[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
CAPACITY SWAPS BY GLOBAL CROSSING AND QWEST: SHAM TRANSACTIONS DESIGNED 
                           TO BOOST REVENUES?
=======================================================================


                                HEARINGS

                               before the

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                    SEPTEMBER 24 and OCTOBER 1, 2002

                               __________

                           Serial No. 107-129

                               __________

       Printed for the use of the Committee on Energy and Commerce








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                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
RICHARD BURR, North Carolina         BART GORDON, Tennessee
ED WHITFIELD, Kentucky               PETER DEUTSCH, Florida
GREG GANSKE, Iowa                    BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming               BART STUPAK, Michigan
JOHN SHIMKUS, Illinois               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           TOM SAWYER, Ohio
JOHN B. SHADEGG, Arizona             ALBERT R. WYNN, Maryland
CHARLES ``CHIP'' PICKERING,          GENE GREEN, Texas
Mississippi                          KAREN McCARTHY, Missouri
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
TOM DAVIS, Virginia                  THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee                 BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland     LOIS CAPPS, California
STEVE BUYER, Indiana                 MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California        CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire       JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
ERNIE FLETCHER, Kentucky

                  David V. Marventano, Staff Director
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

              Subcommittee on Oversight and Investigations

               JAMES C. GREENWOOD, Pennsylvania, Chairman

MICHAEL BILIRAKIS, Florida           PETER DEUTSCH, Florida
CLIFF STEARNS, Florida               BART STUPAK, Michigan
PAUL E. GILLMOR, Ohio                TED STRICKLAND, Ohio
RICHARD BURR, North Carolina         DIANA DeGETTE, Colorado
ED WHITFIELD, Kentucky               CHRISTOPHER JOHN, Louisiana
  Vice Chairman                      BOBBY L. RUSH, Illinois
CHARLES F. BASS, New Hampshire       JOHN D. DINGELL, Michigan,
ERNIE FLETCHER, Kentucky               (Ex Officio)
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)











                            C O N T E N T S

                               __________
                                                                   Page

Hearings held:
    September 24, 2002...........................................     1
    October 1, 2002..............................................   365
Testimony of:
    Armstrong, Jackie, Counsel, Global Crossing, Ltd.; Robin 
      Wright, former Vice President of Carrier Sales, Global 
      Crossing, Ltd; Greg Casey, former Executive Vice President 
      of Wholesale Markets, Qwest Communications International 
      Inc.; Susan Chase, Vice President of International 
      Wholesale Markets, Qwest Communications International Inc.; 
      Kym Smiley, former Director of Strategic Negotiations, 
      Qwest Communications International, Inc....................    65
    Crumpler, Lenette, Frontier, a Citizens Company..............   501
    Floyd, Ken, Director of Sales in North America, Flag Telecom.    67
    Hellman, Peter S., Chairman of the Audit Committee, Qwest 
      Communications International Inc...........................   599
    Joggerst, Patrick, former President of Carrier Sales, Global 
      Crossing, Ltd..............................................    14
    Mohebbi, Afshin, President and Chief Operating Officer, Qwest 
      Communications International Inc...........................   592
    Nacchio, Joseph P., former Chairman and Chief Executive 
      Officer, Qwest Communications International Inc............   588
    Olofson, Roy L., former Vice President of Finance, Global 
      Crossing, Ltd..............................................    15
    Shaffer, Oren G., Vice President and Chief Financial Officer, 
      Qwest Communications International Inc.....................   595
    Smith, Paula M., Consultant and former Qwest Employee........   506
    Szeliga, Robin, Executive Vice President, Qwest 
      Communications International, Inc..........................    20
    Winnick, Gary, Chairman of the Board of Directors, Global 
      Crossing Ltd.; Jim Gorton, former General Counsel, Global 
      Crossing Ltd.; Dan Cohrs, Chief Financial Officer, Global 
      Crossing Ltd.; Joe Perrone, Executive Vice President of 
      Finance, Global Crossing Ltd.; and David Walsh, former 
      President and Chief Operating Officer, Global Crossing Ltd.   520

                                 (iii)












CAPACITY SWAPS BY GLOBAL CROSSING AND QWEST: SHAM TRANSACTIONS DESIGNED 
                           TO BOOST REVENUES?

