of no side agreement that
altered the substance of any Qwest IRU transaction.
There were discussions at last week's hearing regarding an
e-mail sent under my name relating to a transaction with the
company Cable & Wireless. Three essential points must be made
on that subject.
First, the e-mail was reviewed and approved by a number of
members of the transaction team, the legal department, and
contract management group before it was sent.
Second, while I do not recall sending the e-mail, I will
take full responsibility for it.
Third, I believe, as does the company, that this e-mail did
not create a unilateral right to port or upgrade for Cable &
Wireless, but, rather, provided a pricing schedule to be used
should both companies later agree to do another transaction.
I also want to address the allegation that senior managers
at Qwest created an inappropriate tone at the top concerning
compliance and ethical issues. Qwest employees worked
tirelessly to expand our company, meet our goals, and provide
world-class service to our customers. We pushed ourselves hard
to meet our goals, and I, along with other executives,
encouraged our employees to sell our products and services. But
I did not authorize or encourage anyone to cut ethical or
procedural corners.
Moreover, I felt there was nothing wrong with encouraging
our employees to meet targets, and today I feel the same way.
Companies in competitive markets like ours must constantly
strive to sell our products and generate revenue. Our
shareholders expect nothing less.
Mr. Chairman, I take pride in the progress Qwest has been
making and the work that I have done here during the three and
a half years of my tenure at the company. In record time, we
have greatly improved the quality of local telephone service
that we provide to our customers, as shown in data published by
the Federal Communications Commission.
I have the utmost faith in the vast potential of our
company, as well as the ability and ethics of our employees. As
a result, I have never sold a single share of Qwest stock or
exercised a single Qwest stock option. In fact, earlier this
year, I purchased approximately 25,000 additional shares in the
company. I am fully committed to the long-term success of my
company.
Thank you for the opportunity to make this statement and
provide testimony today. As you know, I am appearing here
voluntarily and have cooperated fully with the subcommittee and
its staff. And I would be glad to respond to any questions that
the subcommittee may have.
[The prepared statement of Afshin Mohebbi follows:]
Prepared Statement of Afshin Mohebbi, President and Chief Operating
Officer, Qwest Communications International Inc.
Good morning, Mr. Chairman and members of the Subcommittee. My name
is Afshin Mohebbi. I am the President and Chief Operating Officer of
Qwest Communications International Inc. I would like to thank you for
inviting me to appear voluntarily at this important hearing today.
Please permit me to tell you a little bit about my company. Qwest
is a local telephone company with more than 25 million customers,
serving a 14-state area throughout the West. We have 55,000 employees,
more than 55,000 retirees and annual revenues of more than $17 billion.
We also are the nation's fourth-largest long-distance company and do
business with more than 60% of the Fortune 1,000 companies worldwide.
Qwest has a state-of-the-art worldwide fiber optic network running
throughout the United States, Asia and Latin America. Our strategy in
building our domestic network was to construct facilities for our own
use while, at the same time, building facilities for sale to our
customers. The sales of conduit, fiber and optical capacity that Qwest
made to customers in accordance with this business strategy paid for a
substantial portion of the cost of building our U.S. network. As we
completed that project, we sought to expand overseas. Qwest decided
that it would be more efficient to purchase, rather than build, its
international facilities.
It was in this context that Qwest entered into IRU transactions
with other companies. An IRU is an ``indefeasible right of use,'' which
is the exclusive right to use a specified amount of capacity or fiber
for a specified period of time, usually 20 years or more. IRUs are for
specific point-to-point assets. The purchase and sale of IRUs were a
major part of our consistent business strategy to build a global
network and create shareholder value.
In some cases, Qwest entered into IRU transactions that occurred at
or near the same time. Though close in time, it was believed that the
contracts for the optical capacity were separate agreements,
individually enforceable. I do not believe that these transactions were
``sham'' transactions. I believe we were buying capacity we needed and
were selling capacity we had built to be sold.
There are established policies and processes at Qwest through which
all large contracts that the company enters into must pass prior to
being finalized. Each contract is shepherded through the process by a
team of Qwest employees assigned to the transaction. In order to ensure
that the transaction both is beneficial to Qwest and meets all legal
and accounting requirements, each transaction team consists of a
diverse group of employees from numerous departments, including Sales,
Engineering, Accounting, Finance and Legal. Each team has members whose
responsibility it is to make sure that Legal, Finance and Accounting
approve of the transaction. The experts at Qwest in those areas made
the determinations as to how transactions would be booked and how the
contracts would read.
At the hearing before this Subcommittee last week, a question arose
as to whether Qwest's policies and procedures had been undercut by
secret side agreements. Since I joined Qwest, the company has entered
into hundreds of transactions. I know of no side agreement that has
altered the substance of any of Qwest's IRU transactions.
There was discussion at last week's hearing regarding a particular
e-mail relating to a transaction with the company Cable & Wireless.
Three essential points must be made on that subject. First, the e-mail
was reviewed and approved by a number of members of the transaction
team, the Legal Department and contract management group before it was
sent. Second, while I do not recall sending the e-mail, I take full
responsibility for it. Third, I believe, as does the Company, that it
did not create a unilateral right to port or upgrade for Cable and
Wireless, but, rather, provided a pricing schedule to be used should
both companies later agree to another transaction.
I also want to address the allegation that senior managers at Qwest
created an ``inappropriate tone at the top'' concerning compliance and
ethical issues. Qwest employees worked tirelessly to expand our
company, meet our goals and provide world-class service to our
customers. We pushed ourselves hard to meet our goals and I along with
other executives encouraged our employees to sell our products and
services. But I did not authorize or encourage anyone to cut ethical or
procedural corners.
Moreover, I felt there was nothing wrong with encouraging our
employees to meet targets and today I feel the same way. Companies in
competitive markets like ours must constantly strive to sell our
products and generate revenue; our shareholders expect nothing less.
Mr. Chairman, for the past three and a half years, I have dedicated
myself to serving Qwest and its shareholders. In June 1999, I joined
the company as President and Chief Operating Officer. In July 2000,
after Qwest merged with US West, I became President of Network and
Worldwide Operations. And in April 2001, I was appointed Chief
Operating Officer, a position that had been eliminated after the US
West merger.
I take great pride in the progress Qwest has made and the work that
I have done during my tenure at the company. In record time, we have
greatly improved the quality of local telephone service that we provide
to our customers, as shown in data published by the Federal
Communications Commission. I have the utmost faith in the vast
potential of our company, as well as the ability and ethics of our
employees. For these reasons and others, I have never sold even a
single share of Qwest stock or exercised a single Qwest stock option.
In fact, earlier this year I purchased approximately 25,000 additional
shares in the company. I am fully committed to the long-term success of
our company.
Thank you for the opportunity to make this statement and provide
testimony today. As you know, I am appearing here voluntarily and have
cooperated fully with the Subcommittee and its staff, as I have with
other congressional committees. I would be glad to respond to any
questions the Subcommittee may have.
Mr. Greenwood. Thank you, Mr. Mohebbi.
Mr. Shaffer, do you have an opening statement?
Mr. Shaffer. I do, Mr. Chairman.
Mr. Greenwood. You are recognized for 5 minutes.
TESTIMONY OF OREN G. SHAFFER
Mr. Shaffer. I am Oren Shaffer.
Mr. Greenwood. Make sure that microphone is directed toward
you, please. That is good. That is better.
Mr. Shaffer. I am Oren Shaffer. I joined Qwest less than 3
months ago as the company's Vice Chairman and Chief Financial
Officer, and I am pleased to be here today to discuss what we
have done, what we are going to do, and to address some of the
issues that are of concern to me, to this subcommittee, and to
the company, as well as our external constituencies.
Let me begin by stating that Qwest faces significant
challenges. Primary among these are saving the company, its
55,000 jobs, the communications service it provides to 25
million customers, and returning Qwest to the stability that
our 50,000 plus retirees were part of building.
To accomplish this, we must first gain the confidence of
our employees, customers, investors, and regulators. We must
put the questions about our accounting behind us. In this
regard, I have been analyzing these issues as expeditiously as
possible.
As I will explain, we are well underway in an analysis of
the company's accounting for IRU transactions and are
addressing other accounting issues. We have publicly announced
that this process will result in a restatement of Qwest's
financial statements, and we have disclosed the total amounts
of IRU revenue and profits potentially at issue and the
company's interim conclusions to date.
We, along with our new auditors KPMG, have initiated a
review of the company's internal control systems and processes,
combined with an overall risk assessment to identify those
high-risk accounting areas that may require special attention.
We are committed to making any changes that are appropriate in
systems or in personnel to ensure that the kinds of accounting
problems we are finding do not occur again.
At the same time, Qwest has made significant progress in
improving the financial health of the company and refocusing
management's attention on profitable and sustainable growth
once we weather this difficult economic climate. One major step
was entering into a definitive agreement for the sale of our
directory services business, QwestDex, for more than $7
billion. This transaction will be a key to our continuing
effort to decrease the $25 billion of debt we find on our
balance sheet.
Qwest has also amended its $3.4 billion credit facility and
obtained $750 million of new funding. With our current
commitments and obligations, we will have the liquidity to
operate through 2005, which should allow us to implement the
business plan that new management is establishing.
Central to our efforts is winning the confidence of our
employees. Our new Chairman and CEO, Dick Notebaert, has the
vision and experience to lead this cultural change by
emphasizing open communications, doing what you believe is
right, and transparency in all parts of the work environment.
Qwest disclosed in its 2001 Form 10-K that the total review
recognized from IRU transactions in the 2000 and 2001 financial
statement was approximately $1.48 billion, and that this amount
might be subject to adjustment. Since I arrived in July, the
company has made subsequent disclosures on July 28, August 19,
and September 22. And on each occasion, Qwest has told the
public the status of the ongoing accounting analysis and the
probable magnitude of the restatement of Qwest's 2000 and 2001
financial statements.
Now, we have significantly narrowed the focus of the
remaining examination following our conclusion that two-thirds,
or approximately $950 million, of the IRU revenue in 2000 and
2001 must be reversed. The remaining $531 million of IRU
revenue in this period remains under examination, and we
anticipate reaching further conclusions on these within a
matter of weeks.
We are continuing to review these remaining IRU
transactions and certain other accounting issues that we have
identified. We are committed to concluding this process as
promptly as possible.
There are two messages I want to give the subcommittee
today. First, my only goal is to get it right. With the
assistance of KPMG and other professional advisors, I will call
them as I see them. If the accounting is wrong, we will fix it,
and we will make the appropriate disclosure.
Second, as part of this process, we will strengthen our
internal control systems and establish an environment where
only the best practices are tolerated.
I also want to leave the committee with a sense of what we
have achieved in the short period that Dick and I have been at
Qwest. I believe that Qwest is increasingly well positioned to
achieve greater stability and profitability in the future,
bringing with it the benefits of 55,000 jobs, and the
significant economic impact of a world-class communications
service provider. I am looking forward to being part of that
process.
Again, I am pleased to be here today, and I will try to
answer your questions as best I can.
[The prepared statement of Oren G. Shaffer follows:]
Prepared Statement of Oren G. Shaffer, Vice Chairman and Chief
Financial Officer, Qwest Communications International Inc.
I am Oren G. Shaffer. I joined Qwest less than three months ago as
the company's Vice Chairman and Chief Financial Officer, and I am
pleased to be here with you today to discuss what we have done, and are
doing, to address some of the issues that are of concern to me, to this
Subcommittee and to the company as well as our external constituencies.
Let me begin by stating that Qwest faces significant challenges.
Primary among these is saving the company--its 55,000 jobs and the
communications service it provides to 25 million customers--and
returning Qwest to the stability that our 50,000 plus retirees were
part of building. To accomplish this, we must first regain the
confidence of our employees, customers, investors and regulators. We
must put the questions about our accounting behind us. In this regard,
I have been analyzing these issues as expeditiously as possible.
As I will explain, we are well underway in an analysis of the
company's accounting for IRU transactions and addressing other
accounting issues. We have publicly announced that this process will
result in a restatement of Qwest's financial statements; and we have
disclosed the total amounts of IRU revenue and profits potentially at
issue and the company's interim conclusions to date.
We, along with our new auditors KPMG, have initiated a review of
the company's internal control systems and processes, combined with an
overall risk assessment to identify those high-risk accounting areas
requiring special attention. We are committed to making any changes
that are appropriate in systems or in personnel to ensure that the
kinds of accounting problems we are finding do not occur again.
At the same time, Qwest has made significant progress in improving
the financial health of the company and refocusing management's
attention on profitable and sustainable growth once we weather this
difficult economic climate. One major step was entering into a
definitive agreement for the sale of our directory publishing business,
QwestDex, for more than $7 billion. This transaction will be a key to
our continuing effort to decrease the $25 billion of debt on the
company's balance sheet.
Qwest also has amended its $3.4 billion credit facility to extend
the maturity date to 2005 as well as to relax the financial covenants
to obtain greater flexibility for the future. We also obtained in early
September $750 million of new funding. With our current commitments and
obligations, once we have completed the sale of QwestDex we will have
the liquidity to operate into 2005, which should allow us to implement
the business plan that new management is establishing.
Central to our efforts is winning the confidence of our employees.
Our new Chairman and CEO, Dick Notebaert, has the vision and experience
to lead this cultural change by emphasizing open communication, doing
what you believe is right and transparency in all areas of the work
environment.
I am Committed To Concluding The Restatement of Qwest's Historical
Financial Statements As Promptly As Possible, And I am Overseeing
Appropriate Measures To Satisfy our Investors, Employees, Retireees,
Customers and Other Constituents That The Accounting Problems We Are
Identifying Do Not Recur.
The company decided not to re-engage Arthur Andersen and retained
KPMG as its independent auditors shortly before I joined Qwest in July
of this year. I and others have worked closely with KPMG to make
certain that accounting issues of the past are identified, corrected
and that the accounting is done properly in the future.
Qwest disclosed in its 2001 Form 10-K that the total revenue
recognized from IRU transactions in the 2000 and 2001 financial
statements was approximately $1.48 billion, and that this amount might
be subject to adjustment. Since I arrived in July, the company has made
subsequent disclosures on July 28th, August 19th and September 22nd,
and on each occasion Qwest told the public the status of the on-going
accounting analysis and the probable magnitude of the restatement of
Qwest's 2000 and 2001 financial statements.
We have significantly narrowed the focus of the remaining
examination following our conclusion that two-thirds, approximately
$950 million, of the IRU revenue in 2000 and 2001 must be reversed. The
remaining $531 million of IRU revenue in this period remains under
examination and we anticipate reaching further conclusions on these
within a matter of weeks.
We are continuing to review these remaining IRU transactions and
certain other accounting issues that we have identified. We are
committed to concluding this process as promptly as possible, with the
goal of a complete and accurate restatement of Qwest's financial
statements so that our security holders and the market can rely with
confidence on our financial statements. The restatement will not be
complete until KPMG has reaudited certain historical financial
statements.
Qwest Is Committed To Strengthening Its Internal Controls And To
Instilling a Culture Where Only The Best Practices Are Followed.
With the help of our new auditors and other professional advisors,
we are engaged in a major project to review and strengthen our internal
control systems. As part of that process, our internal audit group is
conducting a top-to-bottom risk assessment to identify those areas
where we should focus our internal and external audit resources to
protect against future errors.
I should emphasize the word ``future'' here. As we have announced,
Qwest will not account for future IRU sales in a manner that gives rise
to the accounting problems we are dealing with today in our historical
financial statements. We will take the lessons learned from this
examination of accounting issues and apply them to other areas to
strengthen the company's financial reporting.
We are also working hard to foster an open environment where Qwest
employees are encouraged to challenge assumptions, offer ideas, and
raise issues, problems and concerns for consideration and resolution.
At the same time, we are committed to expanding the overall level of
experience in the finance and accounting organization. We expect that
these actions will result in a climate where potential errors are more
quickly identified and avoided, and, if found, quickly corrected and
resolved.
We also understand that Qwest cannot build a new future without
seeking to hold accountable those who were responsible for the problems
in our past. In addition to cooperating fully with the investigative
bodies that are principally responsible for holding individuals
accountable for wrongdoing, Qwest is also conducting its own review;
and our actions in this regard are ongoing.
Qwest Is Committed To Work Cooperatively With, Congress, The SEC
And Other Governmental Agencies.
