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

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CAPACITY SWAPS BY GLOBAL CROSSING AND QWEST: SHAM

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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

2

COMMITTEE ON ENERGY AND COMMERCE 

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman 

MICHAEL BILIRAKIS, Florida 

JOE BARTON, Texas 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

PAUL E. GILLMOR, Ohio 

JAMES C. GREENWOOD, Pennsylvania 

CHRISTOPHER COX, California 

NATHAN DEAL, Georgia 

RICHARD BURR, North Carolina 

ED WHITFIELD, Kentucky 

GREG GANSKE, Iowa 

CHARLIE NORWOOD, Georgia 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

JOHN B. SHADEGG, Arizona 

CHARLES ‘‘CHIP’’ PICKERING, Mississippi 

VITO FOSSELLA, New York 

ROY BLUNT, Missouri 

TOM DAVIS, Virginia 

ED BRYANT, Tennessee 

ROBERT L. EHRLICH, Jr., Maryland 

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

CHARLES F. BASS, New Hampshire 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

ERNIE FLETCHER, Kentucky 

JOHN D. DINGELL, Michigan 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

RALPH M. HALL, Texas 

RICK BOUCHER, Virginia 

EDOLPHUS TOWNS, New York 

FRANK PALLONE, Jr., New Jersey 

SHERROD BROWN, Ohio 

BART GORDON, Tennessee 

PETER DEUTSCH, Florida 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT L. ENGEL, New York 

TOM SAWYER, Ohio 

ALBERT R. WYNN, Maryland 

GENE GREEN, Texas 

KAREN MCCARTHY, Missouri 

TED STRICKLAND, Ohio 

DIANA DEGETTE, Colorado 

THOMAS M. BARRETT, Wisconsin 

BILL LUTHER, Minnesota 

LOIS CAPPS, California 

MICHAEL F. DOYLE, Pennsylvania 

CHRISTOPHER JOHN, Louisiana 

JANE HARMAN, California 

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 

CLIFF STEARNS, Florida 

PAUL E. GILLMOR, Ohio 

RICHARD BURR, North Carolina 

ED WHITFIELD, Kentucky 

Vice Chairman 

CHARLES F. BASS, New Hampshire 

ERNIE FLETCHER, Kentucky 

W.J. ‘‘BILLY’’ TAUZIN, Louisiana 

(Ex Officio) 

PETER DEUTSCH, Florida 

BART STUPAK, Michigan 

TED STRICKLAND, Ohio 

DIANA DEGETTE, Colorado 

CHRISTOPHER JOHN, Louisiana 

BOBBY L. RUSH, Illinois 

JOHN D. DINGELL, Michigan, 

(Ex Officio) 

(II) 

3

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) 

(1)

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. 

2

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 

3

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 

4

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 

5

$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 deciVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 W:\DISC\81961 81961
6

sions 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 

7

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. 

8

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. 

9

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 

10

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 

11

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 SarbanesOxley 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. 

12

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 betVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 W:\DISC\81961 81961
13

ter 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. 

14

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. 

15

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 

16

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. 

17

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 fiVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00023 Fmt 6633 Sfmt 6621 W:\DISC\81961 81961
18

nancial 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. 

19

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 engiVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00025 Fmt 6633 Sfmt 6621 W:\DISC\81961 81961
20

neers 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. AsVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00026 Fmt 6633 Sfmt 6602 W:\DISC\81961 81961
21

sisting 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 crossfunctional 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 

22

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 inVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00028 Fmt 6633 Sfmt 6621 W:\DISC\81961 81961
23

quiry. 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? 

24

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. 

25

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? 

26

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 

27

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 unreasonVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 W:\DISC\81961 81961
28

able 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 

29

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 

30

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 

31

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 

32

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 diVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 W:\DISC\81961 81961
33

rectly 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? 

34

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——

35

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? 

36

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 

37

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? 

38

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. 

39

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. 

40

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? 

41

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? 

42

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. 

43

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 

44

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 

45

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. 

46

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 

47

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. 

48

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? 

49

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 

50

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 

51

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——

52

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——

53

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 re ́sume ́ 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. 

54

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. 

55

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 eVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00061 Fmt 6633 Sfmt 6602 W:\DISC\81961 81961
56

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. 

57

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? 

58

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 reveVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00064 Fmt 6633 Sfmt 6602 W:\DISC\81961 81961
59

nues 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 

60

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. 