                              ----------                              


                      TUESDAY, SEPTEMBER 24, 2002

                  House of Representatives,
                  Committee on Energy and Commerce,
              Subcommittee on Oversight and Investigations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, James C. Greenwood 
(chairman) presiding.
    Members present: Representatives Greenwood, Stearns, 
Gillmor, Burr, Whitfield, Bass, Tauzin (ex officio), Deutsch, 
Stupak, Strickland, and DeGette.
    Staff present: Jennifer Safavian, majority counsel; Casey 
Hemard, majority counsel; Ann Washington, majority professional 
staff; Kelli Andrews, majority counsel; Tom Dilenge, majority 
counsel; Mark Paoletta, majority counsel; Brendan Williams, 
legislative clerk; Edith Holleman, minority counsel; and Nicole 
Kenner, minority research assistant.
    Mr. Greenwood. Good morning. We welcome our witnesses and 
we welcome our guests. The Chair will recognize himself for the 
purpose of making an opening statement.
    Good morning and welcome to the Subcommittee on Oversight 
and Investigations' first day of hearings on a series of highly 
questionable business transactions involving the Global 
Crossing and Qwest Corporations. In particular, this committee 
is interested in what are referred to in the telecommunications 
industry as ``reciprocal fiber optic capacity transactions,'' 
more commonly known as capacity swaps.
    Ideally, in a globally competitive marketplace, the ability 
of one telecommunications firm to purchase capacity from 
another improves market efficiency and shareholder value by 
eliminating network bottlenecks and reducing redundancies. In 
such cases, a firm that is experiencing increased demand on its 
own network can use such a purchase to meet increased customer 
demand. If on the other hand the telecommunications firm 
purchases increased capacity in a market of shrinking demand, 
that raises serious questions about the underlying rationale 
for such a purpose and in cases where two firms engage in a 
capacity swap in which both firms are confronting shrinking 
markets, that raises further questions as to the business 
motives behind these transactions.
    It is this variety of dubious transactions in which both 
Global Crossing and Qwest engaged that we will examine in the 
course of our hearings. Were these capacity swap transactions 
undertaken to do new business opportunities or were they merely 
designed to provide the appearance of expanding business and 
growing revenues?
    Evidence uncovered by this committee's investigation 
suggests that the latter is true. Confronted with shrinking 
markets and declining business volume, executives at Global 
Crossing and Qwest used capacity swaps to conceal slowing 
growth by booking fictitious revenue.
    The importance of these swaps to the financial image these 
firms were seeking to create becomes clear as we examine the 
details. Global Crossing reported $720 million in cash revenues 
from the sale portion of these capacity swaps in the first and 
second quarters of 2001 alone. At the same time, we have 
acquired Global Crossing documents that suggest a significant 
portion of these transactions were constructed solely to meet 
the company's publicly announced revenue targets. The documents 
suggest that it was less important to the executives 
authorizing these swaps what capacity was actually being 
purchased by Global Crossing as was the perceived need for 
consummating the transaction itself and booking the revenues.
    Documents also suggest that the amount of capacity to be 
purchased and sold in these swaps was remarkably fluid, 
allowing dollar values that could be set as necessary to bridge 
the gap in the firm's ability to meet a particular quarters 
revenue numbers. It was not the value of the transactions 
themselves, but rather the urgency to complete them by the end 
of certain quarters that drove the deals.
    As further evidence of the strategy, we have e-mails 
showing that the sales team was the driving force behind these 
deals, while the network people, those who would know whether 
or not such capacity was needed, questioned the rationale for 
many of these purchases. Moreover, Global Crossing apparently 
continued to engage in these questionable transactions even 
while an internal review was underway to determine how to 
dispose of excess capacity acquired through previous swaps.
    This review subsequently revealed that Global Crossing 
lacked sufficient working capital to incorporate roughly $1 
billion of the purchase capacity into its network. In the end, 
this overextension cost the company dearly as it was forced to 
try to find buyers of this excess capacity for pennies on the 
dollar.
    Global Crossing filed for bankruptcy on January 28, 2002, 
the fourth largest bankruptcy in United States history. As a 
result, its investors, average American families, lost $54 
billion and nearly 10,000 employees lost their jobs.
    As for Qwest, the company reported revenues of more than $1 
billion from network capacity sales in 2001. But as it turned 
out, more than two thirds of those sales were swaps in which 
Qwest simultaneously purchased similar amounts of capacity from 
its purchasers.
    Moreover, documents and interviews make plain that the 
company strategy was to book up front as much revenue from 
these swaps as possible, even though Global Crossing and others 
in the industry generally booked such revenue gradually over 
the life of these long-term contracts.
    To recognize revenue from these swaps up front, the deals 
had to meet certain accounting criteria, such as the inability 
of the purchaser to freely alter the capacity route at a later 
time, which made it harder to get other companies to agree to 
such purchases from Qwest.
    What we've learned in our investigation is that in an 
apparent attempt to circumvent these and other accounting 
criteria, Qwest executives and employees entered into side 
agreements with transaction partners to permit the purchaser 
route flexibility while keeping the finance and accounting 
personnel in the dark.
    We also have discovered that Global Crossing personnel 
agreed to structure these swaps with Qwest in such a manner as 
to permit immediate revenue recognition by Qwest so long as 
Global Crossing received oral promises that the contracts' 
terms would not be enforced.
    Just this past Sunday night, Qwest announced that it was 
going to restate approximately $950 million in revenue that it 
recognized from capacity swaps between June 30, 2000 and the 
end of 2001. These are the very swaps that have been the 
subject of our investigation and investigations by other 
Federal authorities.
    While we do not yet know the specific findings that led to 
this restatement, all Qwest has said so far is that its 
policies and practices did not support the company's prior 
accounting treatment for these swaps. We believe their 
restatements eliminate the significance of the problems we have 
identified.
    Although Global Crossing utilized different formal 
accounting methods for its swaps, its pro forma financial 
reporting which included virtually the full value of the sale 
side of the swaps in its cash revenue and earnings numbers can 
also be said to have misled investors and there are questions 
as well as to whether the Securities and Exchange Commission 
and the Financial Accounting Standards Board were sufficiently 
proactive in dealing with the important issues arising from the 
increased use of such swaps throughout the industry.
    We will seek to address these vital issues more in depth 
during the second day of our hearings into these transactions 
next week.
    Like many other telecommunications firms in the late 1990's 
and the first 2 years of this century, Global Crossing and 
Qwest were confronted with a declining market for their 
products and a glut in telecommunications capacity. By now, 
this has become a familiar, if disturbing story. In the go-go 
1990's when irrational exuberance of the marketplace dictated 
that stocks only increase in value, meeting Wall Street's 
expectations, came to be seen as the paramount duty of all too 
many corporate executives. But that cannot justify what these 
firms seem to have attempted with these swaps any more than the 
bizarre partnerships at Enron, with the ginned up books at 
WorldCom. In every case, these short term efforts at hiding the 