We have not undertaken these activities in a vacuum. Rather, as I
suggested above, our efforts at restatement and reform have been
accompanied by substantial efforts to cooperate with Congressional
inquiries and with investigations initiated by the Securities and
Exchange Commission and other governmental agencies. We have cooperated
extensively with this Committee, voluntarily making our senior officers
and board members available for more than 80 hours of interviews and
testimony. We have also produced more than 250,000 pages of documents
the Committee has requested. At the same time, we have had constructive
discussions with the SEC's Office of Chief Accountant concerning some
of the accounting issues we confront, and we are cooperating with the
SEC's Division of Enforcement in the hope of resolving its pending
investigation as promptly as possible.
There are two assurances I want to give this subcommittee today.
First, my only goal is to get it right. With the assistance of KPMG
and our other professional advisors, I call them as I see them. If the
accounting is wrong, we'll fix it, and we will make the appropriate
disclosure.
Second, as part of this process, we will strengthen our internal
control systems and establish an environment where only the best
business practices are tolerated.
I also want to leave the subcommittee with a sense of what we have
achieved in the short period Dick and I have been at Qwest. I believe
that Qwest is increasingly well-positioned to achieve greater stability
and profitability in the future, bringing with it the benefits of
55,000 jobs and the significant economic impact of a world class
communications services provider. I look forward to being part of that
process.
Again, I am pleased to be here today, and I will try to answer your
questions as best I can.
Mr. Greenwood. Thank you.
Mr. Hellman, do you have an opening statement?
Mr. Hellman. Mr. Chairman, I have prepared an opening
statement. In order to best utilize the committee's time, I
will submit it for the record. I would just like to, as a way
of introduction, perhaps read the opening paragraph. And the
statement was submitted to the staff last night. I found a typo
this morning. I would like to correct that for the record as
well, but let me start by opening--the opening paragraph of it.
Mr. Greenwood. By all means. And your entire statement will
be made a part of the record, including the typo correction.
Mr. Hellman. Thank you, Mr. Chairman.
TESTIMONY OF PETER S. HELLMAN
Mr. Hellman. My name is Peter Hellman. I am a member of the
Board of Directors of Qwest Communications International. I
have been Chairman of its audit committee for the past 4
months, since May 29, 2002. Prior to that time, I was a member
of the audit committee since the merger of Qwest and US WEST on
June 30, 2000. Prior to the merger, I was a member of the Board
of US WEST and Chairman of its audit committee.
And with that, sir, the typo is number of audit committee
meetings held in--there was over 35. In 2000, we met 11 times,
and in 2002, we have already met 22 times, not the 14 that is
cited in the statement.
[The prepared statement of Peter S. Hellman follows:]
Prepared Statement of Peter S. Hellman, Chairman, Audit Committee,
Qwest Communications International, Inc.
My name is Peter Hellman. I am a member of the Board of Directors
of Qwest Communications International, Inc., and I have been Chairman
of its Audit Committee for the past four months, since May 29, 2002.
Prior to that time, I was a member of the Audit Committee since the
merger of Qwest and US West on June 30, 2000. Prior to the merger, I
was a member of the Board of US West and Chairman of its Audit
Committee.
The purpose of the Audit Committee is to provide oversight in
connection with the Company's financial reporting, internal controls,
and accounting; to facilitate communication between management, the
Board of Directors and the independent public accountants; and to
oversee Qwest's relationship with those accountants. In performing our
duties, we hold five regularly scheduled meetings each year, and
special meetings on other occasions. Since the merger we have met more
than thirty-five times. In 2001, we met eleven times; in 2002, we have
already met fourteen times. As the Subcommittee is aware, we had
frequent communication among the members of the Audit Committee and
with management, independent auditors, and other members of the Board.
We routinely meet with the independent auditors, internal auditors and
finance management in private, executive sessions. We report our
reviews and findings to the full Board formally at each subsequent
Board meeting.
In order to evaluate the Company's accounting practices and policy,
as a general matter, we relied heavily on our outside auditors, our
internal auditors and our finance professionals (including our internal
research personnel) to provide us with the generally accepted
accounting guidance (GAAP) and the relevant facts by which to apply
that guidance. Indeed, by the terms of its charter, the Committee is
charged with carrying out these duties ``in reliance on senior
financial management and [Qwest's] independent public accountants.''
Among the issues which we examined has been Qwest's accounting for
IRUs and, specifically, whether our revenue recognition policies after
the merger in 2000 and in 2001 for sales of IRUs were consistent with
GAAP and in conformity with the guidance of our independent auditor. At
a meeting of the Audit Committee held in February 2001, Qwest's
independent auditor expressly informed us that the quality of our
financial reporting for one-way cash sales of IRUs was acceptable and
that the reporting for the Company's contemporaneous transactions
(those involving purchases and sales that occurred in the same quarter
and that the Company treated as nonmonetary exchanges) was ``acceptable
but aggressive.''
The assessment by our independent auditor, at the same meeting, of
our internal controls was that they were also acceptable. Qwest was
deemed to have acceptable and effective controls for all of the areas
evaluated by the auditor, including the adequacy of accounting
resources.
Although our auditor specifically told us at that time that our
IRU-related accounting was ``acceptable,'' we directed management to
increase disclosures in our quarterly statements concerning IRUs. We
did this even though IRU sales represented approximately 5% of Company
revenues for the year 2000. Indeed, each quarter's disclosure was
increased from that of the prior quarter for the remainder of the year.
This increased level of disclosure has continued. In the Company's 2001
Form 10-K, the Company has disclosed the total revenue recognized from
IRU transactions and that the Company may restate the total amount of
IRU revenue.
On October 29, 2001, the Audit Committee was informed by our Chief
Financial Officer that she had just learned of an e-mail apparently
sent by Qwest to Cable & Wireless (``C&W'') on December 29, 2000 that
could be construed as a collateral agreement affecting a sale of an IRU
by Qwest to C&W. Senior management also reported that they had
determined that the Company was not obligated by the e-mail to act in
any fashion that would compromise the Company's accounting. The Audit
Committee considered whether the Company should restate its earnings to
delete the revenue recognized in the fourth quarter of 2000 as a result
of that transaction. After reviewing that accounting and the
circumstances surrounding the transaction, and after consulting with
our independent auditor, we concluded that the transaction was not
improperly accounted for and was not material so as to require
restatement since it constituted slightly more than one half of one
percent of 2000 revenues. Given that determination, our independent
auditor advised the Audit Committee that the transaction had been
validly recognized as revenue as originally booked by the Company.
The Audit Committee was, nonetheless, concerned by the
circumstances of this delayed recognition of information which could
have affected the accounting of the transaction. Therefore, the Audit
Committee did not end its inquiry. We directed the finance department
to conduct an internal review to locate all other documents--regardless
of their effect on the Company's accounting--that might have affected
the terms of any IRU transaction. The Audit Committee, which inquired
about this issue regularly, was assured that no other written ``side
letter'' or written agreement was found that put the Company's revenue
recognition into question.
Consistent with the scope of audit that we reviewed, a confirmation
letter was sent to each customer to whom an IRU had been sold after
October 1, 2000. The letter requested confirmation as to the terms of
all contracts--and specifically inquired whether the customer was aware
of any ``side letter or oral agreement.'' Although Arthur Andersen
received responses from many customers, including Global Crossing and
Cable and Wireless, only one customer, Flag USA, asserted that it had
rights outside our formal agreements.
Upon learning that Flag contended that Qwest had orally promised in
or about June 2001 to permit the exchange of certain fiber optic
capacity upon demand (in a transaction constituting approximately one-
fifth of 1% of 2001 gross revenue), the Audit Committee instructed the
Company in January 2002 to investigate all aspects of that transaction.
The Committee was advised that every sales person involved in the
transaction was individually interviewed. In February 2002, the Company
presented to the Audit Committee the results of that review. The
Committee was informed that no binding agreement existed and that no
correction was necessary.
My concerns about the Company's practices were increased by
comments provided to the Audit Committee in executive session with our
internal auditor who was leaving the Company. He assured the Committee
that our policies were appropriate and that management was formally
providing correct instructions on compliance with them. In his opinion,
however, the implementation could be better facilitated by senior
management, starting with the CEO. I reported these comments and my own
concerns to the chairman of the Audit Committee who concurred. The
Audit Committee met with the Company's then-Chairman and Chief
Executive Officer, Mr. Nacchio, in executive session to remind him of
his obligation to set a proper and proactive ``tone at the top.'' Our
concern was not with any wrongdoing on his part--it was our purpose to
ensure that the Company continued to meet revenue expectations without
compromising accounting, legal or ethical standards. Additionally,
there was the possibility that, in the pressure to meet quarterly
targets, sales personnel may have failed to provide information about
every transaction to the finance department. The Audit Committee urged
that Mr. Nacchio take the opportunity to reinstill in his operations
personnel an absolute an unwavering regard for full disclosure and
transparency throughout the organization, as well as a complete regard
for accounting standards and the Company's code of conduct.
In mid-February 2002, the Company was served with a subpoena to
provide information to the Securities and Exchange Commission, which
was then conducting an investigation into Global Crossing. The Company
retained outside counsel and began another review of all of its IRU
transactions. To be sure, while that further analysis has taken several
months, it has occurred during a period of great change. The Company
has since hired a new management team, as well as engaged a new
independent auditor. Moreover, outside counsel have themselves engaged
additional new accounting experts.
Since the merger, the Company entered into 91 IRU transactions. It
is important to note the pertinent accounting policies have been in
transition, and with respect to which the views of regulators were
evolving. Indeed, the White Paper written by Arthur Andersen to provide
guidance on the accounting for IRU transactions was revised numerous
times, most recently in early 2002. It is in this context that the
process of reviewing nearly all of the Company's sales of IRUs has been
conducted and that the Audit Committee has reviewed and evaluated the
Company's accounting standards, policies and practices. We have
conducted this review in a conscientious and methodical fashion with
appropriate disclosure of our progress.
To conclude, the Audit Committee specifically probed the method of
accounting by Qwest for sales of IRUs. It repeatedly sought and then
relied upon the advice of its independent auditor and its finance
management in reviewing and approving those accounting policies and
their application. In the process of obtaining that advice, the Audit
Committee regularly asked questions of management and pressed both
management and the auditors to make sure that all accounting
methodology was proper and that the Company had full compliance. At the
same time, the Audit Committee insisted on increased public disclosure
regarding IRU transactions beginning in early 2001. As it learned
information that could potentially implicate the Company's financial
statements, it supervised an aggressive investigation and expanded the
appropriate disclosures. That investigation continues to this day.
What can be learned? We were dealing with a new business based on
new technology. The Audit Committee sought from its independent auditor
an explanation of how its opinions compared with opinions of the FASB
and the SEC. We were told that traditional accounting wasn't keeping
pace. The emerging issues task force and the SEC were struggling to
adapt existing accounting to this technology. The provisions of
Sarbanes-Oxley will also establish best practices as the standard.
Again, I wish to express my thanks to the Chairman and members of
the Subcommittee for inviting the submission of this statement.
Mr. Greenwood. So it is 22, not 14.
Mr. Hellman. Correct, sir.
Mr. Greenwood. Ah ha.
Thank you, sir. Appreciate that.
The Chair is going to recognize the chairman of the full
committee, Mr. Tauzin, to question first, insofar as he has to
chair a very important energy conference very shortly. The
gentleman is recognized for 10 minutes.
Chairman Tauzin. Thank you, Mr. Chairman.
Mr. Nacchio, who is Russell Knowles?
Mr. Nacchio. Congressman Tauzin, Russell Knowles was the
previous--I should say previous from when I left, but previous
head of our internal auditing group.
Chairman Tauzin. And on Tab 78, if you will go to the book,
we have a memo from Mr. Hellman to Tom Stevens. And I want to
turn to Mr. Hellman first.
We read this memo into the record last week, and it
basically starts out by saying, ``We did have a good
conversation with Russell Knowles, the internal auditor. And
while he is not leaving because of anything at Qwest directly,
a factor in his decision is the tone at the top and how that
makes a job in the corporate more difficult, not that Joe''--I
assume he is talking about you, Mr. Nacchio--``he is not saying
the right things, make the numbers and do it the right way, but
the line people, including the divisional CFOs, are only
hearing 'make numbers.' In my opinion''--this is you, Mr.
Hellman, stating this, ``there are well-known consequences for
not making the numbers, but no clear consequences for cutting
corners.''
Would you elaborate just a bit on why you wrote that and
what it means?
Mr. Hellman. Yes, I will, Mr. Chairman. And if I could put
it in a context, it was the fall of last year. Business
conditions were certainly getting more difficult. We had just
had an audit committee meeting, and this was the--this was a
report back to the audit committee chairman of the executive
session of that meeting, and the chair of the committee was
able to attend by telephone the audit committee but not the
executive portion. So I am reporting back the part he didn't
hear.
Chairman Tauzin. Yes, I understand.
Mr. Hellman. And in that meeting, as part of the closing
discussion, inquiry with our financial management and our
independent accounts, a transaction was discussed that was
entered into in the prior quarter, in September 2001, a
transaction with a company called CalPoint.
Chairman Tauzin. Okay.
Mr. Hellman. Now that transaction was accounted correctly,
but some documents that made that determination more easily,
that made it more efficient for the finance staff to review,
weren't in the original set of documents. They had to ask for
them and get them, if you will.
And so with the CalPoint transaction, and then--and I will
discuss Mr. Knowles' comments, he was leaving the company. I am
of the belief that senior financial management who leave the
company should have exit interviews, and, if they are senior
enough, should have exit interviews with the audit committee.
And so this was, if you will, such a meeting.
Chairman Tauzin. Yes.
Mr. Hellman. I had known Mr. Knowles for over 3 years,
because he was the internal auditor of US West as well. And as
I said, I led the executive committee discussion with Mr.
Knowles.
Chairman Tauzin. What do you mean by saying, ``In my
opinion, there are well-known consequences for not making the
numbers,'' what are the well-known consequences?
Mr. Hellman. Well, I believe that people clearly had their
compensation altered, because they were either on a commission
system or on a bonus system. If they didn't produce financial
results, they were not promoted, and----
Chairman Tauzin. Was anybody fired?
Mr. Hellman. I did not know of that. That clearly would be
a possibility, if one didn't perform.
Chairman Tauzin. But you make the point that there were no
clear consequences for cutting the corners--in other words,
making the numbers any way you can.
Mr. Hellman. Yes. And let me put that into context.
Chairman Tauzin. Yes. Will you, please.
Mr. Hellman. As business--in my experience, as business
gets more difficult, and management is pushing for results, it
is a matter of balance. So if you push for results, I think it
is also important to reemphasize, if you will, the way in which
the company performs, the way in which those results would be
developed and delivered. So if you are pushing for results, you
ought to be reiterating, and we do it the right way.
Chairman Tauzin. Yes.
Mr. Hellman. To be going on the proactive, if you will, Mr.
Chairman.
Chairman Tauzin. Right. And, in fact, you go on to say in
the memo, ``Finance people in the business unit were obscuring
the appropriate facts, both from AA and Robin, to whom they
directly reported. As far as I am concerned--can determine,
there were no consequences for the action.'' Who was obscuring
the facts, and what facts were they obscuring?
Mr. Hellman. I don't have that information, Mr. Chairman.
The finance----
Chairman Tauzin. Well, why would you write that if you
didn't know that?
Mr. Hellman. I don't know the particular people's names. I
was told at the time that those documents weren't readily
available. I was told at the time that the finance department
had to go out of its way to get those documents. That is what I
was referring to.
Chairman Tauzin. But you are on the audit committee. Why
wouldn't you know who was obscuring the facts? This is pretty
important stuff, isn't it?
Mr. Hellman. Well----
Chairman Tauzin. Did you look into it and try to find out
how was obscuring the facts from the standpoint of there would
be no consequences? When I read your memo, it sounds like you
are basically saying somebody did something inappropriate, and
there are no consequences for doing it inappropriately. And I
am just asking: as the audit committee, wouldn't you want to
know who is doing inappropriate things and obscuring facts and
take them into account for them?
Mr. Hellman. I think, first, the audit committee relies on
management to manage its employees, until such time as that
inquiry needs to be elevated. Since the----
Chairman Tauzin. Well, did anybody else at the table know
who these people were who were obscuring the facts in the
finance--the finance people, whoever they were? Anybody want to
volunteer? Well, you just don't know who those people were?
