Global Crossing

Wessex House 45 Reid St Hamilton HM 12 Bermuda Operating Headquarters Beverly Hills California

Bill Carter and Wallace Dawson, two executives in AT&T's submarine group, hatched the idea in the mid-1990's that laying a fiber-optic cable beneath the Atlantic would be the best way to profit from the surge in voice and data traffic between the U.S. and Europe.

Gary Winnick, a native of Long Island with an unremarkable upbringing, a father who ran a restaurant supply business, a degree from local college CW Post, a stint after college as a furniture salesman, stumbled onto the fast track in the early 1970s when he joined Drexel Burnham Lambert. He developed a taste for the high life after he made his way to the Los Angeles office, where he worked on the bond sales desk alongside Michael Milken. While Milken ended up in jail for securities and reporting violations, Winnick escaped Drexel untarnished and founded Pacific Capital Group, an investment firm in Los Angeles.

Winnick and Pacific Capital Group were eager to invest in telecom companies, convinced the sector was set to explode. Winnick sent his partner David Lee to AT&T to talk about business opportunities, and after AT&T sold its submarine unit in 1996, Winnick lured much of the team with big bonuses to form a new company. Global Crossing was founded in 1997, and Winnick put $15 million of his own money into the startup.

Winnick drew on his Wall Street ties to raise money. He contacted an old Drexel associate who had moved to Canadian investment bank CIBC World Markets, where coincidentally his son had begun working only a short time earlier. CIBC didn't appear high in peer rankings of investment banks, was looking to beef up its high-yield business, and so was glad to do business with Winnick. CIBC led the syndication of a $482 million loan to Global Crossing in late 1997 as well as an $850 million round of financing for the telco's first undersea cable four months later.

To make sure Global Crossing was one of the companies everyone wanted, Winnick sought out Salomon Smith Barney's Jack Grubman. 'Jack had great power. If he didn't endorse a deal or a strategic direction, it wasn't going to work,' recalls a former telecom CEO who raised money during the boom. 'But he held you hostage. In order to endorse the deal, he and Salomon had to get a major chunk of the banking business. He was very blatant. He would tell you what his expectations were in terms of investment banking for the firm.'

When Global Crossing went public in August 1998, Salomon and Merrill Lynch led the deal. The fees for the IPO alone totaled nearly $30 million. Winnick came away with 27% of the company, a stake worth $1.4 billion - and the first leg of the network had barely been completed.

Winnick next enlisted Grubman's help to implement the 'growth by acquisition' model used by Grubman's friend Bernie Ebbers at WorldCom. Using Grubman's Salomon as the investment banker, Winnick announced in early 1999 a deal to buy long-distance provider Frontier for $11.2 billion, and two months after that announced an even bigger deal to buy US West for $37 billion. Although Winnick eventually lost US West in a bidding war with Qwest, Global Crossing's stock soared, along with Winnick's wealth and public image. His stake swelled to more than $4.5 billion on paper, and he appeared on the cover of Forbes that spring.

And all the while, buddy Grubman talked up Global Crossing stock. 'The impression that was given around the office was that Grubman was in Winnick's back pocket,' recalls a former Global Crossing employee who worked in the Beverly Hills headquarters. 'If news had to be put in a way that was positive to the company, Grubman would do it.'

By 1999 Winnick had abandoned his plan to raise funds for the network bit by bit. With money there for the asking, he wanted to fund the network all at once and make Global Crossing a real force on the Street. Drawing again on his Drexel heritage, he decided to raise billions by selling - hold on tight now - junk bonds, and Winnick's new investment bank of choice was JP Morgan Chase.

Chase got Winnick by playing up to his weakness for hobnobbing with high society. Maria Elena Lagomasino, co-head of Chase's private banking unit, introduced Winnick to David Rockefeller Sr who took him on a private tour of the Museum of Modern Art. That same year Winnick made Lagomasino one of his personal bankers, and in 2001 he appointed her to Global Crossing's board.

Chase negotiated a $3 billion line of credit in conjunction with Global Crossing's acquisition of Frontier. In 2000 Chase advised Global Crossing on its acquisition of IPC/IXnet. Salomon advised IPC/IXnet and split the $23.3 million in fees for the deal. Overall, Chase's share of the U.S. telecom merger advisory market soared to 17% in 2000 from less than half that the year before.

And Winnick raked it in. In 1998 he made the first of four large sales of Global Crossing stock; others followed in each of the next three years. Besides the $2.8 million in compensation and bonuses Winnick banked during 1999 and 2000, he received various fees through his holding company, Pacific Capital Group. The most remarkable of these transactions involved PCG Telecom, a subsidiary of the holding company.

PCG Telecom's staff consisted of Winnick and three other Global Crossing board members. According to documents filed with the SEC in 1998, Global Crossing signed a long-term consulting contract with PCG Telecom under which the subsidiary would receive an astounding 2% of Global Crossing's gross revenues in return for advice on the development and marketing of the network. In 1997 Winnick and the other three executives at PCG split $7.2 million in fees for arranging financing for the undersea cable - work that in most big corporations falls under the job description of chairman. In March 1998 - before any part of the network was operating - PCG Telecom collected a $2 million advance against future revenues.

On 30 June 1998 Global Crossing canceled the contract, and as compensation PCG Telecom received $135 million in stock.

But Winnick had even more angles. The company's opulent Beverly Hills headquarters are in a building Winnick himself owns through his real estate company North Crescent Realty. Winnick collected $3.8 million from Global Crossing to go toward the $7 million renovation of the offices, which has a room modeled on the White House's Oval Office. Winnick also collects $400,000 a month in rent.

'Gary always talked about getting spiffed for this or that,' recalls a former employee, referring to salesman argot for 'kickback'.

The air finally started coming out of the telecom bubble in the spring of 2000, and Winnick's luck began to change as well. Internet broadband companies imploded, and Global Crossing's stock sank from $61 to $16 by the end of the year.

As Global Crossing's stock continued tumbling through 2001, Winnick fought to keep the company aloft. Telecom carriers, which had been Global Crossing's biggest customers, were beginning to go bust, and business accounts just weren't showing up. So Winnick turned to his competitors - he started using IRUs to fabricate sales.

In a complaint filed in May 2002 in Los Angeles Supreme Court, former Global Crossing employee Roy Olofson charged that $720 million of Global Crossing's $3.2 billion in sales for the first half of 2001 were IRUs.

Investors began to lose faith in Global Crossing, but the joyride wasn't over yet. From 1998 through 2001 the top Wall Street firms earned more than $13 billion in telecom underwriting and investment-banking fees. Telecom IPOs stalled in 2001, but debt issuance actually grew to $120 billion, from $73.4 billion in the prior year, thanks partly to an increase in so-called drive-by bond sales.

Yet by 2001 nearly 11% of telecom companies defaulted on their debt. A number of them filed for bankruptcy, including Winstar, 360networks, and PSINet. The slump hammered the banks. Chase's loan-loss provisions skyrocketed to $3.2 billion in 2001 from $1.4 billion the prior year. In December 2001, when Global Crossing's stock was trading at around $1 a share, the telco met with its creditors - among them JP Morgan Chase and Citigroup. After ponying up more collateral for the banks, Global Crossing won an extension on its credit agreements.

That move held off bankruptcy for about a month, enough time for Winnick and his cohorts to dump their stock. Finally, Global Crossing filed for bankruptcy protection on 28 January 2002. As former employees and investors flock to join lawsuits, and the SEC and the FBI plow through Global Crossing documents, there's more than enough blame to go around.

Some blame the banks, some blame Wall Street, some blame themselves, and everyone blames Gary Winnick.