true facts only serve to dreadfully distort the stock market's 
ability to efficiently allocate resources, the critical genius 
of our economy.
    This number obsessed atmosphere also placed employees of 
these companies in untenuous positions. At today's hearing we 
will hear from some of those current and former employees from 
both companies. They have come forward to help us understand 
these transactions in more detail and to grasp the importance 
of these swaps in meeting Wall Street's expectations.
    Some also will describe their concerns with these swaps and 
the efforts they took to raise red flags within the companies.
    Our second day of hearings will allow us to ask the high 
ranking, current and former executives at these companies about 
the legitimacy of the swaps, the impact these swaps had on 
their financial reporting and what, if any, steps they have 
taken to avoid similar situations in the future.
    I welcome all of our witnesses today and I will now 
recognize the ranking member, Mr. Deutsch, for his opening 
statement.
    Mr. Deutsch. Thank you, Mr. Chairman, and thank you for 
holding this very important hearing. It has been 10 months 
since this committee began investigating a string of corporate 
scandals ranging from last year's collapse of Enron to the 
admission of WorldCom that it improperly booked $3.9 billion in 
expenses as capital costs.
    Since then, we have seen the demise of other companies, 
Tyco, Delphi and these companies have unfolded because of 
questionable accounting and misuse of funds by top officers.
    A new sense of responsibility and fear has entered into 
corporate suites and board rooms across America. These scandals 
have been devastating not only to employees, retirees and 
shareholders, but to our Nation's economy. Congress must work 
to reverse this trend of corporate malfeasance until ultimately 
all publicly traded corporations recognize that their duty is 
to all of their shareholders, not just to chief executives and 
other top insiders.
    Today, this committee will be hearing testimony on two 
telecommunications companies where in an effort to keep the 
stock prices high, the chief executives imposed unrealistic 
revenue goals on their sales staffs at the same time the 
industry was facing a glut of fiber optic resources and a sharp 
drop in prices.
    In order to meet these goals, Global Crossing, Qwest and 
others engaged in swaps of fiber optic capacity under which 
each claimed revenues through creative accounting techniques. 
In Sunday's announcement of a $1 billion plus restatement, 
Qwest placed the blame on its accounting firm. What was left 
unsaid, however, is the reason that we're all here today, that 
Qwest and these other companies knowingly entered into many 
deals which they knew had no real business purpose except to 
recognize revenue.
    This committee has reviewed dozens of e-mails in which 
sales staff openly admitted that these deals were for revenue 
recognition. As early as June 2000, Robin Wright of Global 
Crossing wrote to David Walsh, Global president, that her 
``biggest concern about Qwest is buying something we don't 
really need to trade for the revenue.'' This desperate attempt 
to meet the numbers probably reached its lowest point when some 
of the Qwest sales staff made undisclosed oral and written 
representation to several companies' sales staffs that would 
have allowed the portability of the assets that were allegedly 
sold.
    Neither the accountants nor the internal orders were told 
of these agreements. One such agreement was essential to 
sealing a $109 million year end deal which sent from the 
computer of Qwest president, although he claims no knowledge of 
the message and everyone else denies sending it. Although the 
existence of this e-mail has been known for almost a year, the 
company inexplicably has not yet finished its investigation of 
who sent it, how it was sent or even taken affidavits from the 
involved employees. These side agreements, had they been known 
to Qwest accountants would have completely changed the 
accounting and reduced Qwest's revenue by hundreds of millions 
of dollars.
    At Global Crossing, employees tried to carry out two 
opposing directives. The network engineers had been ordered to 
reduce the amount of capital expenditures while the sales 
people were spending it on whatever deals that they could, just 
to book revenue. The culmination of the unraveling of the 
situation is when Global did not know whether or not Qwest was 
trying to sell something that it already had bought.
    Mr. Chairman, the people who will testify today did not set 
out to disrupt the lives of fellow employees, retirees and 
shareholders. However, most made no attempt to step these 
unethical and possibly fraudulent deals.
    As we learned from Enron, Global Crossing and Delphi, Qwest 
and others, corporate abuses demand real solution. It is my 
hope that these hearings will provide the insight needed to 
restore the public's face in their investments. Thank you, Mr. 
Chairman.
    Mr. Greenwood. The Chair thanks the gentleman from Florida 
and recognizes the chairman of the full committee, Mr. Tauzin 
for an opening statement.
    Chairman Tauzin. Thank you, Mr. Chairman, and let me extend 
my warm appreciation again to you, Mr. Deutsch, and to Ranking 
Member Dingell for the extraordinary cooperation and assistance 
in the continuing bipartisan committee investigations into 
corporate responsibility failures. We could not do our work 
without that spirit of bipartisanship and the agreement not to 
politicize these hearings. And again, I want to extend to you 
publicly our compliments, our thanks because Chairman Greenwood 
and I are deeply appreciative that we've been able to make such 
progress because of that. Thank you.
    When we set out to get to the bottom of Enron's financial 
collapse back in November last year, we said we'd pursue the 
facts wherever they might lead. And we did so with the kind of 
stubborn determination that eventually showed the public how 
the deceptive and greedy actions of a few executives could 
bring whole companies down to their knees, destroy employee 
futures, families and bring financial devastation to honest and 
hard working employees and most notably to the whole structure 
by which investors invest in public companies.
    I'm sad to say this threat of greed and deceit in the 
executive suite and the board room seems to have run through 
other once high flying companies as well. The hearing beginning 
this morning will shine a light on the activities of two well-
known telcom firms, Global Crossing and Qwest. And I'm 
disappointed to say the evidence amassed by the committee and 
our joint investigative team raises once again some very 
troublesome questions about the behavior of certain individuals 
entrusted with making the right decisions for a company, its 
employees and for its real owners, the investing community of 
America, the pension funds and the individual investors who 
believe these companies are on the up and up.
    What we have before us today are transactions involving the 
exchange of long-term leases, so-called swaps of fiber optic 
capacity, otherwise known as IRUs, indefeasible rights of use 
that appear to derive from quite the same deceptive impulses 
that drove a handful of Enron executives to destroy that 
company.
    Enron executives' central deception was to engage in 
transactions that were designed to push the debt of that 
company off the books, to hide it from the Wall Street 
investment community, the rest of us who were investing in 
Enron and indeed to give a false picture of the company's 
financial position, all in an effort to prop up its stock 
price.
    Well, today we'll hear a similar set of efforts to deceive 
Wall Street and the American investing community. In this case 
we have evidence that Global Crossing and Qwest executives 
received sham transactions to put revenue on the books, to 
mislead investors and to prevent further drops in their stock 
prices. Interestingly, just last week, Mr. Chairman, Qwest 
announced a $1.4 billion rewrite of its income indicating the 
dimensions of this fraud.
    I think it's important to put it in layman's terms, what we 
discovered here. There is a legitimate thing called an IRU, a 
swap of capacity and there's a legitimate accounting treatment 
of it. If it's real capacity, if it's really swapped, and it 