Mr. Hellman. Sir, since January, January 2002, we have had
an active investigation. We have hired an independent counsel,
both for the company and for the board. The priority of that
review, that investigation, has been to determine the
appropriate accounting.
Chairman Tauzin. Well----
Mr. Hellman. And it--oh, sorry.
Chairman Tauzin. [continuing] you mentioned Mr. Knowles.
And, Mr. Nacchio, I want to come back to you at this point. We
don't have Mr. Knowles before us. We tried to bring him here.
We just interviewed him on Saturday. But when we did interview
him, he pointed out to us that he, according to him at least,
he met with Joe Nacchio to discuss his concerns regarding
Qwest's corporate environment and overly aggressive accounting.
Do you recall such a meeting, Mr. Nacchio?
Mr. Nacchio. Congressman Tauzin, I met with Russell Knowles
each quarter as our internal auditor.
Chairman Tauzin. Yes.
Mr. Nacchio. I do not remember that coming up. Russell came
into those meetings with a long list of items. He had open
access to me in between those meetings. I also just want to
note, I interviewed Russell on his exit from the company also.
And he did not bring up these matters to me.
Chairman Tauzin. He tells us that you advised him that you
did not advocate anyone doing anything unethical or illegal in
the company, and you told him you would talk to his direct
reports about these concerns. You don't recall that?
Mr. Nacchio. I don't recall that. But had he brought it up,
I would have said that, and I would have done that. But I don't
specifically recall that.
Chairman Tauzin. In fact, you did have a meeting, didn't
you, with the leaders of the business units regarding ethics
and integrity?
Mr. Nacchio. We spoke of that I would say systematically if
not regularly. I know we had an annual review of the Code of
Conduct, and I actually believe in the period since the
takeover of US WEST we did it four times in those 2 years,
because of it being a new company. But I am not refuting that
Mr. Knowles may have said that. I don't remember. I did meet
with him quarterly. He had open access. And I did meet with him
when he was choosing to leave the company. I actually tried to
encourage him to stay.
Chairman Tauzin. Well, he said you gave him the right
answer. He said you didn't encourage anybody, and you would
have a meeting with the people, and you did end up having a
meeting.
Mr. Nacchio. That is fine, but I don't remember that.
Chairman Tauzin. You don't remember that.
Mr. Nacchio. Right.
Chairman Tauzin. There is also, I understand, a difference
of opinion as to what is remembered or what happened between
you and Ms. Szeliga. Last week, she told us that, in fact,
looking at a memo in Tab 64, if you will follow along with me--
--
Mr. Nacchio. 64?
Chairman Tauzin. Yes, 64, to Qwest Communications
International Incorporated, Audit Committee of the Board of
Directors.
Mr. Nacchio. 64. I have not----
Chairman Tauzin. There are two----
Mr. Nacchio. Oh, I am sorry.
Chairman Tauzin. 64. Okay. If you will look at that second
document, you will see that in it is--it contains the following
report. Mr. Szeliga also informed the committee that she had
discussed the matter with J.P. Nacchio, Chairman and Chief
Executive Officer of the corporation.
The matter they are talking about is the size of the
transactions and the accounting--financial reporting of those
transactions, her concerns about the side agreements and what
might be going on. She testified, if you recall, last week that
she had become concerned about these side agreements and these
oral assurances, and that this made it very difficult for
them--for her and others to deal with the accountants. They
said, ``You can't do that. You can't have these side
agreements. You can't have these oral agreements and still
account for these transactions the way you have.''
And she claims at least here that she discussed this matter
with you. What have you to say about that?
Mr. Nacchio. Ms. Szeliga was my Chief Financial Officer----
Chairman Tauzin. Yes.
Mr. Nacchio. [continuing] as you know. Her office was next
to mine. We met daily, and we met, I would say, formally at
times when we had a monthly review of results, but we also met
frequently on an informal basis. She had open access. I know
she has said this. I have seen this memo presented, I think, on
the September 19 meeting.
Chairman Tauzin. Yes.
Mr. Nacchio. She may have said it to me. I do know she did
the right things and did the things I would have told her to
do, if we had that conversation. If she had brought that to my
attention, I would have said to her, ``Go to our general
counsel, investigate the matter. If I can help, have me
involved. Bring it to the audit committee, so we have an
independent assessment. And make me a recommendation.''
Now, she subsequently did all of that. The recommendation I
got back--I don't remember it coming from Ms. Szeliga. I
remember in a February e-mail that I saw--I believe this was
referencing a C&W transaction, and I know this in the sense of
having been prepared on the September 19 meeting, that I saw an
e-mail that I had passed to my general counsel to investigate,
and he came back to me at some subsequent time and said, ``That
matter has been taken care of.''
Now I get a lot of complaints daily from lots of customers,
small customers in the local telephone service to
multinationals. I generally pass them to the right people. I
ask for follow up. But I generally don't quiz them when they
tell me it has been solved.
Chairman Tauzin. Now, you testified that you did interview
Mr. Knowles upon his leaving the company.
Mr. Nacchio. Yes.
Chairman Tauzin. What did he tell you when you interviewed
him were his reasons for leaving?
Mr. Nacchio. Two principal reasons. He had worked for US
WEST I think for 18 years. I don't know the exact amount of
time. He had a good opportunity, I think it was in Minneapolis,
Minnesota, and I was of some impression there were some family
circumstances that also were influencing his decision to move
to Minnesota.
Chairman Tauzin. Now, again, I don't have him here in front
of us, so you can both discuss this, and I apologize for that.
We did try to get him. But in our interview with him Saturday,
he told us that he left because it was becoming too difficult
to navigate within the acceptable levels of risk in the current
Qwest corporate environment, and that good business people were
being pushed to do unethical things for the sake of meeting
their goals. He mentioned none of this to you?
Mr. Nacchio. Congressman Tauzin, I only wish he had. He did
not mention it to me. Had he mentioned it to me, I would have
taken appropriate action.
Chairman Tauzin. And, Mr. Hellman, did Mr. Knowles ever
tell you anything like that?
Mr. Hellman. No, sir. I think my I guess it is an e-mail to
Tom Stevens was a fair recitation of his comments to me, and
you can tell it was sent the next day, so it would have been
vivid in my memory. Clearly, he discussed concerns about the
ability of the internal audit function to have the appropriate
priority among line management. I think that would be how he
stated it, not----
Chairman Tauzin. Are you----
Mr. Hellman. [continuing] clearly the intensity of his
comments to you last week, or the committee last week.
Chairman Tauzin. You were at the audit committee of the
board of directors meeting that is referred to in Tab 64
wherein Ms. Szeliga claims that she informed the committee that
she had discussed these problems with the chairman, Joe
Nacchio. Do you recall that meeting, first of all?
Mr. Hellman. Yes, I do. I attended by phone. It was a
telephonic----
Chairman Tauzin. Do you recall Ms. Szeliga making that
comment?
Mr. Hellman. I do recall that.
Chairman Tauzin. So you confirm that she at least told the
committee that she had reported these problems to the chairman,
Joe Nacchio?
Mr. Hellman. I do--sorry, I missed your question exactly,
but that is what she said. The minutes of the meeting are
correct.
Chairman Tauzin. That is essentially what I was trying to
get to.
Mr. Nacchio, you simply don't recall whether she did talk
to you?
Mr. Nacchio. She may have. I don't recall any specific
discussion with her about that item.
Chairman Tauzin. What she was concerned about is pretty
serious stuff.
Mr. Nacchio. Absolutely.
Chairman Tauzin. That these transactions had been accounted
for in a way that the accountants could qualify some of these
deals as income in the corporation. And yet these side
agreements, these perhaps side letters, were they known to the
accountants, would force a restatement of income, or would
force the reevaluation of how that accounting had occurred.
That is pretty serious business, wasn't it, for you?
Mr. Nacchio. Yes, it would be.
Chairman Tauzin. So if she had told you that, why wouldn't
you remember that?
Mr. Nacchio. Again, Congressman, I believe this, as I
understand it, was a response to, did I know about a very
specific transaction. When I appointed Ms. Szeliga in the
spring of 2001----
Chairman Tauzin. Yes.
Mr. Nacchio. [continuing] she had been with Qwest, had been
Senior Financial--Vice President of Financial Planning, knew
the Qwest side of the business, did not know the larger part of
the business we just acquired.
Chairman Tauzin. Yes.
Mr. Nacchio. I sat with her and said, ``Robin, one of the
things you have to do, this is just good plain old advice, is
we have got a big part of the business you are not familiar
with. Concentrate on controls as one of your early things.''
And as any new executive, she had opportunities where she
came to me for coaching about relationships with other
executives. And part of what you do as a CEO is know how to try
to get them through that without operating in a heavy-handed
way.
So the notion that she had problems with controls was
something we had discussed earlier. I am answering specifically
about as I understand this to be a transaction related to a
side letter on a specific transaction. Matter of fact, she put
in very specific policies in her tenure--early tenure as CFO
about all types of accounting activities and disclosure to her
financial staff, which was placed in each business unit.
Chairman Tauzin. Now, there was another audit committee
meeting on December 5, Mr. Hellman. Do you remember that
meeting?
Mr. Hellman. Yes, I do, sir.
Chairman Tauzin. Ms. Szeliga gave us some information about
it, basically that she had been asked to leave, and that audit
committee members had some tough words after that. Do you
recall that meeting, and can you tell us about it?
Mr. Hellman. Yes, I recall the meeting. It was a meeting in
Denver. I actually attended by phone, so I can't tell you
everything about it. It was limited by being on the phone, but
I--I can tell you about it.
Chairman Tauzin. Please do.
Mr. Hellman. The meeting was a regularly scheduled board
meeting, followed by an executive session, and the executive
session we invited Joe Nacchio to attend that portion of the
meeting.
Chairman Tauzin. And what occurred in this meeting? Wasn't
there a discussion regarding the current accounting issues at
that meeting?
Mr. Hellman. There was, sir. Do you have in the record the
minutes that I could refer to?
Chairman Tauzin. I don't think we do. We can make a copy
and give you a copy.
Mr. Hellman. I mean, so----
Chairman Tauzin. Let us do that.
Mr. Hellman. My recollection, sir, is that----
Chairman Tauzin. Let us do that, make a copy and give it
to----
Mr. Greenwood. I believe that document, Mr. Hellman, is in
the stack right in front of you.
Mr. Hellman. This here? I may have it here, Mr. Chairman.
Chairman Tauzin. I want to make sure you have it before I
interview you.
Mr. Hellman. So I do.
Chairman Tauzin. No, that is fair. And I--if you don't have
it, I will move on and come back to it.
Mr. Hellman. I will quickly go through this.
Chairman Tauzin. While you are looking at it, Mr. Nacchio,
these--just the last two areas I want to cover, Mr. Chairman.
You have now apparently--the company has now restated
income to the tune of $950 million. But we understand there is
another $531 million of revenue previously recognized from the
sales of optical capacity. Perhaps, Mr. Shaffer, you can help
us with this one. What is all that about? What is this extra
$531 million that is in question?
Mr. Shaffer. Congressman, the $531 million amount concerns
a group of IRU transactions which we are still studying and
reviewing. They are the remainder, if you will, of the entire
universe of IRU transactions. As you are aware, we have written
off already $950 million of those transactions.
Chairman Tauzin. And are they likely to get restated as
well?
Mr. Shaffer. I think there is a high degree of probability
that they are going to be adjusted. At this particular moment,
I just don't have the transaction-by-transaction review to give
you the exact answer, but I believe they will be adjusted.
Chairman Tauzin. All right. Now, Mr. Hellman, have you
acquainted----
Mr. Hellman. Yes, I have, sir.
Chairman Tauzin. [continuing] yourself a little bit with
the document? And can you tell us what all happened at that
meeting and whether or not the meeting involved a discussion of
the current accounting issues that were before the board at
that time?
Mr. Hellman. Yes. Actually, it was an audit committee
meeting that I think we are referencing.
Chairman Tauzin. Yes.
Mr. Hellman. And there were several accounting issues we
addressed. As you will see on page 1 toward the bottom, the
issue on goodwill, this is just going into the new year where
FAS 142 is being adopted. We instructed the staff to begin the
process of evaluation of goodwill.
Chairman Tauzin. Was there a discussion of the tone at the
top?
Mr. Hellman. Sir, that was in the executive session where
that was discussed. But one point I would like to make before
we get there is Ms. Szeliga did come back to the committee, as
we instructed in the October meeting----
Chairman Tauzin. Yes.
Mr. Hellman. [continuing] to say that she had had a
thorough review of all processes and documentation and found no
other side agreement or ancillary or collateral agreement.
Chairman Tauzin. Okay. But tell us about what happened in
the executive session.
Mr. Hellman. Fine, sir. In the executive session, our
committee chair Tom Stevens spoke to Mr. Nacchio about the
importance in this environment of reinstilling, of
communicating broadly in a proactive fashion, the need within
the organization to maintain the highest level of legal and
ethical standards.
Chairman Tauzin. Why did that happen?
Mr. Hellman. I think it was----
Chairman Tauzin. Was there a concern in the audit committee
that that was not occurring in the corporation?
Mr. Hellman. I think it was a followup to my memo of--or my
e-mail of October 25. And so what our chairman was doing was
exactly what I asked him to--to speak to the CEO. He chose to
do it in an executive session of the audit committee.
Chairman Tauzin. I understand.
Mr. Hellman. But to establish the same tone at the top,
sir.
Chairman Tauzin. And, Mr. Nacchio, would you want to
comment about that meeting?
Mr. Nacchio. Yes, I would be happy to. I was asked in--my
recollection it was either the end of the audit committee or
the beginning of the board meeting, but in either case there
were multiple directors there. That is not something I am
challenging.
Mr. Tom Stevens--Mr. Stevens had a document that was a
document I believe that was recently issued from some New York
law firm about, given all of the accounting issues corporate
America was facing, what they considered now to be the new gold
standard. And Tom led the discussion that basically said, ``I
think we ought to adopt these gold standard procedures.'' And I
said, ``Absolutely.'' I mean, why not?
What should we do differently? There were no proposals
made. There was no suggestions of something being done
differently in terms of line management. And it was a general,
and I would say, somewhat undirected discussion about the
importance of the heightened scrutiny that corporate America
was under, and how we should strive for the highest ethical
standards, and, you know----
Chairman Tauzin. Were you offended that they were concerned
about the tone at the top?
Mr. Nacchio. No. Congressman, I am not offended when my
board is trying to be constructive. What does annoy me is when
e-mails get passed behind my back and I don't see them, and I,
therefore, don't know. I can't, through magic, figure out what
is on people's minds if they don't communicate.
Chairman Tauzin. What kind of instructions did you give
them following that executive session?
Mr. Nacchio. I was given no instructions for following----
Chairman Tauzin. Did you give--you gave no instructions?
Mr. Nacchio. Yes. I asked them to give me or to help me
with anything that they were seeing, because this was my, so to
speak, independent committee also, even though I wasn't on it,
who had different visibility. And I think, quite frankly, a
conversation that someone might not want to have with me--and I
will just refer back to the Mr. Knowles conversation, not
suggesting it happened--they might feel less intimidated not
having it with the CEO and having it with an independent group,
which is a good way to facilitate communication. That is part
of why corporate governance generally----
Chairman Tauzin. Because he was leaving. I mean, why
wouldn't he tell you this when he is on the way out?
Mr. Nacchio. I am using it as an example. Part of the
reason we have our CFO, at least in the companies I ran, report
into the audit committee independent of the CEO is so there is
this independence.
Chairman Tauzin. I understand that. But the guy was leaving
your company. Wouldn't he be honest with you on the way out?
Mr. Nacchio. I would hope he would, and there was no reason
not to be. But, again, I can't put words in people's minds.
Chairman Tauzin. I understand.
Mr. Hellman, is that your recollection, too, that Mr.
Nacchio gave instructions to straighten things out?
Mr. Hellman. I don't know what actions he took after the
meeting, sir. I mean, I believe that we found him to be
professional. We found him to understand our concerns and to
say that he would take the appropriate actions. And I believe
that he did so, but I don't have first-hand knowledge of that.
Chairman Tauzin. Is your recollection the same as his about
the discussion of this gold standard accounting, this new
accounting gold standard that you should follow? Is that
accurate?
Mr. Hellman. I don't recall that portion of the meeting.
