GLOBAL MESS
Global Crossing Top Brass May Get Off the Hook in Suits
By KATE BERRY
Former employees, shareholders and bondholders of Global Crossing Ltd. are nearing a broad settlement of all civil litigation filed against the bankrupt telecommunications firm, its co-founder, Gary Winnick, and 32 former officers and directors.
One lawyer characterized negotiations as “far along,” but indicated that the “whole thing could blow up at any time.” Several others said a global settlement could be finalized by this fall.
If reached, the proposed deal would grant plaintiffs $200 million in payouts from Global Crossing’s two insurance firms.
It would also include the $25 million, now in an escrow account, that Winnick volunteered to give back to former employees when he testified before a House subcommittee last year.
Beyond that, negotiations are continuing on whether other insiders will have to contribute to the settlement out-of-pocket, given at least $1.5 billion in insider stock sales made prior to the company’s demise.
“Everybody who’s involved in this would like to see Gary Winnick pay more,” said Matthew Fusco, an attorney in Rochester, N.Y., who represents up to 13,000 former employees of Rochester Telephone Co., which was purchased by Global Crossing in 1999.
Winnick operated Global Crossing, now based in Madison, N.J., out of his Beverly Hills base.
The amount of the potential settlement represents a fraction of the money lost by investors and employees when Global Crossing filed for bankruptcy protection in January 2002.
At its peak in 2000, Global Crossing had a market capitalization of $47 billion,at the time higher than Ford Motor Co.,and had raised more than $20 billion in debt and equity in just three years. It employed as many as 25,000 people.
Plaintiff’s lawyers said they want to settle the case because Global Crossing’s insurance policies,with Pender Insurance Ltd., a reinsurance company based on the Isle of Man, and Chubb Group of Insurance Cos. of Warren, N.J.,are “wasting policies,” in which defendants’ legal fees are deducted from the policy.
The longer the litigation, the higher the likelihood that a payout would go to defendants’ lawyers with less money left over for plaintiffs.
Though a handful of lawyers are involved in the negotiations, as many as 70 are required to sign off on any proposed settlement.
Amounts to be received by each class of plaintiff haven’t been determined.
Negotiations have been ongoing for several months after U.S. District Judge Gerard Lynch consolidated several class-action lawsuits filed against the company and its executives.
He appointed Federal Magistrate Judge Michael H. Dolinger in New York to oversee a settlement.
Dolinger has admonished lawyers not to talk about the negotiations.
It is unlikely that any Global Crossing officials will face criminal charges.
Nevertheless, in their combined lawsuit shareholders and employees allege that Winnick, along with 32 other executives and directors, engaged in a massive fraud and deception that cost investors $40 billion even as company officials enriched themselves.
‘Illusory Paper Transactions’
The 328-page document alleges that the defendants touted billions of dollars of “cash” transactions that were “nothing more than illusory paper transactions with no business substance or purpose.”
Many former Global Crossing employees found their 401k retirement plans, loaded with Global Crossing shares, had become worthless.
Others were promised severance packages that were terminated when the company filed for bankruptcy protection in 2002, even though lump-sum payouts were given to top executives.
“We literally have thousands of people who lost their savings, their jobs and their severance and health coverage,” Fusco said.
Shareholder plaintiffs include the Public Employees Retirement System of Ohio, the State Teachers Retirement System of Ohio, the New York state pension system, hedge funds and individual investors such as telecommunications executive Richard Kleinknecht, who lost $127 million.
What distinguished Global Crossing from other financial scandals was the size of the stock sales, which even exceeded insider sales at Enron Corp.
Winnick, who founded Global Crossing in 1997 by buying the distressed undersea cable assets of AT & T; Corp., sold $735 million in stock, while co-founder David Lee sold $118 million worth of stock.
Abbott Brown, a former senior vice president who now runs Ridgestone Corp. in Los Angeles, cashed out $46.5 million worth of shares, while former co-chairman Lodwrick Cook, who still works with Winnick at Pacific Capital Group in Beverly Hills, sold $35 million worth.
Currently, the company and Winnick are under investigation by the Securities and Exchange Commission, which would not comment on any pending litigation.
Many lawyers involved in the current negotiations said a settlement would end most litigation against former executives and directors.
Whistle-Blower
Global Crossing came under scrutiny after a former vice president, Roy Olofson, accused the company of booking so-called “swaps” of capacity with other telecom carriers, giving the appearance of higher revenues in the first half of 2001, just as the company’s underlying results began to flag.
Last year, two Asian companies, Hong Kong’s Hutchison Whampoa Ltd. and Singapore Technologies Telemedia Pte Ltd., sought to rescue Global Crossing from bankruptcy.
After Hutchison Whampoa dropped out, government-owned ST Telemedia continued as a sole buyer.
However, the plan has received opposition from the Defense Department on national security grounds.
Berry is a staff reporter with the Los Angeles Business Journal.
Stung, Winnick Assumes Lower Profile
The two white buildings in Beverly Hills that were the nexus of power for Global Crossing Ltd. co-founder Gary Winnick are a ghost town now.
One entire building has been stripped inside to concrete, wires hanging from the ceiling. An underground gym filled with exercise equipment stands empty.
In the six months since Winnick resigned from Global Crossing he has been keeping a very low profile.
Some friends say he is nursing his wounds.
“I think he was upset about what people said in the press about being characterized as this big greedy CEO,” said Bruce McNall, a former owner of the Los Angeles Kings hockey team who recently served four years in prison for felony fraud.
Winnick, who pocketed roughly $750 million in sales of Global Crossing stock, has so far escaped any criminal charges.
The Securities and Exchange Commission is still investigating whether he sold shares knowing that the company had swapped communications capacity with other networks and booked it as a form of revenue.
Meanwhile, a settlement agreement involving all the civil lawsuits filed by former employees, shareholders and bondholders is being negotiated.
In one of the few public appearances he made after the scandal broke, Winnick announced before a House subcommittee that he would contribute $25 million to offset some of the losses sustained by retirement and 401k plans of former employees.
At the same time, Winnick told the committee he was unaware of Global Crossing’s deteriorating financial condition when he sold $123 million of stock in 2001.
Winnick still has an office at the Beverly Hills complex, even though he sold the building earlier this year to billionaire Tom Gores, who runs Platinum Equity LLC, a private equity firm.
The entrance to Winnick’s own firm, Pacific Capital Group, is behind a locked door that can only be entered with a key card. Last week, its round foyer held two modern art sculptures and bookshelves. On the shelves were stacks of art books and a handful of photographs of Winnick posing with former President Bill Clinton, Gov. Gray Davis and Prince Andrew.
Winnick and his secretary were ensconced somewhere in the building on the empty 2.5-acre campus. He refused to meet with a reporter.
Winnick has avoided the dinners and charity events he used to routinely attend. He still takes meetings and sees a handful of visitors. But he hasn’t jumped on any deals.
“We’re very proud about his philanthropy, and he has continued to honor his commitments,” said Rosalie Zalis, director of the Winnick Family Foundation, whose offices are near Winnick’s.
“We’re not really interested in fueling stories about Gary. He’s a private individual now,” she said.
Those who know him say Winnick spends most of his time with his wife, Karen, a children’s book author. He also has three sons. He continues to live in a 64-room, 23,000-square-foot mansion, which overlooks the Bel Air Country Club.
,Kate Berry, staff reporter with the Los Angeles Business Journal.
