[GOV] Global Crossing...Eat Your Heart Out Enron

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XXXXX DRUDGE REPORT XXXXX WED JAN 30 2002 10:36:09 ET XXXXX

INTRIGUE SURROUNDS $400 MILLION GOVERNMENT AWARD TO GLOBAL CROSSING

**Exclusive**

Last summer the Bush Administration canceled a Defense Department contract valued up to $400 million with the soon-to-be bankrupt GLOBAL CROSSING after question were raised about the bidding process -- a process top-level GOP insiders now suggest was sweetened by players from the previous administration!

GLOBAL CROSSING filed the 4th largest bankruptcy in history this week. Chairman Gary Winnick saw his stock fortune plunge to zero from a high of more than $5 billion.

During his run Winnick showered political players with cash and options, helping DNC head Terry McAuliffe turn a $100,000 stock investment into $18,000,000 in the late 1990s. Winnick gave a million dollars to help build Clinton's presidential library; hosted fundraising dinners for Senator Tom Daschle; gifted thousands of dollars to Rep. Henry Waxman and other key lawmakers on both sides of the aisle.

Six months before Winnick's stunning bankruptcy call -- the United States awarded GLOBAL CROSSING a massive contract, which called for an extensive phone and data network linking more than 6,000 scientists and engineers at far-flung defense test centers, laboratories, universities and industry locations.

The three-year fiber-optic contract, valued at $137 million for the initial phase and more than $400 million if the Defense Department exercised all options, was canceled just a month after it was awarded when serious question were raised about the bidding process.

"We think there's something smelly here," said Ray Bjorklund, vice president of Federal Sources Inc., a market research and consulting firm. "Something was wrong in the award."

Protests were lodged by AT&T CORP., QWEST COMMUNICATIONS INTERNATIONAL INC., SPRINT CORP. and WORLDCOM INC. after a lengthy bidding window, which began during the Clinton administration.

"Flags have been raised all over the place about GLOBAL CROSSING winning this deal," a top congressional source told the DRUDGE REPORT late Tuesday. "It sure looks like someone in high office wanted GLOBAL CROSSING from the git-go."

"The U.S. taxpayers sure are fortunate the Defense Department made a quick reversal," said the congressional source. "[However,] I sure would like to know how a company that was on the verge of bankruptcy got the contract! Spread a little money around? Give some cash to a presidential library, take some folks out to fancy dinners? That's all it took? We've got to take a look at this."

A finance executive at Winnick's CROSSING warned last August -- just weeks after the lucrative Defense Department contract was awarded -- how the company's financial condition was being enhanced with misleading accounting techniques.

The five-page letter, written by the former vice president of finance, contains a detailed analysis of deceptive accounting practices: including inflating revenue and cash-flow figures, numbers that may have helped convince investors and analysts that GLOBAL CROSSING was healthier than it was, the LOS ANGELES TIMES reported in Wednesday editions.

Eat your chart out, ENRON!
 
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From The Washington Dispatch

National
Next Question: How Did McAuliffe Do It?
News Analysis by Ron Rizzo



Jan 30, 2002



No combination of historical stock prices from the initial public offering (IPO) of Global Crossing (NYSE: GX) through 1999, and allowing for maximum margin, renders $18-million from an investment of $100,000. However, that is what the current DNC chair and number one Clinton fundraiser, Terry McAuliffe, accomplished in 1999.

It was reported Monday and confirmed by Chairman of the Democratic National Committee that he—Terry McAuliffe—profited from the undersea communications cable firm that for filed Chapter 11 reorganization Monday.

McAuliffe cashed out his shares sometime in 1999 prior to introducing President Clinton and GC Chairman Gary Winnick. The pair—the President and the Chairman--played golf and Winnick contributed $1-million to Clinton’s presidential library.

From the IPO in August of ’98 through the end of 1999, including a 2 for 1 stock split in Feb. of that year, the lowest share price of the common was $8.00, the highest $64.00. A purchase of 12,500 shares for $100,000, excluding transaction costs, splitting 2 for 1—which doubled the shares into 25,000--and selling at the stock’s all time high of $64.00, would cash out only $1.6-million, again excluding transaction costs. Even if McAuliffe had purchased shares with such extraordinary good fortune on maximum margin, in other words, borrowing another 25,000 shares, the highest possible sale possible would be only $3.2-million, not enough.

However, there are other possibilities. One would be able to profit in a short time period if the stock was owned by McAuliffe in the options market. An option is purchased for a fraction of the cost of the stock itself. Options are highly volatile and are more prone to spectacular losses than gains. It is more probable that he would have lost his initial investment than profit.

More likely, he pulled an Enron. What this means is he was admitted into a private placement that obligated Global Crossings common shares to a leveraged exchange or indebtedness back to the private placement.

Records going back to ’98 and ’99 indicate the possibility of such arrangements. For example in Nov. 1998 the company issued $500-million in unregistered, exchangeable, preferred shares. According to a company release dated Nov. 24, these shares are not registered with the SEC and are therefore purchased and sold under Rule 144A. Therefore any conversion of these shares must be listed with the SEC. McAuliffe’s name does not appear on any 144 lists in an initial, cursory search by the Washington Dispatch.

Yet another possibility is for McAuliffe to have exchanged early private shares, say in ’97, for public shares later. This type of transaction would most likely be reported by the SEC and reported on the Commission’s web site.

Another way to exchange one security for another is with debt. For example, one such vehicle was developed by Goldman Sachs’s Fixed Income Department under New Jersey’s Democratic Senator John Corzine in the early ‘90’s when he headed the department. It’s called Preferred Monthly Income Shares or MIPS. They contain some interesting features. Such offerings can be a debt structure labeled in SEC filings as an asset.

Say a company borrows through its separate entity. The entity, either a preferred offering or a partnership lends money to the parent in exchange for certain payback conditions and privileges outlined in a—literally--secret private placement circular. Dollars come from private investors labeled by the SEC as “accredited.” This investor label requires investors must show a net worth of $1-million or more.

The firm borrows the private placement funds and perhaps matching bank funds. Since the parent firm now has control of the separate entity—actually operating its own lender--although the obligation would normally be listed on the liability side of the balance sheet; since the company has control of the lending unit’s operation, the parent carries the obligation as an asset, pumping up the company to the unknowing investor.

The IRS has failed to successfully challenge this shell game.

The current melt down of the stock market stems from fears that this practice may be widespread. It is being labeled the “Enron Effect,” although, perhaps it would be more accurately labeled the “Goldman Sachs Effect.”

In the case of Enron, for example, a separate entity known as Whitewing is owed by Enron common an estimated $600-million upon a “market trigger,” known only to some board members. The obligation was triggered in Oct. And shareholders never knew of the obligation until an amended SEC form 8-K was filed explaining that all official Enron financial forms from 1997 were inaccurate.

Further, because of provisions of the 1995 Private Securities Litigation Act, spearheaded by former Senator, and then head of the DNC, Christopher Dodd, accounting firms, lawyers and investment firms are nearly immune from liability. Thus accounting firms identified in SEC filings as “Independent Auditors” are also acting as consultants in a clear conflict of interest.
 
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