The portion that I recall was this establishment of a tone,
being proactive, talking to line management about be sure we do
it the right way.
Chairman Tauzin. Thank you very much, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentlelady from Colorado, Ms. DeGette, for 10
minutes.
Ms. DeGette. Thank you, Mr. Chairman.
Now, Mr. Nacchio, my records show that between 1999 and
2001 you sold about $235 million worth of Qwest stock. Is that
accurate?
Mr. Nacchio. Approximately right.
Ms. DeGette. Okay. And between 1997 and 2001, Qwest
executives sold about $640 million worth of stocks.
Mr. Nacchio. I don't know if that is--I mean, it could be.
Ms. DeGette. You wouldn't disagree with that.
Mr. Nacchio. I have no reason to agree or disagree. There
are lots of executives who came and left, and I think, as you
know, our founder sold a lot of stock, and I think that is not
in that number.
Ms. DeGette. Okay. Now, when you were the CEO of Qwest,
were you aware that the company was counting revenue from the
employee pension fund as operating revenue on the books?
Mr. Nacchio. When I was the CEO of Qwest, post the merger
with US WEST, because that is where you had the over--that is
where you had an accounting I guess----
Ms. DeGette. Okay. Post the merger----
Mr. Nacchio. That was the pension fund that would have
generated, under the accounting rules, surpluses which had to
be counted as operating income. That was something we inherited
with the acquisition of US WEST.
Ms. DeGette. So someone told you you were required to count
the revenue from the employee pension fund as operating
revenue?
Mr. Nacchio. I am aware of the issue, because at the time
of the merger we were picking up a pension fund that we were
inheriting from the old--the US WEST company.
Ms. DeGette. Gotcha.
Mr. Nacchio. I knew--and it was--this has been written
about in the press for years about pension fund accounting and
people doing things. And I knew of the general area. No one
came to me specifically. The pension fund is managed by an
independent group of executives.
Ms. DeGette. Right.
Mr. Nacchio. And so I know of the general topic. I am just
trying to answer the question. I know of the general topic, but
no one came to me, if your question was, to get guidance on the
pension fund?
Ms. DeGette. No. I asked you----
Mr. Nacchio. Oh.
Ms. DeGette. [continuing] actually, a very simple question,
which was, were you aware that the company was counting revenue
from the employee pension fund as operating revenue on the
books?
Mr. Nacchio. As operating revenue?
Ms. DeGette. Right.
Mr. Nacchio. No, I am not aware of that.
Ms. DeGette. Do you deny that that is true?
Mr. Nacchio. I have no reason to know----
Ms. DeGette. Mr. Mohebbi, do you know whether that is true?
Mr. Mohebbi. Congresswoman, I do not.
Ms. DeGette. Anyone else? Mr. Hellman, do you know whether
that is true?
Mr. Hellman. Yes, it is appropriate. In the footnotes of
our annual report, both US WEST and Qwest, has shown as income
on its income statement a portion of the overfunded position of
the pension fund.
Ms. DeGette. As operating income.
Mr. Hellman. I can't recall which part--how far down the
income statement--clearly on the income statement, clearly in
the footnotes. I don't know if it is operating or below
operating income level.
Ms. DeGette. Because, obviously, if it is a pension fund,
you wouldn't be able to use those funds as operating income,
would you?
Mr. Hellman. It is income recognition, Madam.
Ms. DeGette. Right.
Mr. Hellman. It is not movement of cash.
Ms. DeGette. Right. Exactly.
And, Mr. Nacchio, I want to ask you, after you left Qwest,
were you retained as a consultant by Qwest?
Mr. Nacchio. Yes, I was retained as a consultant for Qwest
for 2 years.
Ms. DeGette. And when did your contract begin?
Mr. Nacchio. September 17, 2002.
Ms. DeGette. So you will be retained as a consultant for
roughly 2 years.
Mr. Nacchio. September 16, 2004.
Ms. DeGette. Great. And what is--how much do you receive in
compensation as a consultant?
Mr. Nacchio. $1.5 million annually.
Ms. DeGette. And let me also ask you, please describe the
terms of your severance package with Qwest to us.
Mr. Nacchio. My severance package was defined by my
employment agreement. It is basically two times base salary
plus targeted bonus. There was a----
Ms. DeGette. For what period of time?
Mr. Nacchio. For--well, it is paid at the time you leave
the company. It is paid--it was paid about a month or 6 weeks
later.
Ms. DeGette. And how much was that that you received?
Mr. Nacchio. I am just trying to get you the numbers. It is
two times base plus bonus, which I think is $10.5 million. And
then there was a partial year accrued bonus of $1.2 million, or
something. So it is somewhere around $12 million in total.
Ms. DeGette. Okay. Now, Mr. Nacchio, unfortunately, you
weren't in the room when Ms. Smith testified. And Ms. Smith
is----
Mr. Nacchio. Smith?
Ms. DeGette. I am sorry?
Mr. Nacchio. Ms. Smith?
Ms. DeGette. Yes.
Mr. Nacchio. Okay.
Ms. DeGette. She is one of your former employees, and she
is also my constituent. And what she said when she was in this
room was that she worked for US WEST, and then for Qwest, for a
period of 20 years. I believe she was a technical writer is
what her job was.
And she was laid off just like a whole bunch of other
people from Qwest, 27,000 employees in fact during your tenure
at Qwest, and she lost $230,000 from her retirement savings.
Now, she could have sold the stock that she contributed to the
plan but not the stock contributed by Qwest.
And what she testified is everybody at Qwest who had been
there when your team came on, when Qwest took over, they felt
like a family, and they felt like they were, you know, as Mr.
Mohebbi said in his written opening statement, the local phone
company. So they thought that they would be made whole.
And now here they all are, 27,000 people, mostly in Denver,
my district, they don't have jobs. And I don't know if you
heard the last panel.
Mr. Nacchio. No, I did not.
Ms. DeGette. Okay. You didn't hear the last panel. But Mr.
Winnick came in and he testified, and he apologized to the
employees for what had happened to their pensions and to their
jobs.
Ms. Smith told me she has two girls. She wants to send them
to college. And they are in their teens now. She doesn't know
how that is going to happen, because that $230,000, that was
for their college and for her retirement.
And so I asked Mr. Winnick, you know, it is one thing to
apologize to your employees, which is, frankly, not even
anything I have heard from you here today--an apology to these
27,000 people.
Mr. Nacchio. I think my opening statement covered that,
Congresswoman.
Ms. DeGette. Okay. Well, you know what? The people who are
watching this on TV in Denver did not see your written
statement.
Mr. Nacchio. I read it.
Ms. DeGette. And the thing is, I said to Mr. Winnick, I
said, ``Mr. Winnick, what are you going to do besides
apologize?'' And Mr. Winnick said, ``You know what? I am going
to take--I talked about it with my wife, and I am going to take
$25 million from my pocket and put it back into the pension
fund.'' I want to know, is there anything you plan to do to
make the pensioners who lost their jobs and the employees who
lost their jobs while you were the CEO whole?
Mr. Nacchio. Can I respond to several things that you said
in that statement, or----
Ms. DeGette. Sure.
Mr. Nacchio. [continuing] do you want just a short answer?
I mean, seriously, because I did not lay off 27,000 people.
When we merged the two companies, it was 72,000 employees. When
I left Qwest, the number was about 60,000. It would be 12.
Second, when I----
Ms. DeGette. So only 12,000 lost their jobs.
Mr. Nacchio. Yes. Last week alone, SBC announced 11,000
employees being laid off. Every Bell operating company in this
country has laid off employees because of the--I won't blame it
on the economy. I will say the economy, the industry structure,
the substitution by wireless, by cable. Whatever the fact is,
every company that used to be a Bell operating company is
laying off employees, literally as we speak.
The second thing, about that 401(k) plan, we inherited a
401(k) plan from US WEST where employees of US WEST, prior to
the merger, were locked up on the company contribution.
Employees who came from Qwest were not locked up. Employees who
joined the company after the merger were not locked up.
When that issue was brought to my attention in early 2002,
I went to the board of directors and changed that provision. So
that was something we inherited that I was not aware of, and I
feel bad I didn't know about it earlier.
Now, in terms of Mr. Winnick's proposal, as I understand
what you just told me, I have not heard about it. I have no
reflection on it. Mr. Winnick----
Ms. DeGette. I think he just came up with it today.
Mr. Nacchio. Mr. Winnick's company also went bankrupt.
Qwest is not a bankrupt company. It has a pension plan, and
there are lots of reasons why the telecommunications industry
is on hard times.
Ms. DeGette. So I guess your answer to Ms. Smith and to
other people is: tough luck.
Mr. Nacchio. No, that isn't what I just said.
Ms. DeGette. Well, I mean, that is the way they are going
to think of it.
Mr. Shaffer, let me ask you, because this is a real concern
of mine, and I think it is a real concern of Mr. Notebaert's as
well. What does the new management of Qwest intend to do about
these folks who have been laid off, who have lost their
retirement, who are really looking to the new leadership to do
something?
Mr. Shaffer. Congresswoman, we are right now paying most of
our attention--in fact, I would say all of our attention--to,
in fact, saving the current company and its 55,000 employees
and continuing to not, as Mr. Nacchio said, go into bankruptcy
in which not only do we lose the benefits for all of the
employees, but the 55,000 employees, the pension benefits for
the 50,000 employees which do receive benefits from the
company.
So we are concentrating now on improving the operations of
Qwest, creating value in Qwest, continuing the company as a
good employer, as a good contributor to the economy, and, quite
frankly, have not thought about what has happened in the past
or trying to remedy that.
Ms. DeGette. Well, Mr. Shaffer, I know you all are trying
to be--you have come in and inherited a mess. You are trying to
be good corporate citizens. I would hope that you would
consider these folks who are sitting out there with nothing as
you work through your plan.
Mr. Shaffer. If I could just respond. I would go further
and say that we will be good corporate citizens. We do have a
different approach to not only our communications internally
but also externally with our constituencies around the company
and in different states. And this is something which you
correctly point out that Dick Notebaert has stated his opinions
very clearly.
And, you know, if it would do anything, I might read you a
letter here from Morty Barr, who is the president of the CWA.
They have 700,000 members in their union, mostly in the
telecommunications area. But this is an unsolicited letter from
Morty. Wall Street, along with----
Ms. DeGette. To save time----
Mr. Shaffer. --Qwest customers and----
Ms. DeGette. Sir?
Mr. Shaffer. [continuing] business partners, can have full
confidence----
Ms. DeGette. Sir?
Mr. Shaffer. [continuing] in Dick Notebaert's commitment to
setting the highest ethical standards in his experienced and
executive ability.
Ms. DeGette. Mr. Shaffer? Excuse me. I have limited time.
If I can just ask unanimous consent, we can include that letter
in the record.
Mr. Shaffer. Actually, that is fine. I would love to give
it to you, because I think it is a great letter, and from a
very, very large constituency.
Ms. DeGette. Thank you.
Mr. Shaffer. You are welcome.
Ms. DeGette. I would just like to follow up briefly on the
chairman's questions, if I may, about the audit committee
meetings in the fall and into the winter of 2001.
Mr. Shaffer, I believe that the company has restated, as of
September 22 of this year, about $900 million. Is that correct?
Mr. Shaffer. $950 million.
Ms. DeGette. And how much of that was IRUs?
Mr. Shaffer. The entire amount was IRU.
Ms. DeGette. The entire amount. And you are looking at
potentially restating around $500 million more?
Mr. Shaffer. It is a different category of IRU, but we are
reviewing that, and we are viewing it on a case-by-case basis.
Ms. DeGette. Okay. Now, Mr. Hellman, going back to Chairman
Tauzin's questions, I know that the board was concerned about
the accounting treatment of a lot of these transactions clear
back--I believe all the way back to 2000, 2001. Would that be
accurate to state?
Mr. Hellman. I joined the audit committee, in fact the
board of Qwest, in mid-year 2000. I have been told that in the
first audit committee meeting there was a discussion on IRUs.
To be candid, I don't recall that October 2000 meeting. It is
part of material that has been shown to me.
Ms. DeGette. Was the board aware of the IRUs at that time,
in 2000?
Mr. Hellman. Oh, clearly. Yes, sir--I mean, ma'am.
Ms. DeGette. That is okay.
And if you will take a look at Tab 63 in your notebook, the
first part of that is the audit committee minutes, which you
talked about with the chairman. And then attached to that is a
presentation that Arthur Andersen did to the audit committee
October 4, 2000. Were you on the audit committee at that time?
Mr. Hellman. Yes, I was.
Ms. DeGette. Okay. And in that memo that Arthur Andersen
presented, they talked to you about these IRUs and about the
SEC investigating them, that you didn't--SEC emphasis on no
future benefit to the company and no future revenue generation
from the activity. SEC vigorously challenging sales treatment.
So you were aware of these problems clear back in 2000, right?
Mr. Hellman. I was at the time. I don't recall this
meeting, but clearly the IRUs were addressed at almost every
meeting of the audit committee. And we met 35 times.
Ms. DeGette. And was Mr. Nacchio present at those meetings?
Mr. Hellman. As a common practice, no.
Ms. DeGette. Okay. Do you know if Mr. Nacchio was aware of
the concerns about the IRUs?
Mr. Hellman. He would have been, in that the audit
committee reported back to the full board, and he was a member
of the full board. So, clearly, from the audit committee
standpoint, he would have been aware of those concerns. And I
can't address whether he would also be aware of the concerns
meeting directly with the independent auditors or his chief
financial officer.
Ms. DeGette. And what specifically were the concerns of the
audit committee?
Mr. Hellman. The concerns----
Ms. DeGette. About the IRUs.
Mr. Hellman. The concerns of the IRU is it is an extremely
complex transaction, and it has to be appropriately applied to
the specific transaction the company is entering into. Arthur
Andersen----
Ms. DeGette. And it has to have a business purpose.
Mr. Hellman. It has to have a business purpose. But that is
only one of the multitude of elements that an IRU would have to
have to achieve the recognition of income that the company's
policy called for.
Ms. DeGette. Okay. And you testified, when the chairman
asked you the questions, that when Ms. Szeliga came to you and
talked to you about the Cable & Wireless deal--remember that?
That was the end of October. That involved about $109 million.
Is that correct?
Mr. Hellman. Yes.
Ms. DeGette. And later on you learned about additional
deals with side agreements or--that is what we call them,
because, you know, we are not accountants. And those totaled I
guess, from what we have heard from Mr. Shaffer, around $950
million, right?
Mr. Hellman. No, I think he was referring to all IRUs.
Ms. DeGette. Okay.
Mr. Hellman. Not just IRUs that would potentially have a
side agreement.
Ms. DeGette. How many of the IRUs did you learn about with
a side agreement?
Mr. Hellman. I believe there have been three.
Ms. DeGette. And what was the total of those three
transactions? I think you are right.
Mr. Hellman. Well, it would be 109 plus the other two,
which I can't----
Ms. DeGette. Right.
Mr. Hellman. And I----
Ms. DeGette. Even I took high school math, so I got that
far.
Mr. Hellman. Okay. So I am trying to think on my feet. I
don't know exactly.
Ms. DeGette. Okay. And did Ms. Szeliga also----
Mr. Hellman. But it would be a small portion of the
subtotal.
Ms. DeGette. Did Ms. Szeliga also advise you that the other
two did not need to be restated, the other two IRUs with the
side agreements?
Mr. Hellman. No. I think we had a more formal investigation
by the time that those transactions were discovered. It was not
in the October 2000----
Ms. DeGette. When were those discovered?
Mr. Hellman. Well, Flag I think was one that you addressed
last week.
Ms. DeGette. Right.
Mr. Hellman. And I believe that that was--arose from the
mailing by our independent auditor as part of the scope of
audit that the board approved in the beginning of 2002. And,
therefore, I assume that it was first brought to Arthur
Andersen's attention in January or February 2002.
Ms. DeGette. Okay.
Mr. Hellman. At that point, we conducted an investigation
to determine if, indeed, there was--and that was an oral
agreement, and to determine if there was an oral agreement. All
people party to that transaction were interviewed, and we found
that there was no substantiation that an oral agreement
existed. The investigation is continuing as we are continuing
all investigations.
Ms. DeGette. So in your opinion, that Flag agreement--there
was no oral side agreement? Or you just don't?
Mr. Hellman. That is the company position.