really occurs and it's specific capacity that's being swapped, 
accountants are allowed to treat that as a capital lease, in 
effect, almost a sale, an account for income, either 
immediately over the term of the capital lease.
    But if there's portability in the deal, if the capacity is 
not really specified, if you can move it around, if it can be 
other places and other times, if there's portability, there's 
flexibility in that deal, generally speaking, that's not a real 
capital lease. That's an operating lease. And what we 
discovered with documents indicating side agreements, side 
agreements that redefined the nature of these swaps conducted 
between Qwest and Global Crossing and some other companies, 
notably FLAG Communications, Cable and Wireless, as well as 
Global Crossing, side agreements which if known to the 
accountants would have led them to believe that there was 
misaccounting going on, that these agreements were not really 
capital leases and should not have produced income on the 
company's books.
    Even worse, Mr. Chairman, we discovered documents 
indicating oral agreements. Now Qwest will deny it, but we have 
documents from FLAG and from Cable and Wireless and Global 
Communications indicating oral agreements, the winks and the 
nods, that these swaps were not really the kind of swaps that 
could be treated as capital leases; the winks and the nods, 
side agreements, either written or oral, that indicated these 
companies were engaged in deception and fraud to try to make it 
look like the company was making money when it really wasn't, 
to put income on the books that didn't exist and to tell 
investors a false story about the progress of these companies.
    We'll also hear a la Enron of employees who tried to warn 
the higher ups that certain deals were inappropriate, who 
worried about wearing orange and black and white stripes, who 
worried about the fact that these deals wouldn't stand the 
light of day, that if the light ever shown on them, folks would 
know that they were fraudulent and deceptive, and yet those 
warnings were ignored.
    Witnesses before us were well aware of the transactions 
under scrutiny today and I'm sure we'll have some dispute about 
what were legitimate business transactions and what were 
basically deceptive ones, but what is undoubtedly clear is that 
we have a case where people within the company thought they 
were deceptive, tried to warn someone about it, and were 
brushed aside.
    Mr. Chairman, our duty is to pursue the facts and the 
evidence and I believe it's essential that our committee 
examine evidence of deceptive practices and behavior which is 
so poisonous to the public trust and the integrity of the 
financial markets.
    Mr. Chairman, you've been dogged in your pursuit of 
corporate responsibility and accountability in these cases and 
I believe that dogged pursuit is eventually going to help us 
restore trust and integrity because companies watching these 
hearings, executives and board members watching these hearings, 
watching the light of day shown on these practices, are going 
to know that they can't do it any more. They've got to be 
honest with investors and they've got to think a little bit 
more about the companies and the employees they destroy when 
they play games like we discovered were being played at these 
two enormously important corporations.
    Thank you, Mr. Chairman. I yield back.
    Mr. Greenwood. The Chair thanks the chairman of the full 
committee and recognizes the gentlelady from Colorado for an 
opening statement for 5 minutes.
    Ms. DeGette. Thank you, Mr. Chairman. I'd like to thank the 
chairman for having this hearing today. Qwest is headquartered 
in my District, Denver, and it employs 15,000 people in 
Colorado, so you can imagine my constituents' interest in this 
matter.
    When I was reviewing the e-mails that form a basis for a 
lot of this hearing, I couldn't help but think about my 
grandmother and how when I was a little girl in Denver, I used 
to go over to her house and in her basement she had one of 
those old black telephones from the 1940's with the really 
heavy handset and you'd pick that telephone up and you'd dial a 
phone number and the person at the other end would answer. And 
what I was thinking about was, isn't that what the phone 
company is supposed to do? And then I was reading these e-mails 
and I was thinking to myself how the industry has changed since 
then, since I was a little girl and how telecommunications, in 
general, has changed. But frankly, how telecommunications' 
essential mission has not changed since that time. And the 
essential mission is really to still help people communicate.
    Now as most of my colleagues know, U.S. West, which is the 
predecessor to Qwest, was created with the break up of Ma Bell 
as one of the baby Bells serving the Rocky Mountain region. 
U.S. West was a solid, profitable and traditional company with 
strong ties in the community. The stock wasn't the most cutting 
edge, but frankly when you picked up the phone to call somebody 
you could get a hold of them and that was exactly the kind of 
company you'd want your grandmother to invest in.
    In June 2000, in the waning days of the go-go internet 
boom, a group of cowboys by the name of Qwest came riding into 
town and they acquired U.S. West. These cowboys promised big 
changes, higher profits, more efficiency, new innovation. They 
plastered the Qwest name in huge blue letters visible day and 
night across two of the biggest skyscrapers in Denver, to show 
their vision. Instead of a traditional telephone company, they 
would turn the new Qwest into a model of the new economy. This 
led, as you might imagine, to a bumpier corporate transition 
than most. The top management changed almost completely. 
Service problems abounded. There were painful layoffs and 
almost a complete halt of corporate charitable giving. This 
corporate culture led to dramatic changes in how Qwest did 
business.
    In the years since Qwest's new management took over, their 
bad business decisions have had a significant impact on our 
local economy, the local work force and the community. And now 
it appears the problems are much worse than simply poor 
business decisions. That's why we're here today.
    What we know is that Qwest engaged in swaps with companies 
like Global Crossing and Enron where each company traded 
capacity with the others. The mere fact that these trades 
occurred is not a problem, but what is a problem is the 
recording of profits from these swaps and the oral side 
agreements that were part of the swaps. As you've heard from 
our Chairman and others, Qwest booked revenues in the same year 
that it received capacity from Global Crossing, yet it recorded 
the expenses over a number of years. This, of course, had the 
effect of artificially inflating Qwest profits.
    In reviewing the e-mails that document transactions one 
thing becomes clear, the Qwest management was not spending its 
time trying to fix all of the problems associated with the 
bumpy takeover. Instead, they were trying to figure out how to 
maximize their book value.
    Now I think that we need to get to the bottom of this. I 
think we also need to look at the role of the Qwest board which 
has been an important issue, with Enron, ImClone and other 
investigations. And here's why this is so essential, even 
though we have all of these problems Qwest is still my local 
telephone company and remains an important part of the 
community. I am heartened to report, Mr. Chairman, that Qwest 
has new leadership and I believe that the new leadership in 
making the $1.4 billion adjustment, in reaching out to the 
community and the employees and the retirees is trying to do 
the right thing. And I hope when you bring the former 
management in, you will also bring the new management in to 
talk about what they're doing. But in the meantime, Qwest has 
more than 50,000 retirees and employees across the United 
States. I want to be confident in this company. I want to be 
confident in the entire telecommunications industry and I think 
that the investors on Wall Street want to have that same 
feeling.
    I look forward to hearing the testimony today, Mr. 
Chairman, and I yield back the balance of my time.
    Mr. Greenwood. The Chair thanks the gentlelady and 
recognizes the gentleman from Kentucky, Mr. Whitfield for 5 
minutes for an opening statement.
