High-speed communications network operator Global Crossing found itself the focus of two federal investigations by the FBI and securities regulators on Friday as the fallout from its huge bankruptcy filing last month worsened.
Federal law enforcement officials said the FBI had launched an investigation into the company, including its accounting practices. Meanwhile, Global Crossing said the U.S Securities and Exchange Commission had also launched a formal probe into the company, after a letter from a former employee alleged it used improper accounting methods that artificially inflated revenues.
Hamilton, Bermuda-based Global Crossing filed for bankruptcy last month in the fourth-largest corporate insolvency in U.S. history.
The company disclosed earlier this week that it was cooperating in a separate U.S. Securities and Exchange Commission probe of allegations of improper accounting at the company.
Global Crossing said Monday it would open its own probe to review a former employee's allegations of improper accounting.
It also said the panel would retain independent counsel and an accounting firm other than Andersen, the company's regular accountants, to review the matter.
Global Crossing's Chapter 11 bankruptcy filing followed similar filings by energy trading giant Enron Corp. and retailer Kmart Corp., both of whose accounting practices have been called into question.
Making matters worse was the discovery, in regulatory filings Friday, that Global Crossing had eased terms on $18 million in loans to two top executives before filing for bankruptcy in January.
In October, the company agreed to eliminate the $10 million outstanding on a $15 million loan made to Chief Executive John Legere, according to Global Crossing's quarterly report with the SEC. It also significantly eased terms on an $8 million loan to former Chief Executive Thomas Casey, according to the filing, which said that if Casey remained with Global Crossing the entire loan would be forgiven.
Separately, Lucent Technologies Inc. said Friday it dropped its case against Global Crossing after reaching an agreement with the telecoms company. Lucent had tried to force Global to immediately accept or reject equipment and network contracts it made with Lucent.
In the letter, dated Aug. 6, 2001, former vice president of finance Roy Olofson alleged that it was improper for Global Crossing to have reported pro forma values for cash revenue and adjusted earnings before interest, taxes, depreciation and amortization because the numbers were not measures of cash receipts or earnings. He also alleged that the amounts were inflated.
After reviewing the letter and consulting outside counsel, Global Crossing said the allegations were without merit. The company also questioned Olofson's motives, saying he had previously threatened to sue the company and has been attempting to negotiate a settlement.
Olofson was fired by Global Crossing on Nov. 30 as part of a move to cut 1,200 jobs. The company said last week it had received a new letter from Olofson saying he would sue for wrongful termination unless a multimillion-dollar payment were made to him by Feb. 1.
Olofson's attorneys have denied Global Crossing's claims. They allege that the company fired Olofson because of his accounting allegations and have said that the law firm is poised to file a lawsuit against Global Crossing any day now.
Legal experts said it was not clear why the FBI had become involved, or whether the investigation was focusing on Global Crossing's accounting or Olofson.
"If a regulatory agency believes they've discovered evidence of criminal activity, they typically advise either the FBI or appropriate local law enforcement immediately," Robert McTamaney, chairman of the corporate legal department with the New York City-based law firm Carter, Ledyard & Milburn.
"The SEC informed us that the investigation doesn't mean that anyone in the company has broken the law and we're confident that they'll determine that the allegations are false," Global Crossings' Yeamans said.
But another expert suggested the FBI might be carrying out routine investigations following Global Crossing's claim that Olofson was just seeking to get money from the company.
"The FBI's general mandate in these kind of cases is not to get into it until after the SEC has concluded its investigations," Martin Pollner, a senior partner with the law firm of Loeb & Loeb in New York, who is also former head of law enforcement for the U.S Treasury department.
"However, if there are allegations of extortion or bribery, the FBI steps in very quickly, that's their jurisdiction."
Reuters contributed to this report.