Ms. DeGette. Hmm?
Mr. Hellman. That is the company position.
Ms. DeGette. Okay. Well, let me ask you, Mr. Shaffer. Why,
then, have--or maybe you, too, Mr. Hellman. Why, then, have you
restated that income from that transaction?
Mr. Hellman. As a part of the overall IRU accounting
analysis, not because of any individual side agreement or
collateral agreement.
Ms. DeGette. Mr. Shaffer, why was all of the IRU revenue
restated?
Mr. Hellman. And I should point out when I was referring
to--I was referring to contemporaneous transactions.
Ms. DeGette. Right.
Mr. Shaffer. As Peter correctly points out, the
contemporaneous transactions we have restated, the $950 million
worth----
Ms. DeGette. Right.
Mr. Shaffer. [continuing] is the result of an analysis of
our own policies and practices, as well as the underlying
records in the company. At the conclusion of that analysis, I
determined, in conjunction with our external auditors, that we
could not sustain the accounting treatment which required
revenue recognition. That is the reason that I----
Ms. DeGette. And why did you not believe you could sustain
that?
Mr. Shaffer. Well, this may get too specific, but, please,
I hope not. One of the basic parameters of recognizing revenue
on a contemporaneous transaction is that the assets that you
have on both sides are dissimilar, meaning that you are
giving----
Ms. DeGette. Right. We have been through this--last week,
yes.
Mr. Shaffer. And when we went to our records--and that
would require, of course, if they were dissimilar that the
records should reflect a group of assets. When we looked at the
specific records, they were lacking. And as this is such a
bright line test as far as recognition and revenue recognition
is concerned, I--in my judgment, we had to restate the
accounts, and that is why we did it.
Ms. DeGette. Thank you.
I will finish my questioning in a minute.
Mr. Greenwood. The time of the gentlelady has expired. We
will do a second round.
As a matter of housekeeping, the Chair would ask unanimous
consent that the--all of the documents in the binder be part of
the record, as well as the--those discussed today, including
the letter just introduced by Mr. Shaffer. Without objection,
so it is.
The Chair recognizes himself for 10 minutes and turns to
Mr. Mohebbi. And I would ask you to turn to Tab 62 in the
binder, which is a series of e-mails, in part between you and a
gentleman by the name of David Boast. They were sent on June
13, 2000. Do you have that document, sir?
Mr. Mohebbi. Yes, Mr. Chairman.
Mr. Greenwood. Let me read from it in part. Mr. Boast
writes to you, ``We agreed at the time of the Touch America
card allocation that we would not be able to do both this IRU
and Touch America. This is not a challenge. It is impossible,
and we shouldn't spend any time at all on this, or we could
jeopardize our other activities. Let us get Sales to find
another IRU--to find other IRU opportunities.''
And then you wrote back, ``What if we misroute the IRU, and
then route it as it is supposed to?'' And Mr. Boast writes back
to you, ``If we could do this, which I am not sure we can, then
all we have to do is get audited, get caught, and get
screwed,'' to which you respond, ``I know it is risky. I will
take the fall for it.'' Could you elaborate on that series of
e-mails?
Mr. Mohebbi. Yes. Actually, I would be delighted to get the
opportunity to do that. And if I could, I would like to set the
stage in terms of what the discussion is. The series of e-
mails, Mr. Chairman, that are here start with an e-mail from--
that have to do with engineering. There is a person in the
wholesale organization that is concerned about a sale--
potential sale to a customer that may not be completed because
there is a lack of equipment.
It was escalated to me by the person who ran the wholesale
organization, and I obviously sent it to Mr. Boast, who was at
that time responsible for operations and engineering. And one
of the things that I do in my job is obviously to try to
encourage people to do as good as they can and make sure that
they get the work done.
Mr. Boast, in this particular case, at the moment thought
that it was impossible to get these two particular jobs done at
the same time. And my suggestion was: what if we misroute the
IRU and then route it as it is supposed to? Misroute, in the
long haul engineering parlance, is when you cannot connect from
point A to point B.
Let us say, if you have an IRU, engineering-wise, if you
can't connect by the shortest distance, and for a number of
reasons--you don't have enough circuits, your network is
incomplete--and you have to go maybe on a route that is not the
shortest distance, the customer doesn't pay for it, but you
have to go through a longer route to get there, that is really
what the definition of the misroute is.
And I said, ``Is it possible for us to do that and then
maybe''----
Mr. Greenwood. Well, let me understand you. You said a
misroute comes when you----
Mr. Mohebbi. Yes.
Mr. Greenwood. [continuing] cannot connect point A to point
B.
Mr. Mohebbi. That is correct. That becomes so----
Mr. Greenwood. Just let me finish. Which then requires you,
because of your inability to connect A and B, to go around.
Now, it seems to me to be another thing entirely if you say,
``What if we misroute it,'' because there you are not being
forced to, you are choosing to.
Mr. Mohebbi. Yes.
Mr. Greenwood. Correct? Okay.
Mr. Mohebbi. So as I was saying, that the shortest
connection between two points is the route. If you connect
point A and point B but don't connect it through the shortest
route, that becomes a misroute in the engineering parlance. And
eventually--you can do a lot of misroutes.
And most of the people that have ``new networks'' have a
lot of new--have what is called a misroute, and then later on
you have to work with the customers, obviously, because
misroutes--to change the misroutes and reroute them, you have
to bring the circuit down. And if the purchaser is a carrier,
for example, they will be out of service for a day, for 2 days,
etcetera.
So in that particular case, my suggestion was, is it
possible--you don't have--I understand you don't have the
circuits to build that particular route--that we could go
elsewhere and then come back?
Mr. Boast is obviously, then, talking about accounting and
why this could be a potential with accounting, and uses, you
know, the words that you mentioned. I believe that Mr. Boast
mentioned those because he was worrying about what happens if
revenue is recognized on this particular route. And then later
on, if you want to change that particular route, there should
be--there could be concerns about it.
Mr. Greenwood. And when he said that to you, when he----
Mr. Mohebbi. Yes.
Mr. Greenwood. [continuing] when he communicated that to
you, did you understand that that is what he was communicating
to you, an audit concern?
Mr. Mohebbi. Again, at the time, I am--this is--I am going
with what I am seeing right now, and I saw this e-mail,
obviously, a few days ago. But my reading right now is, Mr.
Chairman, that he was concerned about the audit potential
because of the revenue recognition implications on----
Mr. Greenwood. I understand that. My question is: do you
assume that that is what you--that is what you believed his
concern to be then?
Mr. Mohebbi. I believed that concern to be then, yes.
Mr. Greenwood. Okay. So, then, and he--he talked about
concern that you would get audited, get caught.
Mr. Mohebbi. Yes.
Mr. Greenwood. And I assume ``get screwed'' means get in
trouble with the law.
Mr. Mohebbi. Yes. Or with internal auditors.
Mr. Greenwood. Okay.
Mr. Mohebbi. That is----
Mr. Greenwood. So when you saw him respond that way, and
you responded by saying, ``I know it is risky. I will take the
fall for it''----
Mr. Mohebbi. Yes.
Mr. Greenwood. [continuing] what did you mean? That was not
an engineering fall, was it?
Mr. Mohebbi. No. Specifically, again, I am glad that you
have--I have an opportunity to talk to you about that, because
the words usually go with the people, and you have to know the
nature of the people. In this particular case, I was dealing
with engineers and operating people, and this was maybe the
shortest way. The choice of words could be, again, discussed.
But this was the shortest way for me to say, ``Look, you
deal with the operational issues that you have. Try your best
to try to get the two jobs done at the same time.'' If there
are--the concerns--the risks have to do with revenue
recognition. If there are any concerns, we do the work. And let
us say the accountants come back and say that the revenue can't
be recognized, I am going to take the blame for that. And that
was what I was trying to communicate to Mr. Boast at that the
time, to try to get the job done. Do your best to get the job
done here.
And, again, if I could just provide the follow up, Mr.
Chairman, since I had the opportunity, and I thank the staff
for providing us with the information ahead of time. I checked
on this particular scenario, and, indeed, Mr. Boast was
incorrect. So the impossible did get done possibly, and the two
jobs got done on the route, and the revenue was recognized in
the quarter.
And by the way, the revenue wasn't required in terms of
what our objectives were for the quarters. But it was a risk
that I was taking, believing that if the operating people did
their work, you know, that that's what I was asking them to do.
Mr. Greenwood. But it wasn't a legal risk you were taking.
You weren't saying, ``Go ahead and break the law. And if you
get caught, I will take the--I will go to jail''?
Mr. Mohebbi. No, Mr. Chairman. That is----
Mr. Greenwood. That is not what you were----
Mr. Mohebbi. That was definitely not what I meant.
Mr. Greenwood. Very well. The e-mail to Nick Jeffery at C&W
that came from your e-mail account has been the subject of a
lot of controversy.
Mr. Mohebbi. That is right.
Mr. Greenwood. I think it can be found in Tab 64.
Mr. Mohebbi. Yes, sir.
Mr. Greenwood. If you don't have it in front of you right
now.
Mr. Mohebbi. Yes, I do, Mr. Chairman.
Mr. Greenwood. Okay. Now, do you recall sending that e-
mail?
Mr. Mohebbi. I do not recall sending this e-mail, Mr.
Chairman.
Mr. Greenwood. Okay. Did you give anyone else permission to
send this e-mail from your account?
Mr. Mohebbi. I do not recall giving someone permission from
my account to send it, no.
Mr. Greenwood. Can you imagine how an e-mail would be sent
from your account without you sending it or you giving someone
else permission to send it from your account?
Mr. Mohebbi. Again, I do not. And one of the key things
that I wanted to do was I wanted to make sure, because it is an
important part of the discussions that we have had here----
Mr. Greenwood. Right.
Mr. Mohebbi. [continuing] and I think it is important that
as we find out what the technicality is and how an e-mail can
be sent, it is important to note that we do know that it went
from my computer, that it went from a computer that had my name
on it. So I better, and I will, take full responsibility for
the e-mail. I have reviewed----
Mr. Greenwood. Although you say you don't recall sending
the e-mail, you don't rule out the possibility that, in fact,
you typed all these words into your computer and sent it?
Mr. Mohebbi. No. I believe that I have--I think we have
enough data that we have provided that showed these particular
words were actually negotiated extensively by the contract
team. As I mentioned in my opening testimony, there are
contract teams in Qwest that work on contracts and addendums,
etcetera. These particular words I think were presented,
negotiated. And, again, I did not notice obviously at the time.
This is all that we have found out so far, Mr. Chairman.
These words were negotiated, a lot of back and forth in
terms of what they meant, and then they were okayed by the
experts. While I did not recall sending it, if I am looking at
it right now, and if it was presented to me in the process, the
way that we have a process to work, if somebody asks me within
the process to send an e-mail, mainly because the customer
needs a comfort level of some sort, I would have sent it.
Mr. Greenwood. But you are familiar with this particular
C&W deal, correct?
Mr. Mohebbi. I have read about it, and so I am a bit
familiar with it, Mr. Chairman.
Mr. Greenwood. Mr. Jeffery of C&W swore in an affidavit
provided to the committee last week that he spoke with you
about this deal and about the contents of the e-mail prior to
the e-mail being sent. Do you recall this conversation?
Mr. Mohebbi. I do not recall that conversation.
Mr. Greenwood. Okay.
Mr. Mohebbi. My recollection is that the first time I
talked live in person with Mr.--I have not yet met Mr. Jeffery
in person. But the first time I actually talked to him on the
phone was sometime in 2002 when there were other issues with
Cable & Wireless, and they specifically asked for me to be on a
particular phone call.
Mr. Greenwood. Well, regardless of who sent the e-mail and
whether you recall this conversation, the statements in this e-
mail are problematic for Qwest in recognizing revenue up front,
are they not?
Mr. Mohebbi. I have not seen the statement, Mr. Chairman,
of Mr. Jeffery.
Mr. Greenwood. No, the e-mail itself.
Mr. Mohebbi. I do not believe so.
Mr. Greenwood. Why not?
Mr. Mohebbi. Again, for the number of reasons that I
mentioned. The text of this particular e-mail was reviewed and
okayed by our experts, and the company, as well as the
experts--you can add my name on it that I am not the experts--
believe that this particular e-mail does not change the
substance of the transaction, and that the transaction at hand,
it was mainly provided as a comfort level and to provide some
pricing, and that is the position that the company has taken
all along.
Mr. Greenwood. Did Ms. Szeliga disagree with that
statement?
Mr. Mohebbi. I don't know why Ms. Szeliga would disagree
with that particular statement.
Mr. Greenwood. She didn't find a problem with this e-mail
and with this practice?
Mr. Mohebbi. I think, again, I am providing you with my
opinion, Mr. Chairman. I think Ms. Szeliga could have had
issues with the process, which is when you have a particular e-
mail like this one that is sent, obviously there is a contract
file, and there is a filing process, and maybe she has got a
problem with a particular process.
But it has been the experts' definition and the experts'
opinion that have seen this particular e-mail that this does
not change the substance of the transaction at hand.
Mr. Greenwood. Well, Robin Szeliga told us last week that
she was very angry because you knew not to do this, and, more
importantly, that you were the president of the company. She
said that she was angry and that this bothered her.
Mr. Mohebbi. Okay. Who did she share her anger with?
Because, Mr. Chairman, I know that----
Mr. Greenwood. She said with you. She said that she shared
that with you.
Mr. Mohebbi. Ms. Szeliga, to the best of my recollection,
after this particular e-mail was identified, was--had actually
stopped by my office. And I believe at the time counsel was
with her as well. And she indicated about the existence of the
e-mail. The tone of the discussion was, again--generally, the
tone of the discussion with me is very regular. It wasn't----
Mr. Greenwood. Why do you suppose she didn't know about
this e-mail for 10 months after it was issued?
Mr. Mohebbi. And that is, Mr. Chairman, what I was saying,
is that if there was an issue, maybe the issue was that there
is an e-mail. The content of the e-mail, the experts have
looked at it, they have negotiated the words, and it does not
change the substance of it, so maybe----
Mr. Greenwood. Why wouldn't this language--if this was
important to send to--this is important information, why
wouldn't this be part of the upfront contract? Why did this
have to travel in e-mail form, unbeknownst to others in the
company, for as much as 10 months?
Mr. Mohebbi. That is a good----
Mr. Greenwood. It certainly strikes us as kind of a secret
side deal that might have been necessary in order to allow for
the accounting to be done the way that it was without this kind
of an agreement being visible to the world.
Mr. Mohebbi. Mr. Chairman, certainly there were no intents
to hide this particular agreement. My understanding is, in
particular, that there is a process that these documents go
through, and this document went through that process, to the
degree that we have found them.
I think if there is an issue it goes back to once that
document was sent, what happened to the filing of the document,
but you asked a specific question which--which I agree, and I
would like to respond to, and that is, why is there even a need
for addendums to contracts? And, again, my----
Mr. Greenwood. Well, addendums to contracts are just that.
They are appended to the contract.
Mr. Mohebbi. Okay. That is correct.
Mr. Greenwood. They become part of the original document.
Mr. Mohebbi. That is----
Mr. Greenwood. An addition to the document. They become
visible to anyone who would examine the document.
Mr. Mohebbi. And, Mr. Chairman, sometime----
Mr. Greenwood. They are not written on the palm of your
hand and flashed up and then held down.
Mr. Mohebbi. Mr. Chairman, in this particular case, I
believe, as I found out, that the customer required some
comfort regarding particular pricing, and this particular----
Mr. Greenwood. Then, why didn't--that would--why was that
not, then, included or amended, appended to the contract?
Mr. Mohebbi. That is a good question. I do not have the
answer to that question, because I don't do the specific
contracting, and I don't want to come up with a reason that
that is not correct. What I can tell you is that the one point
that I could say is--that you could look at, and if you say
going through this whole process is once a particular document,
no matter whether it is a comfort letter, etcetera, it has got
my name on it, and that is obviously significant if it has gone
from Qwest.
I believe maybe the filing of a particular document like
this one is important. And I cannot attest to you that when
this particular document was sent from my computer that the way
that it was filed was something that I followed up on, and
maybe that is something that I had to find out about, and the
filing was something to go after.
But I don't think--I want to make sure--from where I sit,
and from what I know, I don't think there was an attempt made,
Mr. Chairman, to try to write a quick e-mail and then have it
be anywhere.
