Bank Sues Ex-Global Crossing Executives

Investment bank J.P. Morgan Chase & Co. has sued Los Angeles financier Gary Winnick and 22 other former officers and directors of Global Crossing Ltd. for $1.7 billion, accusing them of hiding important financial information while running the fiber optic network builder.

J.P. Morgan contends Winnick and others “devised, directed and controlled” a massive scheme to disguise Global Crossing’s poor financial health so the company could get $2.25 billion in loans.

J.P. Morgan was one of several creditors and bondholders that put a total of $12.4 billion into Global Crossing before the carrier, whose executive offices were in Beverly Hills, collapsed nearly two years ago and filed for Chapter 11 bankruptcy protection.

Global Crossing’s spectacular failure wiped out more than $40 billion in shareholder wealth. Winnick, the company’s former chairman, cashed out more than $575 million and spent some of the proceeds to restore a lavish Bel-Air mansion.

A year ago, he put $25 million into escrow to help compensate Global Crossing employees who lost money in retirement plans, which were typically funded with company stock.

To some, the lawsuit underscores the bitter fallout from the misdeeds that have rocked corporate America in recent years. Jacob Frenkel, a former prosecutor and securities enforcement lawyer, said advisors and creditors used to settle their differences with corporate executives over the telephone. Now the courtroom is the main forum.

“What it does is invite a new dimension of distrust in business relationships at their very start,” Frenkel said.

Global Crossing emerged from bankruptcy late Tuesday with $250 million in debt and a new controlling shareholder, Singapore Technologies Telemedia. Under the reorganization plan, a trust created for creditors will pursue other lawsuits and split any money recovered between banks and bondholders.

Global Crossing is not a defendant in the J.P. Morgan lawsuit, filed Oct. 27 in New York state court. The company, based in Bermuda and operated out of New Jersey, disclosed the suit in a Securities and Exchange Commission filing Monday.

Winnick’s lawyer, Gary Naftalis, declined to comment.

In its suit, J.P. Morgan alleges that Winnick and others overstated Global’s revenue from so-called capacity swaps with competitors. Under such a swap, Global would lease space on its 27-nation network to a competitor while at the same time renting capacity from that rival’s network. It would book the lease as revenue but log the rent as a capital expenditure rather than an expense against revenue.

Such swaps were common among telecom companies and were legitimate when there was a good business case to be made for renting capacity on other carriers’ networks. But the swaps became a subject of ongoing federal and SEC investigations. Global Crossing is in settlement negotiations with the SEC, according to regulatory filings.

J.P. Morgan conducted its own review of the business decisions behind more than 20 transactions that Global Crossing used to justify the swaps. The bank concluded that few of the cases from late 2000 through the first three quarters of 2001 gave senior managers the information they needed to determine whether a proposed transaction should proceed.

“Global Crossing’s business cases typically were incomplete and lacked significant data,” the lawsuit claims. “The business cases were so poorly written and lacked so much essential data that Global Crossing executives could not have relied, in good faith, on these business cases in making decisions to engage in large reciprocal transactions.”

In January, investors sued J.P. Morgan, Citigroup Inc. and four other investment banks, alleging that they used false financial data in material that helped Global Crossing issue securities.

Winnick, a former associate of junk bond advocate Michael Milken at now-defunct Drexel Burnham Lambert, founded Global Crossing in 1997 and ran it from an office patterned after the Oval Office.

His plan was to wire the world with fiber optic cable that could carry data, video and voice at speeds faster than DSL or cable modems. But the company overspent on its network and didn’t attract enough customers soon enough to start paying the bills.

Bloomberg News was used in compiling this report.