61

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 

62

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. 

63

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? 

64

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. 

65

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 31⁄2

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? 

66

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. 

67

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.

68

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. 

69

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. 

70

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? 

71

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.’’ 

72

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 

73

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 

74

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-PaVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00080 Fmt 6633 Sfmt 6602 W:\DISC\81961 81961
75

cific 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 

76

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. 

77

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. 

78

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. 

79

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 revVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00085 Fmt 6633 Sfmt 6602 W:\DISC\81961 81961
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enue 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 guarVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00086 Fmt 6633 Sfmt 6602 W:\DISC\81961 81961
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antee 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 

82

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 

83

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 

84

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. 

85

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. 

86

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? 

87

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 

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deed 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 PC1 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——

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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? 

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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. 

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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——

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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 

93

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. 

94

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 

95

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 

96

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 

97

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 email 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 

98

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 

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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 

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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? 

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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? 

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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? 

103

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? 

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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. 

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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:]

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(365)

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 overVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00371 Fmt 6601 Sfmt 6601 W:\DISC\81961 81961
366

sight 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. 

367

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. 

368

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. 

369

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:]

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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 

500

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? 

501

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 

502

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. 

503

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 selfconfidence. 

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. 

504

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 

505

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 

506

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 

507

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. 

508

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. 

509

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 

510

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. 

511

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. 

512

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. 

513

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? 

514

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 

515

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, 

516

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. 

517

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 

518

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. 

519

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. 

520

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. 

521

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. 

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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——

523

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. 

524

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. 

525

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 guidVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00531 Fmt 6601 Sfmt 6602 W:\DISC\81961 81961
526

ance. 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, 

527

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 

528

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 

529

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. 

530

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. 

531

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 busiVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00537 Fmt 6601 Sfmt 6602 W:\DISC\81961 81961
532

ness 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 

533

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. 

534

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 

535

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? 

536

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——

537

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. 

538

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 email? 

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. 

539

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. 

540

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. 

541

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? 

542

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? 

543

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. 

544

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. 

545

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 

546

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. 

547

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. 

548

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. 

549

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? 

550

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. 

551

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 

552

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. 

553

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 

554

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 

555

‘‘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.’’

556

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 

557

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 

558

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 

559

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 

560

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. 

561

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. 

562

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 emails 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 discusVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00568 Fmt 6601 Sfmt 6602 W:\DISC\81961 81961
563

sion, 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 opportu- nities 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 

564

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. 

565

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 

566

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 

567

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 

568

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? 

569

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. 

570

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——

571

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. 

572

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——

573

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. 

574

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? 

575

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 

576

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. 

577

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? 

578

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. 

579

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. 

580

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. 

581

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. 

582

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.——

583

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 defiVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00589 Fmt 6601 Sfmt 6602 W:\DISC\81961 81961
584

nition 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. 

585

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? 

586

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. 

587

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? 

588

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 rightsof-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 

589

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 

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quired 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 

591

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 fiVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00597 Fmt 6601 Sfmt 6621 W:\DISC\81961 81961
592

nancial 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 enVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00598 Fmt 6601 Sfmt 6602 W:\DISC\81961 81961
593

ters 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 email 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 

594

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 longdistance 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 worldclass 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. 

595

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 

596

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 ob- tained $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. 

597

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. 

598

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. 

599

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 

600

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 email 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. 

601

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? 

602

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. 

603

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 

604

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——

605

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 

606

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 

607

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? 

608

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? 

609

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 emails 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 

610

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 execu- tives 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 revVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00616 Fmt 6601 Sfmt 6602 W:\DISC\81961 81961
611

enue 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. 

612

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. 

613

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 

614

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. 

615

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. 

616

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. 

617

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 

618

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. 

619

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. 

620

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 email, 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? 

621

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 

622

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 email 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. 

623

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 

624

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——

625

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 email. 

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 

626

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 revenuegenerating 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. 

627

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? 

628

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 cochairman. 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? 

629

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. 

630

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 

631

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 

632

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? 

633

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. 

634

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? 

635

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 

636

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 AnderVerDate Jan 31 2003 07:51 Feb 26, 2003 Jkt 010199 PO 00000 Frm 00642 Fmt 6601 Sfmt 6602 W:\DISC\81961 81961
637

sen 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? 

638

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. 

639

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 

640

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 

641

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. 

642

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.] 

[Additional material submitted for the record follows:]

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