Mr. Greenwood. Okay. But you understand what you are
testifying under oath to. You are saying, ``This came from my
computer, but I didn't do it.'' You are saying----
Mr. Mohebbi. But I----
Mr. Greenwood. [continuing] that, ``Yes, it was not
included in the contract, but I don't know why.'' You are
saying that, ``It took 10 months for the finance people to know
about this, but I don't really understand why that is.'' And so
you can't explain any of this.
It is a great mystery to you. And yet there is a plausible
explanation that those of us trying to interpret all of this
would have, and that would be that this would be a very
convenient way to manage the revenues the way you wanted to,
and be able to have it both ways--in other words, be able to
have the accountants treat the revenues one way and yet this
not show up on the legal documents, because, in fact, it may
very well have been that if it was incorporated in the legal
documents, it wouldn't have been--you wouldn't have been able
to account for the revenues that way.
So on the one hand, you have a very plausible, a very
logical reason why this would be done in a surreptitious
fashion. On the other hand, we have your explanation which
says, ``I don't understand how it came out of my computer. I
don't understand why it wasn't part of the document. I don't
understand why the finance people didn't know about it for 10
months.''
Mr. Mohebbi. If I could reply to that, Mr. Chairman.
Mr. Greenwood. Please.
Mr. Mohebbi. I think one of the things that I wanted to
make sure to be helpful to the subcommittee was that there was
a lot of discussion, and I believe it was the ranking member
that says it is interesting that nobody is taking
responsibility for this e-mail being sent.
And one of the things that I said was, obviously, I want to
make sure you knew what the circumstances around the e-mail is.
But I take full responsibility for the e-mail. It has got my
name on it. I don't recall sending it, but that is an issue
separate from--it is--I take accountability for this e-mail.
I believe also that what I tried to tell you is that the
experts at the company that had reviewed this particular--we
have done, as a company, a lot of work in this particular area.
The experts have reviewed the text of this particular e-mail.
The experts included contract management, people from the
financial organization, legal--they had reviewed this
particular document. And before and after it was sent, those
particular experts' position has been that this particular e-
mail did not change the content and the--did not change the
substance of that transaction.
That is the--that is what I am trying to tell you, is that
we strongly believe that this particular e-mail did not change
the substance of transaction. And I don't want the subcommittee
to be hung about, was the e-mail sent? Was the e-mail not sent?
We have verified the e-mail was sent. So let us just take it at
that, and say, ``I will take--it has got my name on it. The
buck stops with me.''
Mr. Greenwood. Would you describe the oral agreement with
Flag in the same way, that it wasn't--the oral agreement with
Flag, would you describe that in the same way, that it was just
a matter of comfort, it didn't change the nature of the
contract? Did you watch the hearings last week or read the
transcript of them?
Mr. Mohebbi. No. Some, Mr. Chairman, not the whole--not the
whole transcript. I apologize. I don't--I was not personally
involved in a Flag transaction, in terms of what a particular
Flag transaction was. If you would like me to familiarize
myself----
Mr. Greenwood. Well, my time has expired. I am going to
recognize the gentlelady from Colorado for a second round now.
Ms. DeGette. Thank you, Mr. Chairman.
Mr. Mohebbi, just to follow up on a question of the
chairman's, you said that Ms. Szeliga, when she learned about
this e-mail, which apparently is unnumbered--you know the one I
mean----
Mr. Mohebbi. Yes, Congresswoman.
Ms. DeGette. The famous e-mail. That Ms. Szeliga showed up
at your office with counsel.
Mr. Mohebbi. That is my----
Ms. DeGette. Okay. Who was the counsel she showed up with?
Mr. Mohebbi. It could be a number of people, but I
believe----
Ms. DeGette. Was it an internal attorney?
Mr. Mohebbi. Yes.
Ms. DeGette. Okay. And did she--was she prone to showing up
at your office with a lawyer?
Mr. Mohebbi. No.
Ms. DeGette. So was this the first time she had done that?
Mr. Mohebbi. I don't think so. There had been other times.
Ms. DeGette. How many times?
Mr. Mohebbi. I can't state that many.
Ms. DeGette. Like less than 10?
Mr. Mohebbi. Fair statement, Congresswoman.
Ms. DeGette. I mean, if someone shows up at your office
with a lawyer, you kind of pay attention, huh?
Mr. Mohebbi. No.
Ms. DeGette. No, you don't?
Mr. Mohebbi. Given--actually, in terms of my day-to-day
activities, a lot of lawyers show up at my office and for
different----
Ms. DeGette. Okay. So now you are saying, no, it wasn't
unusual for her to show up with a lawyer?
Mr. Mohebbi. No. You specifically asked, ``Did Ms. Szeliga
showing up with a counsel was an unusual event''?
Ms. DeGette. Okay. But that brought your attention to the
issue, right?
Mr. Mohebbi. Not anything more than usual, but----
Ms. DeGette. And what did you and Ms. Szeliga and the
counsel discuss at that meeting?
Mr. Mohebbi. I don't remember the exact discussion. I
believe the gist of it was that Ms. Szeliga had identified this
particular e-mail.
Ms. DeGette. Right.
Mr. Mohebbi. And wanted to make me, first of all, aware of
it, that it existed. And told me, you know, did you write this
e-mail? And----
Ms. DeGette. And what did you say?
Mr. Mohebbi. I don't remember exactly what I said, but I
would say the gist of it is that I don't believe I wrote this
e-mail. And----
Ms. DeGette. And what was the result of the meeting?
Mr. Mohebbi. I don't think there was a result.
Ms. DeGette. Did she tell you, ``Don't do this anymore.
This is against company policy''? No?
Mr. Mohebbi. Congresswoman, there were no discussions like
that. It was more of a----
Ms. DeGette. Did she tell you she was going to take this
matter to the audit committee because it was inappropriate
under your accounting rules?
Mr. Mohebbi. I don't believe so, Congresswoman.
Ms. DeGette. Okay. So you remember she showed up with
counsel. You don't really remember what was discussed. Do you
remember, was she mad or not? Angry?
Mr. Mohebbi. I don't remember if she was mad.
Ms. DeGette. Take a look, Mr. Mohebbi, at Tab 35 in your
notebook. That is a May 2001 e-mail to Greg Casey.
Mr. Mohebbi. 35?
Ms. DeGette. Yes. Oh, wait, that is in the first binder.
Have we got that into--I am sorry. We get a new binder every
time we come, so----
Mr. Mohebbi. No problem.
Ms. DeGette. It is dated--while she is looking for that--I
will come back to that. I have a couple more questions for Mr.
Hellman. Oh, 66.
Mr. Mohebbi. Yes, ma'am.
Ms. DeGette. And that is an e-mail from you to Greg Casey
dated--your e-mail is dated May 14, and there is a prior one
dated May 12. And on May 12, you say to Mr. Casey, ``What do
you think about this quarter? Can we make it? Business is in
bad shape. This is a bad April. So we need a ton of one-time
items to make the quarter.''
And then you say in the next--May 13 memo--I guess that is
from Mr. Casey to you. He says, ``I think that Robin said we
weren't going to do any more deals where we pick up facilities
at the same time someone buys them from us.'' And then it goes
on.
So my question to you--and then you respond and you say,
``I will talk to Robin on the accounting rules.'' This is in
May 2001. Did you ever talk to Robin Szeliga about the
accounting rules?
Mr. Mohebbi. Congresswoman, I do not remember I did that.
And one of the reasons that I don't remember doing that is
because, if you look at that particular e-mail, it cc'd Bill
Eveleth, who is a senior financial executive in the company.
And I think I cc'd him, and I particularly wanted him to deal
with the issue. And my----
Ms. DeGette. Well, but that is not what your e-mail says.
Mr. Mohebbi. No. My----
Ms. DeGette. Your e-mail doesn't say, ``Bill, talk to Robin
about the accounting rules.'' It says, ``I will talk to Robin
about the accounting rules.''
Mr. Mohebbi. I don't believe or I don't----
Ms. DeGette. You don't remember talking to Robin about the
accounting rules?
Mr. Mohebbi. No, Congresswoman.
Ms. DeGette. Do you know what happened to this WorldCom
deal that this was--that was being discussed in this e-mail?
And was a port agreement ever negotiated?
Mr. Mohebbi. A version, a particular transaction with
WorldCom. I am just speaking from memory. I am not sure. I
believe a particular transaction with WorldCom was negotiated.
I also--if I could make a statement on this particular e-
mail----
Ms. DeGette. Brief.
Mr. Mohebbi. Because I have seen this particular e-mail.
When I talk about----
Ms. DeGette. Oh, good. Go ahead.
Mr. Mohebbi. Can I?
Ms. DeGette. Yes.
Mr. Mohebbi. Thank you very much. When I am talking about
business is in bad shape in this particular e-mail that you
mentioned to the original--to Mr. Casey, that is the Business
division, not business--we had four particular divisions that
were revenue-generating divisions.
Ms. DeGette. Right.
Mr. Mohebbi. National Division, Consumer Division, Business
Division, and Wholesale Division.
Ms. DeGette. Right.
Mr. Mohebbi. And so I just want to specifically make sure
you understand I wasn't talking about the corporation. It
wasn't an issue of corporation. It was me talking to somebody
who ran a sales force, and I wanted to see how good--how much
more--the e-mail started by saying, ``Look how good we are
doing.'' Generally, when you send me an e-mail like that, my
next question is, ``How much better can you do?'' And this was
a way I had to try to ask that.
Ms. DeGette. Well, I don't know, because the May 12 one
then says, ``Can we make it? Business is in bad shape.''
So let me turn to you, Mr. Hellman. I just have a couple
more questions to follow up on my previous questions. You said
that in the executive session, I believe in early December, you
spoke with Mr. Nacchio about instilling the highest level of
ethical standards. Remember that? Yes?
Mr. Hellman. Yes, that is my testimony.
Ms. DeGette. Okay. Now, in fact, the board was concerned
about Mr. Nacchio's highest level of ethical standards before
that, weren't they?
Mr. Hellman. I think that in the environment--to set the
context, in the environment we wanted to make sure that he set
the right tone, that he went out of his way to be proactive.
Ms. DeGette. Okay. Take a look at Tab 71 in your notebook.
Mr. Hellman. Okay.
Ms. DeGette. Got it?
Mr. Hellman. Yes.
Ms. DeGette. Now, that is the CEO evaluation results from
the board of directors meeting September 13 and 14, 2001. That
would be the evaluation of Mr. Nacchio, right? Were you at that
meeting?
Mr. Hellman. I don't believe this was presented in mid-
September because of 9/11. I think this meeting was canceled.
To the best of my recollection, it was then presented in
December.
Ms. DeGette. Okay. So it was presented in December 2001.
Mr. Hellman. Yes. And I attended that meeting by phone.
Ms. DeGette. Okay. Did you ever receive this document?
Mr. Hellman. I did not, but----
Ms. DeGette. Okay. Well, let me--is this the first you have
seen it, just now?
Mr. Hellman. I think it has been shown to me in the course
of the process.
Ms. DeGette. Of the hearing. Okay. Well, let me just ask
you, since you were there by phone, did you discuss some key
development needs of fostering legal and ethical conduct,
``make the numbers or else,'' accounting credibility issues?
Mr. Hellman. Yes, I believe that was discussed in that
meeting.
Ms. DeGette. Too short-term oriented, was that discussed?
Mr. Hellman. I believe it was.
Ms. DeGette. Keeping the board fully informed, involved,
utilized, was that discussed?
Mr. Hellman. I have less of a recollection of that, but I
have no reason to think it wasn't discussed.
Ms. DeGette. Okay. I mean, the board really had some
concerns about the way Mr. Nacchio and his team were treating
these accounting issues, weren't they?
Mr. Nacchio. Congresswoman, do I get a chance to respond?
Ms. DeGette. Sure. We will let you respond after Mr.
Hellman.
Mr. Hellman. I think these are shown as key areas of
improvement. We also, in balance, saw some very good
professional skills as well.
Ms. DeGette. Right.
Mr. Hellman. But, clearly, we were--I mean, the document
speaks for itself. We were asking him to address these
developmental----
Ms. DeGette. And were these issues discussed with Mr.
Nacchio? Was he there?
Mr. Hellman. Not being on the phone--the common practice
would be to meet in executive session, and then have the
chairman of the compensation committee meet with Mr. Nacchio to
give him both the assessment, this formal document, plus any
other discussion items that would occur in the executive
session. But I can't speak for----
Ms. DeGette. So you don't know whether those things were
discussed.
Mr. Hellman. I do not know. That was the normal practice.
Ms. DeGette. Mr. Nacchio, were they discussed with you?
Mr. Nacchio. Congresswoman, thank you for giving me the
opportunity. My CEO evaluation was discussed with me by the
compensation committee of the board.
Ms. DeGette. Okay.
Mr. Nacchio. I believe it was in October. It was just about
the time they were asking me to sign a new 4-year contract.
Ms. DeGette. Right.
Mr. Nacchio. And I would like to put this in context. First
of all, I have seen this report now with the detailed opinion
sheets of all the things I was strong in, all the things I was
supposedly weak in. And if you look at the bottom of some of
these pages, you are going to see it says there is a wide
disparity between board members on this assessment.
And I would like to set the context. This board of
directors, for which I was co-chairman--I know for the purposes
of this meeting I am now the chairman. But when we ran the
company I was co-chairman. Mr. Anschutz managed the board.
And I want to make a point. I had a hostile board. Half of
my board members were, as a result of a hostile acquisition of
US WEST when they wanted to merge with Global Crossing--half
those board members were hostile to me as the CEO from day one.
I am not surprised to see the wide disparity of scores.
I was prepared to finish my 5-year contract with Qwest in
the fall of 2001 and leave. I was encouraged to stay for 4
additional years. As a matter of fact, back to a previous e-
mail that I was--I never got to see, the e-mail from Mr.
Hellman to Mr. Stevens dated October 24, that happens to be the
day they signed me to a new contract.
Ms. DeGette. Right.
Mr. Nacchio. I was prepared to leave, and it is one of the
reasons I did not put up a fight at the end, because I was
prepared to leave 6 months earlier. My 5 years were up. I
stayed because the board asked me to. The overall evaluation
was above average, and there was no specific discussion about
ethical behavior or my leadership of that in that compensation
committee meeting.
I apologize for being a little bit direct, but I take this
personal.
Ms. DeGette. I understand that, Mr. Nacchio. And that is
what I wanted to ask you was, did they discuss--did the board
discuss with you the accounting credibility issue and ``make
the numbers or else'' accounting credibility issue, did they
discuss that as a weakness with you?
Mr. Nacchio. No, they did not.
Ms. DeGette. Did they ever discuss that as a weakness?
Mr. Nacchio. No, they did not, not that I remember.
Ms. DeGette. During the time period December 2001 or
through the spring of 2002, did they ever discuss the issue of
they thought that you were too creative on accounting, or they
would have to restate income on that? Did they never discuss
that with you?
Mr. Nacchio. No. First of all, I don't do the accounting
for the firm. Okay? I am not----
Ms. DeGette. Right. But you are the captain of----
Mr. Nacchio. Excuse me.
Ms. DeGette. [continuing] the ship.
Mr. Nacchio. May I finish?
Ms. DeGette. Sure.
Mr. Nacchio. They never specifically spoke to me about my
leadership abilities and setting the improper tone on this
matter or any other matter. In terms of the accounting of the
firm, as you pointed out earlier in your testimony, on issues
of IRU accounting and the fact that we were following advice
from Arthur Andersen, and this issue was being discussed in the
accounting industry under the emerging industry task force, the
board was fully aware of all of the issues on our strategy, our
business purpose, and our accounting from 2000, at least the
new board that we inherited as a result of the merger, from
2000 on.
I was never disciplined. I read a newspaper article
recently where it was quoted that--I think it might have been
you being quoted, that someone had the interpretation I was
severely disciplined, at least verbally. There was a different
term used. That did not occur. I was encouraged to stay. I
would have been happy to leave at the end of 2001. I would
personally have been better off had I left at the end of 2001.
But I am happy to be here to cooperate.
Ms. DeGette. So what you are saying is, at the same time
they are writing in the board minutes that they have concerns
about your accounting treatments, they are renewing your
contract for 4 years.
Mr. Nacchio. Yes.