    Mr. Whitfield. Thank you, Mr. Chairman, and members of the 
committee, it is imperative that the hearings be held and our 
continuing effort to bring to light the serious problem of 
deception in parts of corporate America.
    Today, we're once again confronted with two companies whose 
business practices are being called into question. I hope we do 
not hear corporate executives pleading ignorance to facts that 
indicate the contrary. Workers raising concerns, but those 
concerns being ignored, all with the same result, bankruptcy, 
thousands of jobs lost nd pensions and retirement funds lost.
    Since our committee first started investigating the issues 
of corporate accounting abuse, the American people have been 
shocked at the deception and lack of concern by senior 
management for employees, for stock holders, for customers, for 
the general public. Employees who went to work every day, put 
in long hours, committed to the company, providing a living for 
their families, hoping to save for the future, buying stock on 
the company, those people did their part, but unfortunately 
senior executives did not do their part. These greedy 
individuals looking out only for themselves and the quick buck 
have shattered the dreams of thousands and have caused alarm 
throughout the country.
    While the Congress, the Justice Department and SEC and 
maybe other governmental agencies will examine the culpability 
of those individuals, I believe we must recognize, as my friend 
from Colorado said, that companies are much more than senior 
executives. As we hear testimony from the witnesses today, our 
goal should be to get the information we need to help ensure 
that these abuses do not happen again. What has happened, has 
happened. We must look to the future and if there is a way to 
save the company, the jobs, the pension funds, the hopes, we 
must pursue it.
    Qwest alone has over 50,000 employees and nearly as many 
retirees. Nobody, of course, benefits from the demise of any 
company, so I look forward to hearing from the witnesses today 
and the questions from my colleagues and I hope that we are 
able to bring measures to light that must be brought.
    Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman from Michigan, Mr. Stupak for 5 
minutes for an opening statement.
    Mr. Stupak. Thank you, Mr. Chairman. Lately we've been busy 
with the debate to create another government agency, the 
Department of Homeland Security. My concerns regarding that 
agency have long been whether there will be someone 
accountable, someone in charge, someone who will accept 
responsibility for the decisions made or to be made. I find 
myself here today asking similar questions. Why is there no one 
accountable? Very few individuals, if any, have stepped forward 
to stop this corporate wrongdoing. How are these companies 
getting way with this? How many hearings will we have to find 
out why American investors and employees are left empty handed 
while corporate executives leave their bankrupt companies 
richer than when they came in?
    What I've heard from Enron and now today Qwest has left me 
stunned. We find corporate America knowingly making 
misstatements and intentionally padding the revenues of their 
companies with blatant disregard for the truth and for facts.
    I have before me this binder of documents, as we all do. 
These documents, has paper upon paper, of select company 
employees who knew they were misleading the public. E-mails 
that put revenues first and actual business need second. 
There's an e-mail right here that's marked ``confidential'' on 
the top. It says here, ``Susan told me Greg is ready to write a 
check for $75 million this quarter for capacity on SAC.'' It 
goes on to say ``what the hell are we going to buy?'' I guess 
I'd ask what the hell is Congress going to do about this total 
corporate mess.
    I believe and I've long advocated that we must repeal the 
1995 Private Securities Litigation Reform Act. I've introduced 
legislation to do just that, to return the legal rights back to 
the American investor by repealing the ill-conceived Private 
Securities Litigation Reform Act of 1995. The Private 
Securities Litigation Reform Act of 1995 has fostered this 
total disregard for ethics, legal and moral responsibility in 
corporate and financial America.
    I have introduced a bill that will repeal the Private 
Securities Litigation Reform Act of 1995 and empower 
shareholders to seek legal redress when they have discovered 
wrongdoing, rather than being prohibited as they are now under 
current law.
    It is no coincidence that the restatement of earnings that 
you will hear about today go back to the passage of the 1995 
act. My bill would also allow shareholders to use the full 
extent of the court system to go after corporate wrong doers. 
It would restore legal liability for those corporate 
executives, auditors, attorneys and others who have abused the 
public trust and corporate trust.
    We must empower the investors to be on the front lines as a 
practical and as a proactive check on the rampant misdeeds that 
have been going on in some corporations.
    These hearings are needed to end an era where corporate 
executives have been operating in the cover of darkness at the 
expense of corporate responsibility and good faith and innocent 
shareholders and employees are being hurt.
    I'd like to thank our staffs, both Democrat and Republican 
staffs for the fine work they've done over the summer. In this 
case, they've been working on the Qwest documents since March 
2002 and helping us and this country understand the lack of 
corporate accountability and responsibility to the American 
people, shareholders and their employees.
    With that, Mr. Chairman, I yield back.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman from Maine, Mr. Bass--New Hampshire.
    Mr. Bass. When did I come from Maine?
    Mr. Greenwood. New Hampshire.
    Mr. Bass. I appreciate the gentleman from Ohio recognizing 
me. Thank you, Mr. Chairman, for holding this hearing and 
building on this subcommittee's impressive record of oversight 
response to crisis in corporate governance accounting 
practices.
    Mr. Chairman, I look forward to today's testimony and I 
remain frankly amazed at the level of duplicity and greed that 
a small amount of people thought they could get away with. It 
reminds in some respects to the events of last week when a 
robber was able to be conned into entering the Capitol Police's 
Central Headquarters in the Longworth Building to reach an ATM. 
How he ever thought he'd get away with that is similar to what 
we seem to be uncovering today.
    But I also am concerned about the fate of what's left 
behind in the wake of all these scandals and earnings 
restatements, layoffs, plummeting equity prices and so on. It's 
important to remember that there are, especially in the case of 
Qwest, real companies and real employees, real retirees, and 
customers who need services, underlying services that are now 
controlled or managed by these companies and we can and should 
vigorously pursue the people involved and they should spend 
real time in real prisons as we have legislated with our 
Corporate Accountability Bill, the Sarbanes-Oxley Bill, but we 
shouldn't through these hearings or anything else, cause more 
harm to those innocent people who have been so affected. These 
companies need to convince their customers, their investors, 
their workers and government regulators that they've cleaned up 
the mess and have worked to get past the problem in a 
sustainable and equitable manner and I assume we'll hear from 
these witnesses about such progress.
    The case before us today warns of this danger more than any 
of the others that have come before us. In Qwest, not just 
another dot com or technology enterprise, but Qwest is, as we 
know, the local telephone company for the whole western part of 
the United States and a failure of bankruptcy of this company 
would have substantially more impact on consumers and we ought 
to keep that in mind as we move forward.
    The problems, I suspect that relate to corporate 
malfeasance are over. This hearing and the others that we've 
held before us, as the chairman mentioned in his opening 
statement, send--serve to send a clear message to current 
corporate executives, that Congress and the Justice Department 
and the American public will not tolerate this kind of behavior 
in the future.
