Global Crossing

Global Crossing was founded in 1997 and became the fourth-largest bankruptcy in U.S. history just 5 years later in 2002. Specifically, Global Crossing was swapping network capacity with other carriers to artificially inflate earnings and make the company look more profitable than it was. The road to that bankruptcy is a story of revenues inflated by what appears to be fraudulent accounting, in which senior executives enriched themselves while Arthur Andersen served as auditor. Global Crossing employees and shareholders seem to have been left holding the bag, much as in the Enron bankruptcy filed just 2 months earlier.

Global Crossing was the brainchild of Gary Winnick. Winnick was a former junk bond financier who worked with Michael Milken at Drexel Burnham Lambert but escaped untarnished from a 1990s scandal at that firm. Together with a group of financial gurus and chief executive officers, he envisioned a global broadband network that would link continents with undersea fiber-optic cables. This was a risky proposition in 1997 because no such network existed, and no one knew exactly how profitable, or unprofitable, such a network would be. It has always been extremely difficult to forecast the profitability of new services or new technologies, and the Global Crossing proposal was no exception.

Global Crossing faced one, not so small obstacle to executing its business plan: It effectively had no assets, and building such a high-tech, undersea network would be tremendously expensive, of the order of $2.7 billion. Fortunately, Wall Street investors valued the Global Crossing concept highly and offered Winnick and his management team about $40 billion in equity financing and $10 billion in debt financing. Investment analysts gave the stock a “strong buy” rating.

The Global Crossing situation was complicated due to the fact that stock analysts were consistently bullish after the company went public in August, 1998. For example, during the time that Jack Grubman, employed by Salomon Smith Barney, was pushing the stock, Global Crossing executives were selling company stock. The result was millions of dollars of personal income for executives at a time when the business model was falling apart. Chairman Gary Winnick is reported to have sold stock valued at $123 million on May 23, 2001, despite a witness telling a congressional committee investigating Global Crossing that Winnick had seen an April 2001 forecast projecting a drop in revenue of $300 million.

Global Crossing founder and chairman Gary Winnick resigned from the board on December 31, 2002, under pressure from investor groups. Altogether, it appears that Winnick profited by about $734 million from his sales of Global Crossing stock before the company filed bankruptcy. However, he and more than 20 Global Crossing executives and directors face a lawsuit filed in the Federal District Court in Manhattan that consolidates several class-action complaints on behalf of investors who lost billions of dollars on Global Crossing stocks and bonds. Arthur Andersen settled with Global Crossing investors for $25 million for its role in the company's financial failure.

Global Crossing had a market valuation of more than $50 billion, larger than General Motors on paper, and its fiber-optic telecommunications network connected 200 cities in 27 countries. However, it amassed about $12.4 billion in debt establishing its global fiber-optic telecommunications network. Global Crossing's revenues dropped to $2.4 billion in the first three quarters of 2001, down from about $3.8 billion for the same period in 2000. Global Crossing was forced to declare bankruptcy on January 28, 2002.

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