Ms. DeGette. Correct? And one last question. You said that
Mr. Anschutz had dual responsibility with you. My question is:
how involved with the board and the company was Mr. Anschutz in
the accounting decisions and in the day-to-day business
decisions of the firm?
Mr. Nacchio. Phil Anschutz and I were close friends for
five and a half years. I spoke to Phil 2 to 3 times a week.
Every major decision I made at this firm I sought his counsel.
In the old Qwest, he was the majority owner. He headed the
executive committee. I always went to Phil Anschutz when I
needed counsel.
Many times, I would get calls from Phil just to find out
what was going on. Phil was very involved. He was helpful to
me. His vision, combined with my vision, helped us to create
Qwest. And he was co-chair of the board. For board matters, I
went to Phil. Phil managed the relationship with the board.
Ms. DeGette. And so it is your testimony under oath today
that neither Mr. Anschutz nor the rest of the board ever talked
to you about concerns about accounting treatments? Is that your
testimony?
Mr. Nacchio. To my recollection, they never spoke to me
about this tone at the top and changing the behavior, other
than the December 5 audit committee meeting, for which I have
already given testimony. And I was encouraged to stay at Qwest
through the fall of 2001. I was encouraged to stay with Qwest
right up until the end.
Ms. DeGette. Mr. Shaffer, do you----
Mr. Nacchio. I mean, board members were calling my wife to
encourage her to convince me to stay.
Ms. DeGette. Do you have any information about this, Mr.
Shaffer, whether these matters were brought to Mr. Nacchio's
attention?
Mr. Shaffer. Congresswoman, this is long before my arrival
at Qwest, so I can't help out there at all.
Ms. DeGette. Mr. Hellman, do you know of these matters ever
being brought to Mr. Nacchio's attention? Were you ever there
besides the December 5 meeting when the accounting issues were
discussed with Mr. Nacchio, or the issues of the tone and
everything else?
Mr. Hellman. As I stated on this evaluation form that you
gave me, I don't recall getting it. Therefore, since I attended
the board meeting in December by phone, I assumed it might have
been done there. If it was done in October, I don't recall
getting it, just to set the record straight. And I am sorry, I
have forgotten your question. Do I ever remember that there
was----
Ms. DeGette. The question is: were you ever present when
there were discussions between the board----
Mr. Hellman. Full board.
Ms. DeGette. [continuing] and Mr. Nacchio--or any
subsection of the board, any committee of the board, any
informal group of directors of the board, telling Mr. Nacchio
about the concerns which are raised in the document which you
have seen about the accounting treatments and the ethics?
Mr. Hellman. The December 5 executive session I was
present.
Ms. DeGette. Right.
Mr. Hellman. He was there. The chairman of the committee--I
was there by phone, but I was present for that committee, where
we pointed out our concerns that we wanted him to be more
proactive in demonstrating tone at the top and in forcefully
aligning the organization to the Code of Conduct.
Ms. DeGette. And I assume you were also present at the
September 19, 2001, meeting, because the minutes reflect that.
That is Tab 71. Well, no. Did you have a meeting on September
19? Or was that the one you said got put off until December?
Mr. Hellman. No, I believe--if I could just look to Tab 71.
Ms. DeGette. Yes. That is the one we were talking about
with the CEO evaluation results.
Mr. Hellman. The CEO evaluation dates I believe was going
to be a strategic retreat. It was canceled because of 9/11. I
believe there might have been a September board meeting that
was later in the month, but it was telephonic because of
travel, obviously.
Ms. DeGette. Now, after December 5, you--I mean, you knew
about a lot of the income that was problematic--the $109
million, some of the other transactions which you found out
about later. Between that December 5 meeting and when Mr.
Nacchio was let go in June of this year, do you recall any
other discussions between the board and Mr. Nacchio about the
accounting and ethics issues?
Mr. Hellman. As we went into the first half of 2002, there
was a lot of discussion about IRU accounting.
Ms. DeGette. And was Mr. Nacchio present at those meetings?
Mr. Hellman. Well, he would have been at the board meeting,
and I know that, indeed, the audit committee reported back to
the board, and we would have reported back, and we did report
back our concern--not necessarily concern. The point is that
the IRUs were being, by then, fully investigated. We had hired
outside counsel, which Mr. Nacchio would have been aware of--
actually two, Boyd Schiller and Wilmer Cutler.
They were going through a thorough review. We had received
inquiry from the SEC regarding the accounting, and then that
inquiry had turned into a formal investigation. I believe he
was aware of the investigation and all of the IRUs issues.
Ms. DeGette. And why did you all wait until June 2002 to
terminate his employment?
Mr. Greenwood. This will be the last question.
Ms. DeGette. It is the last question.
Mr. Hellman. I believe that in the backdrop we were also
dealing in an industrial environment. That we--as I had pointed
out, there were issues--there were areas of weakness, or areas
of development I think it is called. But more importantly, the
industry was going through a down turn, and, on the broadband
side, a collapse.
We felt that the skill set that Joe had--and I point to
skills, those things that he had demonstrated over the years he
had been with Qwest, were not necessarily the skills that we
needed going forward in this very different environment, or an
environment more attune to an RBOC than a broadband internet
company, more like, if you will, the conventional US WEST, less
like Qwest.
Is that responsive?
Ms. DeGette. Yes, thank you very much.
And thanks for your comity, Mr. Chairman.
Mr. Greenwood. Certainly. The Chair thanks the gentlelady
and recognizes himself for 10 minutes for inquiry.
Let me go back to you, Mr. Mohebbi, because you and I had a
dialog a little while ago about the side deal and the e-mail
and C&W, and you didn't know that it came from--whether it came
from--you knew it came from your computer, but you don't know
who sent it, and you didn't know why it was sent, and you don't
know why it wasn't a part of the contract, and you don't know
why it took 10 months for the finance folks to find out about
it.
And then I asked you about the Flag side agreement that was
testified--to which we heard testimony last week. And you said
you didn't know about that.
Mr. Mohebbi. Not the specifics of it.
Mr. Greenwood. You don't know about the specifics of that.
And Global Crossing told us last week that they had what they
thought was a binding oral agreement. Do you know about that?
Do you know the details of that?
Mr. Mohebbi. I don't know the details of that. That one I
read in the newspapers, Mr. Chairman, and what I can say is I
have not had direct involvement with Global Crossing executives
on particular transactions. So I would not----
Mr. Greenwood. Okay. Here is what I am struggling with.
Mr. Mohebbi. Yes.
Mr. Greenwood. You are the President and the Chief
Operating Officer of this company. Okay? And these are
transactions that happened in the fourth quarter of 2000, in
the first and second quarters of 2001, in June 2001. It was a
while ago. And why is it that I know more about these
transactions than you do? Why is it that my counsel knows a
thousand times more about these transactions than you are
admitting to?
It would seem to me if, in fact, you knew nothing about
them then, that you don't have a whole lot else to do except to
understand how this company operates, that you would have--if
you didn't know about them then, that by now that you would be
an expert on them, that you would--that this company has been
involved in an investigation of these, an internal
investigation of these matters.
Why are you not an expert? Why are you not fully informed
about the motivation for these side agreements, who conducted
them, what their legal consequences were, what their accounting
consequences were, who was engaged in them? Why do you not know
that as of today?
Mr. Mohebbi. Mr. Chairman, in terms of my responsibilities,
obviously one of the things that I was responsible for is to
ensure that there are processes in the company that took care
of key issues and key transactions.
Mr. Greenwood. Right.
Mr. Mohebbi. Obviously, as we discussed, IRUs are key
transactions.
Mr. Greenwood. Right.
Mr. Mohebbi. And we had processes to take a look at them.
You mentioned the issue of specific transactions and the
contracts, and that there were concerns that were brought up by
our former chief financial officer in this area, and they were
brought up to the board of directors, to the chief executive
officer. I was not in that particular discussion.
And then, as the investigations were going on obviously,
the investigations that were conducted, they were just being
conducted obviously independently. They were going through
everything that was happening and checking the processes per
se.
So I am here to help you as much as possible, and----
Mr. Greenwood. But you are still in charge of processes and
policies, and so forth, are you not?
Mr. Mohebbi. In charge of processes and policies. I am not
specifically in charge of processes and policies. I ensure that
other people are in charge of processes and policies.
Mr. Greenwood. Okay. You ensure that. I got that.
Now, if it were my job----
Mr. Mohebbi. Yes, sir.
Mr. Greenwood. [continuing] to ensure that the processes
and policies of the company were followed, one of the first
things I would have done recently would have been to say,
``What in the heck was going on with those side agreements?''
Mr. Mohebbi. Yes, sir.
Mr. Greenwood. I need to understand, how could an e-mail
mysteriously be sent from my computer? Why would the finance
people not know about this? Whose idea was it to have these
oral agreements? What did they mean? So certainly you would be,
it would seem to me, busy about trying to understand how these
things happened, so that going forward everyone was clear. Have
you done that?
Mr. Mohebbi. I apologize if the--it if looks like, you
know, I wasn't looking at them. In my opening statement, Mr.
Chairman, one of the things that I said was that the
transactions--I personally haven't gone through every
particular transaction in the----
Mr. Greenwood. But these have been the subject of gigantic
scrutiny.
Mr. Mohebbi. Yes.
Mr. Greenwood. I mean, the Congress is scrutinizing these.
The SEC is scrutinizing these.
Mr. Mohebbi. And as----
Mr. Greenwood. The Justice Department is scrutinizing
these. Journalists are scrutinizing these. Employees of the
company are scrutinizing these. Everyone is scrutinizing these
things except you, whose job it is to scrutinize these things.
Mr. Mohebbi. As a result of the increased concerns,
obviously in this particular area of the company, as Mr.
Shaffer and others said, hired a number of outside experts,
legal counsel, accounting experts.
Mr. Greenwood. Have you been consulting with them?
Mr. Mohebbi. They have not, in particular--I have talked to
them, of course. But they have a job to do, which is to get to
the bottom of these particular transactions.
Mr. Greenwood. Is that not also your job?
Mr. Mohebbi. In this particular case, no, it is not my job.
So I haven't been involved, and I haven't been asked to go
through each of these particular transactions.
Mr. Greenwood. Have you turned to these investigators----
Mr. Mohebbi. Yes.
Mr. Greenwood. [continuing] and said, ``In the course of
your investigation, have you figured out how this e-mail flew
out of my computer?''
Mr. Mohebbi. No. But one of the things that I have done
here is since we haven't gotten to the bottom of that, I have
come to you and said, ``I come from the school that says if it
has got my name on it, I am representing the company.''
Mr. Greenwood. Oh, I understand that.
Mr. Mohebbi. The buck stops with me.
Mr. Greenwood. I understand that you take responsibility
for it, but that is sort of like I take responsibility for it.
I----
Mr. Mohebbi. No. No, I said I take full responsibility for
it.
Mr. Greenwood. I understand you take full responsibility
for it, but you don't seem to have a lot of curiosity as to how
it happened, so that you can understand it.
Mr. Mohebbi. It is very important for us, as I have
testified before in terms of other committees, and it was asked
of the company to do an independent investigation of these
transactions. It is very important that that independent
transaction is completed. And I am sure----
Mr. Greenwood. When is that expected?
Mr. Mohebbi. I am not sure. I am not the lead person that
is responsible for the investigations. However, I would like to
add, you asked a particular question----
Mr. Greenwood. It has been a year since this e-mail's
information has been out.
Mr. Mohebbi. I understand that, sir. But, however, there
are a couple of things that I wanted to say. And I included
that in my opening statement, Mr. Chairman, that did I have--
have I had conversations with experts that are working on these
particular transactions? Yes. And as I made the statement in my
statement, I am not aware of a side agreement that has altered
the nature of a particular transaction that we have had with a
particular customer.
And, again, if--one of the things that I have stated in
front of the other committees, as well as your staff, is that
if we find through our independent investigation----
Mr. Greenwood. How long ago did that independent
investigation begin?
Mr. Mohebbi. I am not sure. Oren, you----
Mr. Shaffer. Mr. Chairman, I--at the risk of not knowing
the exact date, but I believe it was February 2002 the board
directed management to----
Mr. Greenwood. This specific e-mail? Because we are told by
the attorneys doing the investigation that they just started to
look at this e-mail in the last couple of months.
Mr. Shaffer. Well, I think----
Mr. Greenwood. Weeks. I am sorry, weeks.
Mr. Shaffer. Right. That could very well be the stage of
the review that they were at in the last couple of months, but
I believe the review began in February 2002.
Mr. Greenwood. All right. Let me--while you have the
microphone, just keep it there, Mr. Shaffer, because I have
some questions for you. You stated just a little while ago that
the reason that Qwest is restating is because you have
concluded that the capacity swapped was not dissimilar but was,
rather, similar.
This has been the core of what we have been trying to
understand about your company, about Global Crossing, and about
others. And that is, whether these swaps were, in fact, done
for business deals, business purposes, or whether they were
done simply to enhance revenue. Okay.
Why has Qwest now determined, and on what basis has Qwest
determined, that these swaps are of similar assets and not
dissimilar assets? How did you come to that conclusion?
Mr. Shaffer. The bright line accounting test, as I said, is
that in order for them to be dissimilar, even though they are
both capacity--communications capacity----
Mr. Greenwood. Right.
Mr. Shaffer. [continuing] one has to be held for resale as
part of a business. And then the fact that you would buy
additional capacity to complete a network would make them
dissimilar.
In order to have dissimilarity, however, you have got to
have a very clear identification of those assets held for sale.
And as we reviewed our policies and our practices on
accounting, we could not reestablish those records that were
separate for these assets that, in fact, were sold.
Mr. Greenwood. So then it seems to me to follow that what
you did conclude was that capacity swaps were made not for
purposes of--consistent with the business plan, but simply to
demonstrate revenue. Is that what you found?
Mr. Shaffer. No, Mr. Chairman. What we found was that we
actually did sell capacity, and we purchased capacity. Our
problem with the accounting was we weren't holding a separate
inventory of the capacity we were selling, but we actually--
they were separate capacity deals, and we received and we gave
capacity.
On the accounting treatment, which is my main focus right
now, trying to get the accounts straight, the accounting
treatment requires that they are very clearly--if I go back, I
have to find the ledger that says these assets are held for
sale. Couldn't find that ledger. And without that bright line
test----
Mr. Greenwood. So what do you conclude was the purpose for
these transactions?
Mr. Shaffer. I have not----
Mr. Greenwood. Why were these transactions undertaken?
Mr. Shaffer. These transactions----
Mr. Greenwood. Why were they undertaken in the times that
they were--timeframes in which they were undertaken?
Mr. Shaffer. My purpose to date has been to review and
focus on the accounting treatment of the transactions. There
are other groups which continue to review other areas and other
subjects around these transactions, and that----
Mr. Greenwood. Well, isn't it--doesn't it pique your
curiosity--has it not piqued your curiosity, as you have
decided very meticulously that this transaction and this
transaction and this transaction did not meet the definition of
dissimilar, that they are similar? Has it piqued your curiosity
as to why those transactions would have been conducted?
Mr. Shaffer. It has definitely piqued my curiosity.
Mr. Greenwood. Have you found ways to satisfy your
curiosity?
Mr. Shaffer. We are in the process of doing that, as I
said, by----
Mr. Greenwood. Have you begun that process?
Mr. Shaffer. That process is underway.
Mr. Greenwood. What have you learned so far?
Mr. Shaffer. I am sorry?
Mr. Greenwood. What have you learned so far with regard to
the motivations behind the transactions that have proven to be
similar, not dissimilar, and, therefore, cannot be considered--
accounted for in the same way? What have you learned so far
about----
Mr. Shaffer. Well, the conclusion we have reached so far is
that the accounting treatment, based on APB 29, which is
dissimilarity, cannot be satisfied. So from an accounting point
of view, we are reversing that revenue from our books.
Mr. Greenwood. I understand that. But you are not----
Mr. Shaffer. And on the other----
Mr. Greenwood. [continuing] responding to my question.
Mr. Shaffer. I am sorry.
Mr. Greenwood. The question is: as you look--as you take
certain transactions and move from them category A to category
B, you say you know what, these are not--don't meet the
definition of dissimilar. In fact, they are similar
transactions. Okay?
As you have looked at those ones that you say we cannot
count this, we are going to restate because of this, what can
you possibly conclude would have been the motivation for
engaging in and transacting a capacity exchange that was
similar? What would be the business purpose of doing that?