    It is our responsibility to get to the bottom of this 
issue, but do so in such a manner so that we do not jeopardize 
real value that exists today and I yield back to the chairman.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman from Ohio, Mr. Strickland, for 5 
minutes for his opening statement.
    Mr. Strickland. Thank you, Mr. Chairman. Mr. Chairman, the 
reputation of corporate America has been tarnished over the 
course of the past year. We've learned the hard way that 
America's accounting standards are insufficient and that 
American business ethics fall short of the general public's 
expectations. We must not write off the collapse of Enron and 
the unfolding financial turmoil of the telecom sector as the 
growing pains of new industries. Accounting standards must stay 
ahead of the curve in anticipation of the newest developments 
in energy trading and the technological advances of 
communications.
    Yesterday, we learned that Qwest Communications plans to 
restate its financial statements from 2000 and 2001 in order to 
cancel $950 million in sales of capacity swaps. We will hear 
today how those capacity swaps were used in vain to revive a 
dying company.
    In 1999, Qwest's stock doubled in value from $20 per share 
to $40 per share and in 2000, Qwest shareholders experienced a 
heady ride as the stock bounced around between $40 and $60. It 
was during 2000, that investors were fooled into believing that 
Qwest's high stock price was founded on solid business 
practices and good management. Employees bought stock. Pension 
funds bought stock. Americans all over the country prepared for 
retirement by buying Qwest stock for their 401(k) plans and it 
was all a sham. It seems that Qwest engaged in these capacity 
swaps so they could meet publicly announced revenue targets and 
so that its stock price would remain in the clouds with the 
dreams of the company executives.
    Yesterday, Qwest stock closed at $2.79 and the company is 
under investigation, not only by this panel, but by the SEC and 
the DOJ as well. Now many of us are wondering what we can do to 
stem the tide of all this corporate wrong doing. We created a 
new body to set accounting standards in an attempt to change 
business practices inside the companies. We required the 
executives to certify quarterly and annual statements so that 
investors can believe that what they are reading is true, but 
we didn't create a penalty for the companies whose principal 
executives failed to certify reports.
    Later this week I will introduce legislation to do just 
that. My bill will prohibit the Federal Government from 
contracting with a company whose CEO fails to certify periodic 
reports as required by Section 302 of the Sarbanes-Oxley At. It 
would also require the SEC to make public a list of those 
companies who have failed to comply with Section 302.
    I invite all of my colleagues here today to join in co-
sponsoring language that will give executives a reason to think 
twice before they falsely certify their 10-Qs or 10-Ks. Qwest 
is one of a handful of companies whose CEOs and CFOs have been 
unable to verify their companies' SEC filings from the past 
year and it has yet to file a quarterly report for the second 
quarter. Failure to certify periodic reports should make 
investors and customers alike a little wary and I think the 
Federal Government itself should be a little wary of 
contracting with companies who can't abide by the law.
    Today, we will try to get to the bottom of some of these 
shady deals transacted over the past years which make Qwest 
current executives so uncertain of past financial statements.
    Mr. Chairman, there is a malignancy growing within 
corporate America and it is killing the hopes and dreams of 
America's families. I hope we take the strongest possible 
action in this committee and in this Congress. And Mr. 
Chairman, I yield back the balance of my time.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman from Florida, Mr. Stearns, for his 
opening statement.
    Mr. Stearns. Thank you, Mr. Chairman, and of course, like 
my colleagues, I compliment you for having this hearing. It's 
unfortunate that we have to have this hearing. The 
telecommunications sector, of course, has been the hardest hit 
in this downturn in the economy and it's affected, obviously, 
hundreds of thousands of people and they're wondering about 
their jobs, could their jobs have been saved if management had 
been prudent? Had there been better accounting practices, 
disclosure requirements and corporate mismanagement been 
curtailed, and if the board of directors of these companies had 
been responsible, could they have stopped it? These are a lot 
of the questions we need to answer.
    Mr. Chairman, there's a fundamental thought that's going 
through a lot of people, both here in Washington and outside. 
There's been a huge transfer of wealth from investors, men and 
women, the small investors to a clique of management in this 
country and it has happened seamlessly and this is wrong. If 
capitalism is supposed to work, it's going to work, and if free 
enterprise is a key aspect about it, we can't have this 
transfer to 10,000 individuals or a small group of people. 
There has to be in place the requirements, whether it's 
accounting practice, disclosure, transparency, preventing 
corporate mismanagement or making the board of directors more 
responsible because in the end this huge transfer affects every 
man and woman who is looking for retirement and they went under 
the assumption that when their broker, their institutional 
mutual fund made their decision that there was transparency.
    For the 9,000 people who lost their jobs as a result of the 
Global Crossing bankruptcy, most of which they were unaware of 
these improprieties and they've cost them their jobs. The reach 
of Global Crossing debacle into telecommunications is deep by 
some estimates 500,000 jobs and $2 trillion in market 
capitalization and a sector was lost as a direct result of this 
bankruptcy. This is an awesome, awesome thing.
    So Mr. Chairman, I think it's very important that Congress 
give credibility to these hearings by trying to offer solutions 
after it's over. So I urge you and my colleagues that we work 
together, if there's more that can be done. So I look forward 
to the testimony and I thank you for the hearing.
    Mr. Greenwood. The Chair thanks the gentleman and I believe 
that that concludes our opening statements and now I would like 
to introduce our first panel. They are Mr. Patrick Joggerst, 
who is the former President of Carrier Sales for Global 
Crossing; Mr. Roy Olofson, the former Vice President of Finance 
for Global Crossing; and Ms. Robin Szeliga, the Executive Vice 
President for Qwest Communications International. We thank each 
of you for coming. We appreciate your willingness to come and 
testify before us. I think you are aware that the committee is 
holding an investigative hearing and when we hold investigative 
hearings it is our practice to take testimony under oath.
    Do any of you object to giving your testimony under oath 
this morning? Seeing no such objection I would advise you that 
pursuant to the rules of this committee and pursuant to the 
rules of the House, that you're entitled to be advised by 
counsel. Are you advised by counsel this morning, Mr. Joggerst? 
All right, would you identify your counsel by name, please? Is 
your microphone on, sir?
    Mr. Joggerst. Yes, my counsel is here. His name is Lorne 
Cohen.
    Mr. Greenwood. Mr. Olofson, are you represented by counsel? 
You need to push your button on those microphones.
    Mr. Olofson. I am represented by counsel, Mr. Paul Murphy.
    Mr. Greenwood. Good morning, sir. Thank you for being with 
us. And Ms. Szeliga, are you represented by counsel? You have 
to push your button as well.
    Ms. Szeliga. Yes, I am.
    Mr. Greenwood. You have two attorneys and they are?
    Ms. Szeliga. Pardon me, Terry Byrd and Vince Morella.
    Mr. Greenwood. Welcome, gentlemen, we thank you for being 
with us this morning.
    All right, in that case, if you would rise and raise your 
right hand, I will give you the oath.
    [Witnesses sworn.]
    You are under oath. You may be seated and I believe each of 
you has an opening statement that you'd like to make and we're 
going to go from right to left and we're going to begin with 
you, Mr. Joggerst. You are recognized for 5 minutes for your 
opening statement.

