Case prepared by
Dr. Sarah Stanwick, Auburn University, School of Accountancy
Dr. Peter Stanwick, Auburn University, Department of Management

No part of this case may be reproduced without the consent of the authors.

The authors gratefully acknowledge the receipt of a 2002-2003 Daniel F. Breeden Endowment for Faculty Enhancement Grant.

ABOUT THE COMPANY

Global Crossing, founded in 1997 by Gary Winnick, is a telecommunications firm headquartered in Bermuda, but operates primarily in the United States. The company's network operates in 27 countries and in more than 200 worldwide cities. After a series of accounting irregularities, the company announced it would seek Chapter 11 Bankruptcy Protection on January 28, 2002. Additional filings for its affiliates were made in April and August 2002. The company's plan for bankruptcy reorganization as filed on September 16, 2002. A major portion of this plan included an agreement between Hutchison Telecommunications and Singapore Technologies Telemedia who agreed to buy a majority interest in Global Crossing on August 9, 2002.

Once one of the bright stars on the New York Stock Exchange, listed as GX, Global Crossing faced a plummeting share price. In February 2000, shares were trading around $61.00. By January 2002, immediately before the bankruptcy filing, shares were trading around $.51 a share.

WHAT WENT WRONG?

According to John Legere, CEO of Global Crossing when the company sought Chapter 11 protection, "Ours is a balance sheet issue, not an operational one, and today's actions are intended to directly address this issue. Even with the financial uncertainty we've recently experienced, customers have continued to choose our network over many others. With this restructuring, we'll put financial uncertainty behind us and the power of our network will once again become the primary factor in the minds of our customers" (www.globalcrossing.com). On October 21, 2002, Global Crossing announced that it would restate previous financial statements filed with the Securities and Exchange Commission (SEC).

There were two main problems with Global Crossing's business operations: swap deals and insider trading. The swap deals allowed Global Crossing to show financial health while hiding their true declining health. The restatements require the exchanges between telecommunications carriers to be recorded at historical carryover basis, as required in Accounting Principles Bulletin No. 29. This means that no revenue should be recognized on these exchanges, a practice Global Crossing participated in order to overstate revenues. Management said they relied on the advice of their auditor, the now defunct Arthur Andersen, when recording these exchanges. The SEC said the treatment was not in accordance with generally accepted accounting principles.

The second problem occurring in Global Crossing was that of insider trading. The House Energy and Commerce Committee began investigating possible insider trading by executives, especially Chairman Gary Winnick, in August 2002. Chairman Winnick, who resigned from his position on December 31, 2002, sold approximately $734 million in company stock before the company collapsed. Winnick still held about 75% of his original holdings when the company collapsed. These shares are worth just $5 million (New York Times, February 11, 2002). In May 2001, Winnick sold 10% of his stock for $123 million. Witnesses say Winnick saw a projection of decreased revenues (Washington Post, August 30, 2002). Winnick says he had no knowledge of this information.

In an effort to possibly redeem his credibility with employees at Global Crossing, Winnick told members of the House Energy and Commerce Committee that he would personally contribute $25 million to workers who lost their retirement funds because of the company's collapse. Many say this was a public relations gesture and that it came too late. Winnick maintains that his functions as Chairman were primarily "ceremonial" (The Washington Times, October 20, 2002).

REASONS TO BELIEVE IN GLOBAL CROSSING

On August 12, 2002, the CEO of Global Crossing, John Legere, issued a list of reasons (See Exhibit 1) to believe in Global Crossing in an effort to convince stakeholders that the company was continuing to operate in a business as usual mode. However, these ten reasons provide no assurance to the thousands of employees who have lost value in their 401K plans because they once believed in the company.

Suggested Questions for Discussion:

1. Who are the stakeholders in the case?
2. What are the ethical issues involved?
3. Read APB No. 29. Discuss the implications related to this case.
4. What does the future hold for Global Crossing? Update the case and speculate on the future.

Resources to Consult:

1. January 28, 2002. Hutchison Whampoa Limited and Singapore Technologies Telemedia Pte. Ltd. Plan to Invest $750 Million in Global Crossing. www.globalcrossing.com.

2. January 28, 2002. Global files for Bankruptcy. www.money.cn.com/2002/01/28/companies/globalcrossing.

3. February 11, 2002. How Executives Prospered as Global Crossing Collapsed. Geraldine Fabrikant with Simon Romero. www.nyt.com.

4. May 20, 2002. Enron has Link to Global Crossing. David Barboza with Simon Romero. www.nyt.com.

5. August 10, 2002. Global Crossing to be Sold at Bargain Basement Price. Elizabeth Douglass. The Los Angeles Times, C-1.

6. August 30, 2002. Panel Turns Focus to Founder in Global Crossing Investigation. The New York Times, C-1.

7. October 2, 2002. Global Crossing Chairman Offers Workers $25 Million. The Washington Times.

8. October 21, 2002. Global Crossing to Restate Financial Statements. www.globalcrossing.com.

9. October 22, 2002. Global Crossing to Restate Results. Toronto Star.

10. December 18, 2002. Court Approves Global Crossing Plan. Toronto Star.

11. 2002. Reasons to Believe, One Planet. One Network. A Million Possibilities. www.globalcrossing.com.