Mr. Shaffer. I think there are two things to remember here.
One is that at the time the transactions were originally
recorded, it would appear that the outside audit firm, Arthur
Andersen, reviewing policy and practices, considered these
transactions not to be--not to fail the accounting test, and,
therefore, did have a business purpose. I am now----
Mr. Greenwood. Have you looked at them? Have you said, ``I
have got to take this transaction and move it over here?'' Have
you said to any of your compadres at the company, ``Could
somebody show me the business purpose for this transaction?''
Mr. Shaffer. That is being discussed and reviewed.
Mr. Greenwood. Have you been involved in any of those
discussions or reviews?
Mr. Shaffer. And I have been concentrating on the
accounting issues, but----
Mr. Greenwood. Have you been involved in any of those
discussions or reviews?
Mr. Shaffer. I have not to date, but when they have----
Mr. Greenwood. Do you know anything about those discussions
or reviews?
Mr. Shaffer. I am sorry?
Mr. Greenwood. Do you know anything about those discussions
and reviews? Have you heard anything about whether or not there
was a legitimate business plan to support these transactions?
Mr. Shaffer. I have no readout of that information at this
time.
Mr. Greenwood. Haven't heard anything? No----
Mr. Shaffer. It is not----
Mr. Greenwood. [continuing] water cooler chat about that?
Mr. Shaffer. I don't recall having those discussions. My
discussions, as I say, have been directed entirely to the
accounting treatment. I think it is very important that we get
that issue settled with the SEC. I think it is a gating factor
to go forward.
Mr. Greenwood. So who is investigating? Who is looking at
these transactions? You understand why I am asking you these
questions, don't you? The reason I am asking you these
questions is because I believe that these transactions were not
done pursuant to any business plan. I believe that these
transactions were done in order to book revenue. And that is my
concern about Qwest. That is my concern about Global Crossing.
And I have been--I am in search of the business plan that--
to which--pursuant to which these transactions were made. And
when you tell me that they are similar transactions, it leads
me to believe that maybe my suspicions are correct.
And I see Mr. Nacchio is chomping at the bit, so would you
like to respond?
Mr. Nacchio. Mr. Chairman, I am chomping at the bit. I am
chomping at the bit to try to illuminate your question, because
I have been listening to this conversation. I believe--and I
don't mean to put words in your mouth, so please correct me--
you are asking about business purpose, and Mr. Shaffer is
talking about how our new accountant, who is not abiding by the
Arthur Andersen advice, is asking him to--and I am not there
now, so give me some latitude--is asking him to follow a
certain new set of rules to determine similarity or
dissimilarity.
I think, frankly, I hear you talking by each other. When we
look at that map, and you can ask me any route, I will tell you
the business purpose, I will tell you what budget it was in,
and I will tell you what board meeting we reviewed it.
We were building a global network, and we were building a
network in the U.S. that had the highest characteristics of
reliability. We wanted physical diversity. We wanted power and
space diversity. We wanted to terminate our own traffic to
international points that we were passing to other carriers. We
had very big and important clients requiring global
requirements.
So the business purposes were clear. I have no position,
since I have left, on what they are learning about the
bookkeeping or the accounting. But I didn't want to mislead,
because I still have a strong feeling for this company. We had
business purposes. Had someone brought to me any transaction--
as I said in my opening statement--simply to book revenues, and
it did not match where we were trying to go globally, or what
we were trying to do domestically, we would have killed it.
And I don't want to speak for other people on this panel,
but I believe my senior officers who were doing that day to day
would have done the same.
Now, in terms of accounting and in terms of crossing Ts,
dotting Is, new rules, new FASB rules, what comes out of the
emerging industry task force, I will have to leave that to Mr.
Shaffer since I left.
I hope that was helpful.
Mr. Greenwood. Thank you, Mr. Nacchio.
So, Mr. Shaffer, back to you, would you please explain for
the committee how this investigation, as to the business
purposes of these transactions being conducted, by whom, and
when we would expect the results?
Mr. Shaffer. Mr. Chairman, in spite of the elucidation that
Mr. Nacchio have given us, it seems I am still having a
difficult time making my role clear here. I was not in a
position to discuss any of these transactions with the people
who did the transactions.
Second, I am purely focused at this point in time on
cleaning up, changing, revising, documenting the accounting
treatment. There are groups that are working in other areas of
this review, and if and when they find something that needs to
be reported out, I will be part of the group that they report
it to. And if there are decisions that have to be made on the
basis of that information, I will be part of the group that
makes the decisions.
As of today, the progress that we have made--and I consider
it quite substantial progress--we have taken a look at the IRU
transactions. We have restated two-thirds of them. I have a
time table of finishing the last group within weeks. We feel
that we, in fact, are making good progress here, and we are
getting things done.
Mr. Greenwood. All right. Let me turn back to Mr. Mohebbi
and ask you to look at page--at Tab 72. This is an e-mail from
you to Mr. Joe Dalton dated September 28, Friday, September 28,
2001, at 9:54 p.m. Do you see that?
Mr. Mohebbi. That is correct.
Mr. Greenwood. Okay.
Mr. Mohebbi. Just to a number of people, including Mr.
Dalton.
Mr. Greenwood. Correct. And it says, ``Team, as I am
sitting here in the office at 10 p.m. Friday night, I need your
help. We have issues with almost all deals we have on the
table. We are committing to buy tons of capacity, eating away
my capital expenditure''--you write ``cap ex''--``and, in
return, I am getting very little recognizable revenues. This
must change and change this weekend.''
``We also have completely given up pushing back at anything
and anybody that comes up with yet another opinion to interpret
things differently. I need you guys to mobilize. Since we have
committed''--and then skip down. Here is the list, Cable &
Wireless--``since we have committed to pay them $49 million,
let us at least pick circuit combinations that will allow us to
book more.''
So now this is, of course--you are running down on the end
of the quarter. It is September 28. It is Friday night at 10
p.m.
Mr. Mohebbi. That is correct.
Mr. Greenwood. Probably not going to be able to do much on
Saturday or Sunday before the quarter ends. It looks like you
are trying to figure out how to meet numbers at the end there,
and it also talks about committing to buy tons of capacity,
eating away at your cap ex and getting very little recognizable
revenues. Could you explain what--how we should interpret this
document?
Mr. Mohebbi. I would be happy to. Part of what I do, Mr.
Chairman, is to encourage, to push, to make sure that our
people do the best they can do in terms of making their
targets. Everyone has a goal, a target, and as we went through
in previous e-mails, sometimes people think targets are
impossible, and part of my job is to encourage them to do their
best.
This is certainly one of those instances where I believe I
was briefed, and the way that I generally was briefed is the
number of transactions that were on the table, what were
involved in the particular transactions, which meant what was
it that we were buying, and generally when you are buying there
is capital expenditures involved, and what we are selling.
And I believe that the subcommittee has gone through this
whole issue of buying and selling, and that there is leverage
with people that you are buying from at the time that you are
buying from them. And that has just been part of the industry,
mainly because other people had choices. We had choices. So
certainly you want to take advantage of any leverage in a
competitive market that you may have.
So in this particular case, as I was looking at the summary
of transactions, as it was provided to me, I was not happy with
the balance, I would say, in terms of these particular
transactions. And as you can see, I am providing some feedback
to these people in terms of what I thought would be what they
needed to do in these particular transactions.
I wanted them to look at working with these particular
customers. I wanted them to work within themselves to try to
see what were the best transactions that they could work on for
Qwest.
Mr. Greenwood. The question is: how do you think that the
team would respond to that? I mean, again, the problem that we
are concerned with here, to try to make it very simple, is that
the team, seeing you unhappy, might be engaged in swaps--the
dirty word--to meet the numbers to make you happy, and to lead
the investors, including the investors who were employees of
the company, into believing that, in fact, things were better
than they were, when, in fact, what they were seeing was the
result of your spurring people on to book revenues by virtually
whatever means is necessary?
Mr. Mohebbi. I think it is a good question, and I think
that is why it is important sometimes to have the person to go
with the message, because it gives you the full picture. What I
was doing--and I did--is to make sure that our people did the
best that they could do for Qwest.
If you look--these are a number of transactions. These are
complex transactions. And we were buying, certainly, capacity,
and we were buying it from particular companies. And I wanted
to make sure that they leveraged that particular position that
they had, because that is the best position that you had.
This is the time that I have needs, in terms of capacity
that I need to build a network, and if I can't use that
particular position as I am negotiating on things that other
people need--and we were competing with other people vigorously
to try to win those particular deals--then when is it that you
can be competitive?
Now, there is an important issue that you brought up, and
that is, didn't you think that the people may just take you
literally and do things that--maybe something that I didn't
want to do? And, certainly, I think, again, that--people who
worked with me. These are people that I have e-mailed to that
had worked with me. They know the type of person that I am.
In a particular e-mail, I think maybe it was even in this
particular e-mail, I have mentioned to them that, ``I want you
to do your best, but you cannot cross a particular line. You
cannot do something that is crossing a particular line.'' So I
think that, in that particular case, I was specific, but that
was in general what I was trying to do here.
Mr. Greenwood. Mr. Nacchio, does this look like a business
plan to you?
Mr. Nacchio. I am sorry?
Mr. Greenwood. Does this e-mail reflect business plans at
work?
Mr. Nacchio. This looks like communications between line
people as they occur. I just wanted to add one thing that might
help on your last question. It was--September 10 of this year
is when I had already taken down the numbers and given new
guidance to the markets. So I am not going to suggest I knew
much about this one, because I think your staff has already
asked me about it.
But this is not what you would call a business plan. This
would be an operational----
Mr. Greenwood. The question was whether it reflected a
business plan.
Mr. Nacchio. There are still routes----
Mr. Greenwood. In other words, business--if this were
saying, ``We have customers who want to buy capacity between
such a place and such a place, and let us engage in
transactions so we can meet that demand, and an additional plus
would be that we would book revenues for that.'' That looks
like it is a reflection of a business plan as opposed to a
desperate attempt to book revenues, any revenues, in the waning
2 hours of a quarter.
Mr. Nacchio. Mr. Chairman, how I read this is I am going to
spend capital to finish building my global network. Why don't
they buy anything from us rather than someone else?
Mr. Greenwood. Ms. DeGette, do you have any additional
questions?
Ms. DeGette. Mr. Chairman, I just have one last question to
clear up your previous questions to Mr. Shaffer.
Mr. Shaffer, you said that your job is to take a look at
these deals and fix the accounting treatment. And you said
other people were investigating, within the company, how the
deals came about, and the other issues around that. Who are
those people within the company? So that we can talk to them as
we go on with this investigation.
Mr. Shaffer. There is a group of outside advisors,
accountants and lawyers, that are assigned specific tasks. They
are being coordinated by counsel, internal counsel.
Ms. DeGette. And what is the name of that person?
Mr. Shaffer. It is Mr. Rich Baer.
Ms. DeGette. Okay.
Mr. Shaffer. And their activities are in helping the
company respond to the SEC investigation and the Department of
Justice investigation. And that is what they are doing, and
they are working at that--as far as I know, they are working at
that quite diligently.
Ms. DeGette. And I know you folks have been trying to be
cooperative with this committee. To the best of his legal
ability, will you make Mr. Baer and his team available to us
for future investigation?
Mr. Shaffer. Well, I thank you, Congresswoman, for the
recognition that we have tried to be helpful. We have, and we
will continue to be, obviously. And I see no reason that we
couldn't make people available, if that is what is needed.
Ms. DeGette. Including Mr. Baer, this person who is heading
up the investigation?
Mr. Shaffer. Well, I can check and see very quickly--it
won't take me long--and let you know.
Ms. DeGette. Great. Thank you very much.
Mr. Shaffer. You are very welcome.
Mr. Greenwood. Thank you.
Finally, and we are just about finished here, Mr. Hellman
had raised concerns back in October 2001 that there were few
consequences for cutting corners. The question that I have and
would ask any of you to respond who would like to is: have
there, in fact, as you have gone forward and gotten into these
investigations--have there been repercussions or reprimands or
new policies put in place, so that there are consequences for
cutting corners, for being engaged in some of the conduct that
this committee has found to be so questionable? Anyone who
wants to respond.
Mr. Nacchio. I would like to respond for the time before I
left. In that fourth quarter or third quarter, somewhere in
that period of time, we did find people violating certain
things, and we thought violating the law.
Mr. Greenwood. Such as?
Mr. Nacchio. Passing proprietary information to investment
banks who were passing it to hedge fund managers. We passed it
to the SEC. We passed it to our internal security, to the
Department of Justice. People were fired, and I think people
were prosecuted.
So when we found things, we stepped up to it. We found--
when we found it, when we knew that--the company can provide
evidence of what these cases are. So I can tell you, I didn't
spend my whole day trying to be an ethics cop. I had a lot to
do as a CEO. I also was not deaf to what my board was telling
me when they told it.
But we tried, as best we could in an economy that was
getting tougher and tougher, but there are clear cases where we
found information through our cyber techniques and others, that
were passed on, not just internally in terms of reprimands, but
dismissals, law enforcement authorities, other things.
Mr. Greenwood. Anyone else care to respond to that?
Mr. Shaffer. I would like to make a response, Mr. Chairman.
Mr. Greenwood. Sure.
Mr. Shaffer. Since Dick Notebaert's arrival and my arrival
shortly thereafter, Dick has addressed the area of culture
directly. We have made it very clear that Qwest is to operate
with an open culture. People are supposed to be solicited for
their views. Everything will be done in a transparent manner.
And in order to put a little bit of teeth into those words,
Dick has had probably every 15 days a company-wide review where
people can call in and ask questions. Any questions are good. I
myself have communicated with my finance staff, entire staff,
in such a call also. We also have meetings. Always trying to
instill the idea that a little bit of common sense will usually
guide you pretty well.
And if you have a question about it, you have to have an
environment that allows people to ask that question, to not
accept an answer if they don't believe it is the right answer.
And that is the culture that is being installed right now.
We have had disciplinary actions since my arrival at the
company for activities that were not consistent with what we
believe was the Qwest Code of Conduct, nor to the high
standards that both Dick and I will insist that the company
adheres to. So, yes, there has been, and hopefully we will not
have to do it in the future, because hopefully we don't have a
reason to do it. But if there is something that is wrong, we
will address it directly, we will take corrective action, and
it will not be long to take. It will be quick and correct.
Mr. Greenwood. Any other responses? Mr. Hellman?
Mr. Hellman. Yes, I would like to respond. Have there been
consequences? In the current year, we have a new auditor. We
have a new CEO. We have a new CFO. We have added 25 percent to
the staffing of our internal audit department. We have a
complete controls review underway by KPMG. We have changed the
reporting of finance personnel to the CFO rather than to line
management.
We have instituted routine executive sessions of the board
of directors. We have added additional resources, budget if you
will, to the audit committee. We have increased disclosure and
transparency. All of those actions have been directed by the
board of directors.
So while Oren was speaking about management, I wanted to
make sure that the board had a voice. Those are consequences.
With regard to your, Mr. Chairman, if you will, frustration
on the process of the investigation, I sense that, and I share
that. The investigation started in February. We were told that
it would initially be completed in April. And the scope of the
investigation, because of oversight by the SEC, Department of
Justice, this committee, other committees, has expanded.
Clearly, we have been responsive. We have been cooperative.
We have also been focused first on the accounting issue. That
accounting issue, as Mr. Shaffer said earlier in his testimony,
should be complete in a couple of weeks. At that point, that
investigation is not over. That investigation is ongoing, and
that investigation will look to whether there was any personal
responsibility.
And I think that is the essence of your question, sir. We
are not there yet. We are working on it.
Mr. Greenwood. Thank you. Anyone else?
I want to thank Mr. Hellman, Mr. Shaffer, Mr. Mohebbi, Mr.
Nacchio, for being here. We have asked you a lot of difficult
questions. It is not because we got up cranky this morning. It
is because over the past year we have seen a lot of Americans
lose an awful lot of money, jobs, 401(k)s. There has been an
awful lot of pain caused by some of the conduct of corporate
Americans.
It is our job to understand exactly how that happened and
probe as deeply as we can. Our staff does a spectacular job, I
think, in getting to--into the details of the company, and we
thank you for helping us with our investigation.
The hearing is adjourned.
[Whereupon, at 4:56 p.m., the subcommittee was adjourned.]
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