  TESTIMONY OF PATRICK JOGGERST, FORMER PRESIDENT OF CARRIER 
   SALES, GLOBAL CROSSING, LTD.; ROY L. OLOFSON, FORMER VICE 
PRESIDENT OF FINANCE, GLOBAL CROSSING, LTD.; AND ROBIN SZELIGA, 
 EXECUTIVE VICE PRESIDENT, QWEST COMMUNICATIONS INTERNATIONAL, 
                              INC.

    Mr. Joggerst. Very good, Mr. Chairman. Good morning, Mr. 
Chairman and members of the subcommittee. My name is Patrick 
Joggerst. I joined Global Crossing in early 1998 following 18 
years at AT&T. I was the twelfth person asked to join the 
company and was involved in marketing and selling wholesale 
products and services since its inception.
    The founders and early employees of Global Crossing share 
da vision of a worldwide fiber optic network. My friends and 
colleagues, together with our suppliers and customers, gave 
that vision life.
    In the early years, demand for global broadband 
connectivity was insatiable. Global Crossing's success 
attracted many competitors with their own financial backers 
eager to replicate Global Crossing's reach.
    In the first three quarters of 2001, Global Crossing's 
stock price started plummeting and recurring revenues failed to 
grow as anticipated. These were the results of the now well-
known glut of fiber optic capacity. However, at the time, I 
continued to believe in the company's future and even suspected 
that the market for global connectivity might rebound. In 
October 2001, I asked the company for additional stock options. 
Unfortunately, my optimism has proven to be incorrect.
    I left Global Crossing at the end of 2001 to pursue new 
opportunities. I have been asked to cooperate with this 
committee and I'm pleased to do so.
    Thank you.
    [The prepared statement of Patrick Joggerst follows.]
  Prepared Statement of Patrick Joggerst, Former President of Carrier 
                      Sales, Global Crossing Ltd.
    Good morning. My name is Patrick Joggerst. I joined Global Crossing 
in early 1998 following 18 years at AT&T. I was the 12th person asked 
to join the company and was involved in marketing and selling wholesale 
products and services since its inception.
    The founders and early employees of Global Crossing shared a vision 
of a worldwide fiber optic network. My friends and colleagues, together 
with our suppliers and customers, gave that vision life.
    In the early years, demand for global broadband connectivity was 
insatiable. Global Crossing's success attracted many competitors with 
their own financial backers eager to replicate Global Crossing's reach.
    In the first three quarters of 2001, Global Crossing's stock price 
started plummeting and recurring revenues failed to grow as 
anticipated. These were the results of the now well-known glut of fiber 
optic capacity. However, at the time, I continued to believe in the 
company's future and even suspected that the market for global 
connectivity would rebound. In October 2001, I asked the company for 
stock options. Unfortunately my optimism has proven to be incorrect.
    I left Global Crossing at the end of 2001 to pursue new 
opportunities.
    I have been asked to cooperate with this committee and I am pleased 
to do so.

