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Global Crossing Lockdown Stopped Workers From Protecting Pensions

By: Dennis K. Berman
The Wall Street Journal, January 31, 2002

New York -- Global Crossing Ltd. prevented its workers from selling company shares or other assets in their 401(k) savings plans for a total of four weeks during December and January, at a time when its fate was increasingly uncertain.

While this practice is legal, these so-called lockdowns have become a big issue in the wake of Enron Corp.'s collapse. Employees of Enron saw their retirement savings evaporate in part because a lockdown period was ongoing when the Houston energy-trading concern filed for bankruptcy-court protection on Dec. 2. Other companies that have drawn scrutiny for plan lockdowns include network-equipment maker Lucent technologies Inc, of Murray Hill, N.J., Stamford, Conn., paper maker International Paper Inc. and Midland, Mich., chemicals concern Dow Chemical Co.

The Global Crossing disclosure of a lockdown comes as new concerns are emerging about the telecommunications concern's accounting, following published reports of a letter from a former executive who warned in August about what he described as "intentionally misleading" accounting tactics.

From Dec. 14 to Jan. 18, the telecommunications concern's 8,000 employees were in the lockdown, in which the assets of their retirement plans were frozen while Global Crossing made administrative changes, the company says. Global Crossing is based in Bermuda, but operates out of Beverly Hills, Calif. About 6% of the plans' assets were in company stock, according to Global Crossing.

Complaints about the company's 401(k) plan were raised in a conference call that Global Crossing executives held with many of its employees Monday, just after the company filed the fourth-largest bankruptcy case in U.S. history. Employees also raised questions about previous statements made by Global Crossing executives, who said the company was fully funded through 2002. "That's a tough question to address in one sense," said Carl Grivner, an executive vice president running the call, based on a company recording of the discussion. The "business model did not achieve objectives."

In an interview, a Global Crossing spokesman said the company needed the lockdown in order to transfer the assets of the plan to offerings run by Boston fund manager Fidelity Investments from the previous administrators, Putnam Investments, the mutual-fund management unit of Marsh & McLennan Cos., of New York, and New York investment bank Merrill Lynch & Co. "It's a common business practice," said Global Crossing spokesman Daniel Coulter, who added that employees were warned of the change one month before it took effect.

Such 401(k) freezes can be controversial. With such plans in a lockdown when a company is in a precarious state, it raises "a real question of fiduciary responsibility," said Louis Berney, editor of DC Plan Investing, a newsletter covering retirement plans.

Global Crossing's stock already was near a low on Dec. 14, closing at 67 cents. As the company's future looked increasingly unclear, the shares dropped an additional 19% by Jan. 18, opening at 54 cents. The company entered the lockdown period after already having warned that it would be in violation of certain debt covenants on Jan. 1, 2002, at which time banks could have forced the company to seek bankruptcy-court protection. At the time, Global Crossing hoped to get an equity injection and a new deal with its bankers that might forestall bankruptcy. The company did receive a short reprieve from its bankers on Dec. 28, but Monday it announced its bankruptcy filing, after the lockdown expired.

Lockdowns already had caught the eye of Congress, which is expected to examine their use during hearings on retirement plans next week.

Of course, Global Crossing isn't an unfamiliar name in Washington. The company, which donated heavily to both political parties, sought to prevent other companies from gaining regulatory permission to lay undersea fiber-optic cables linking the U.S. to Japan and other countries. It hired Anne Bingaman, a former assistant attorney general at the Justice Department and the wife of Sen. Jeff Bingaman (D., N.M.), to be its chief lobbyist on the issue, paying her about $2.5 million in January to June 1999 alone.

On the Global Crossing conference call, employees sounded upset about the fate of their retirement plans, which once had swelled as the company's stock soared to more than $60 in the spring of 2000. If a restructuring plan announced Monday goes through, the common shares are expected to have no value.

One caller asked how employees are expected to maintain trust in the company's executives after the collapse. Mr.Grivner said trust was "something I've got to re-earn and rebuild confidence as we go forward."

Denise Grika, of Brooklyn Park, Minn., was laid off from Global Crossing in November 2001, holding 2,000 Global Crossing shares. Ms. Grika's six months of severance payments also have been halted in the wake of the bankruptcy filing. "I'm not happy about it," she said, "The company was going great, and then it just dove."

The bankruptcy filing has caused some analysts and investors to raise questions about aggressive accounting of fiber-optic capacity swaps. Global Crossing would sell capacity on its 27-country telecommunications network to other carriers, offering them 20-year contracts. The company would book the revenue upfront as one lump sum and would offer to buy capacity from another carrier. The company would book that cost as a capital expense that would allow it to show large revenue increases with little or no operating expenses. Company officials have countered that such swaps were a common industry practice.

Global Crossing's accounting practices are drawing more interest in the wake of the Enron scandal. Arthur Andersen LLP, which audited Enron's books, was the auditor for Global Crossing and a number of emerging telecommunications concerns. Patrick Dorton, a spokesman for Andersen, said accounting had nothing to do with Global Crossing's failure. The collapse "was a long-expected bankruptcy in an industry where 34 companies filed for bankruptcy in the last year."

Separately, the Los Angeles Times reported Wednesday that Roy Olofson, a former Global Crossing vice president of finance, warned Global Crossing's head lawyer in August of accounting irregularities at the company.

Mr. Olofson's lawyer, Paul Murphy, said in an interview that his client sent a letter to the Global Crossing attorney, stating concerns about the company's accounting for long-term lease agreements. The letter alleged that company executives and investment bankers had "intentionally misled" investors about the company's cash revenue, net earnings and other financial metrics for the three quarters ended June 30, 2001.

Dan Cohrs, Global Crossing's chief financial officer, denied the allegations, saying the company's accounting practices were sound. In addition, Mr. Cohrs said Mr. Olofson is seeking financial gain by drawing a parallel to the Enron situation. Mr. Murphy denied that assertion, adding that his 62-year-old client was dismissed for "blowing the whistle on various practices that were not above board."

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