Wall Street Journal

Global Crossing Courted Union Leaders

Over Two Dozen Presidents Were Urged to Buy Stock During Public Offering

By Tom Hamburger and John Harwood

March 18, 2002

Washington-More than two dozen union presidents were personally invited to buy shares in Global Crossing Ltd as the international telecommunications firm was first offering is stock to the general public.

It isn’t clear how many of the officials took advantage of the 1998 offer, but it nonetheless marks an unusual collaboration between organized labor and one of the nation’s most high-flying companies.

The relationship is getting noticed because of two separate inquiries. The first concerns Global Crossing, which is in bankruptcy protection, and the accounting methods it used. Federal regulators and lawmakers want to know whether certain so-called swap transactions, in which the company traded telecom capacity with other carriers, may have masked the firm’s true financial condition.

Executives from Global Crossing, Qwest Communications International Inc. and perhaps other telecommunications firms have been asked to appear Thursday before a House Financial Services subcommittee, which is looking into whether certain accounting techniques masked the true financial picture of the companies. Global Crossing said its chief executive, John Legere, will attend the hearings. A spokesman for Qwest, which received the subcommittee’s letter late Friday, said the company will “decide [today], after we learn more details, what is the right response to the committee.” WorldCom, which also received the letter Friday, said “we haven’t decided whether or not we’ll be attending it.”

The second inquiry is a federal grand jury seeking information from the union officials, all of whom sat on the board of a union-owned insurance and investment firm, Ullico Inc. about their trading in Ullico stock.

Ullico, formerly known as Union Labor Life Insurance Co., was an early investor in Global Crossing, and its stock rose and fell during the past few years, it was often in tandem with shares in the telecommunication firm.

A federal grand jury based in Washington has subpoenaed individuals from Ullico to described how board members bought and sold the private stock of the labor-owned company. Investigators are asking whether Ullico board members wrote repurchase and sales rules that provided them extraordinary financial benefits not available to other shareholders.

All told, Ullico made a handsome profit-about $300 million, company officials said-on its initial $7.5 million investment in Global Crossing. But the union-owned company didn’t sell all of its Global Crossing holdings. The telecommunications firm’s swift demise last year left Ullico lacking  the financial flexibilty it had previously. That, in part, has lead to a lowering of Ullico’s rating to B-plus from B-plus plus from the insurance rating firm A.M.Best Co.

Global Crossing founders welcomed the union investment, seeing it as helpful in establishing credibility with investors and other telecommunication firms whose support was needed to build trans-Atlantic fiber-optic cables. The relationship was also helped politically, on at least one occasion. In the late 1990s Global Crossing needed the approval of New York State officials to purchase Rochester-based Frontier Telephone Inc. One union that is part of Ullico, the Communication Workers of America, backed the deal, which may have speeded the approval.

Opening shares of Global Crossing were in great demand when the company first went public in August 1998. But union leaders had an inside track, thanks to an invitation passed along by Ullico executives to buy what are known informally as “friends and family”shares of the initial public offering. Such shares are typically offered to investors personally associated with the company. Because Ullico, was an early investor in the nascent telecom firm, its executives were offered a chance to purchase relatively small lots (one thousand shares or less) of IPO stock.

Ullico’s ties to Global Crossing were forged by a former Democratic National Committee official, Michael Steed, who had gone on to be director of investments for Ullico in the early 1990s.

Mr. Steed had lead Ullico investment in several private-capital deals including a Los Angeles real-estate partnership, that involved, among others, Gary Winnick, the California-based financier who would later launch Global Crossing. When Mr. Winnick was looking for investors in Global Crossing in early 1997 he approached Mr. Steed. By that point, Mr. Steed had introduced Mr. Winnick to his friends from his days at the Democratic National Committee, Terry McAuliffe.

Mr. McAuliffe, who is now chairman of the DNC, invested $100,000 of his own money in Global Crossing in those early days, at less than $1 a share. A few months later, also before the IPO, former President George Bush received shares in Global Crossing in lieu of a fee for speaking on behalf of he company in Japan. The early stock held by Messrs. McAuliffe and Bush ballooned to a value of millions of dollars as Global’s share price soared in the late 1990s.

At its high point in the summer of 1999, the stock was trading at $64 a share. It isn’t known how many of Ullico board members chose to buy IPO shares in Global Crossing for $18 a share in August 1998. AFL-CIO chairman John Sweeney recalled being offered the opportunity to do so, but he said through a spokesman that he declined to buy any.

A few months after the initial offering, Mr. Winnick and others in Global Crossing corporate team came to Washington to talk to union leaders. They met first at Ullico headquarters and one executive provided a brief summary of the company’s business plans. They then attended a reception at the Corcoran Museum of Art for the labor leaders and Washington staff of the member unions.

A Global Crossing spokesman said the meeting and the reception were held because Ullico was “an important founding investor.”

AFL-CIO has launched its own inquiry into the purchase and sale of Ullico stock by board members. The labor federation, which is an investor in Ullico, wants to know if any board members benefited improperly from the sale of Ullico stock back to the company  under the rules they wrote for themselves.

Meantime, federal regulators and lawmakers looking into Global Crossing's accounting methods want to know whether certain so-called swap transactions, in which Global Crossing traded telecom capacity with other carriers, may have masked the firm's true financial condition.

Executives from Global Crossing,Qwest Communications International Inc., WorldCom Inc. and perhaps other communications firms have been asked to appear Thursday before a House Financial Services subcommittee, which is looking into whether certain accounting techniques masked the true financial picture of the companies. Global Crossing said its chief executive,John Legere, will attend the hearings.

A spokesman for Qwest, which received the subcommittee's letter late Friday, said the company will "decide (today), after we learn more details, what is the right response to the committee." WorldCom, which also received the letter Friday, said "we haven't decided whether or not we'll be attending it."

-Dennis Berman and Deborah Solomon in New York contributed to this article


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