    Mr. Greenwood. Thank you, Mr. Joggerst.
    Mr. Olofson, do you have an opening statement?

                  STATEMENT OF ROY L. OLOFSON

    Mr. Olofson. Good morning, Mr. Chairman, Ranking Member 
Deutsch and other members of the subcommittee and Chairman 
Tauzin. I come here today to assist the subcommittee in its 
investigation of Global Crossing, but I'm also here today for 
another very important reason. I come here to begin the process 
of clearing my name. It is very difficult to pick up the 
newspaper day after day and read how Global Crossing and it's 
public relations machine has accused me of being a disgruntled 
employee. It is also very difficult to find out from friends at 
Global Crossing that after spending over 3 years with the 
company, its chairman of the board, Gary Winnick, had the 
audacity to stand up in front of the entire office and call me 
an extortionist. So I am here today not merely to help you in 
the discovery of the truth, I am also here to help me and my 
family get our lives back.
    As the members of the committee may know, I joined Global 
Crossing as Vice President of Finance in 1998. And I was 
Global's fortieth employee. When I joined Global, I brought 
with me over 28 years of senior financial management 
experience. As Vice President of Finance, I was responsible for 
the company's accounting and financial reporting functions, 
including preparation of budgets, consolidated financial 
statements and filings with the SEC. I reported directly to the 
Chief Financial Officer and I built a staff of some 15 to 20 
people.
    This was an incredibly exciting time for the company and we 
all felt very positive about it's long-term potential. At the 
time, our primary product was the sale of capacity known as 
IRUs and we worked closely with both the SEC and the FASB to 
properly understand and account for these transactions.
    We also had substantial assistance from Arthur Andersen and 
in particular its partner, Joseph Perrone, whom you worked 
closely on many issues. In May 2000, Global Crossing hired Joe 
Perrone as Senior Vice President of Finance. My 
responsibilities were then in the process of changing so that I 
was now focusing on streamlining and integrating the operations 
of what now had become an extremely large company, particularly 
after the merger with Frontier Telecommunications in September 
1999.
    In January 2001, I was diagnosed with lung cancer. Shortly 
thereafter, I took a medical leave of absence to allow me time 
for surgery and rehabilitation. While I was on leave, I learned 
that Global was having a difficult time meeting its first 
quarter revenue projections. I later learned that Global 
ultimately was able to meet its numbers, in part, due to some 
large last minute swap transactions.
    I returned to work in early May 2001 and on June 1, during 
discussions with Joe Perrone about my on-going job 
responsibilities, I told Mr. Perrone I was concerned about the 
way the company had accounted for certain transactions in the 
first quarter and that on a conference call with investors and 
financial analysts, Global's CEO Tom Casey said, ``there were 
no swaps in the quarter.'' Mr. Perrone minimized my concerns 
and said that the company was getting out of the IRU business.
    During June and July I again began to hear concerns that 
the company was engaging in last minute swap transactions as a 
means to boost revenues. I received a copy of a document known 
as the sales funnel that indicated that approximately 13 of the 
18 largest IRU transactions completed in the second quarter 
were last minute swaps, were identical or substantially 
identical amounts of cash were being exchanged along with the 
underlying capacity.
    I found it hard to believe that if the substance of these 
transactions were swaps of capacity that the mere expedient of 
round tripping cash would allow the Your Honor to record 
revenue. By mid to late July, Mr. Perrone still had not given 
me any new job responsibilities and I believed that this was 
occurring because of my conversation with him back in June. On 
August 2, on the company's quarterly conference call with the 
financial analysts for the second quarter, I again heard Tom 
Casey state there had been no swaps in the quarter. I became 
deeply concerned because I felt that the statement was 
inaccurate.
    Pursuant to the company's ethics policy, any concerns about 
the propriety of the company's financial reporting was to be 
directed to the Chief Ethics Officer, James Gorton. I therefore 
sent a letter to Mr. Gorton on August 6 which outlined my 
concerns. Shortly after I sent this letter to Mr. Gorton, I 
received a letter from him assuring me that the matter would be 
fully investigated and that as a member of management, I should 
keep this matter confidential. We now know that while the 
company issued a press release in January 2002 stating that my 
concerns had been fully investigated and found to be without 
merit, they had never given a copy of my letter to Arthur 
Andersen and had never interviewed me.
    This investigation was so inadequate that the company has 
since opened a second investigation which is yet to be 
completed.
    I want to end by stressing two points. First, when I wrote 
my letter, I did not know all the facts surrounding these 
transactions, therefore my letter was not designed or meant to 
conclude that I knew that these transactions were shams. 
Instead, it was designed to say that they didn't pass the smell 
test and therefore should be investigated. However, the facts 
that have been made public since that time only seemed to 
further undermine the legitimacy of these transactions. In 
particular, I have reviewed reports that are in this 
committee's possession from Global's engineers that show that 
most of the IRUs Global received through these swap 
transactions are now considered absolutely worthless.
    Apparently, this study was completed in mid-2001 and 
therefore it appears that Global management must have been 
aware of the issue prior to my letter of August 6.
    I have also reviewed the recent pronouncement of the SEC 
which in my opinion fully supports the concept that if all a 
transaction represents is an exchange of capacity, the 
transaction should be treated as such and not be counted as 
revenue.
    As Mr. Timothy Lucas, head of the FASB Emerging Issues Task 
Force said, ``an exchange of similar network capacity is the 
equivalent of trading a blue truck for a red truck. It 
shouldn't boost the company's revenue.''
    Second, I have been characterized in the press as a whistle 
blower and I have even heard my counsel use that term when 
referring to me. I do not see myself that way. I first aired my 
concerns in June 2001. On August 6 I complied with the 
company's ethics policy and wrote my letter to Mr. Gorton. I 
did so because I was concerned that the public was being 
misled. I concluded that regardless of the ramifications, as an 
officer of the company, I had an obligation to express my 
concerns about what I thought was potentially over aggressive 
accounting. At the time, I believed the company would 
investigate my concerns in good faith. I was wrong. Instead, 
they fired me.
    I can honestly say that I never imagined in my wildest 
dreams that my letter would contribute toward putting in motion 
a series of events that has led to my appearance before this 
committee today. That all being said, I welcome the committee's 
investigation and I will do everything in our power to assist 
the committee in its search for the truth, no matter what that 
might be.
    I now invite your questions and I hope that I prove to be 
of service to you.
    [The prepared statement of Roy L. Olofson follows.]
Prepared Statement of Roy L. Olofson, former Vice President of Finance, 
                          Global Crossing Ltd.
    Good morning Mr. Chairman, Ranking Member Deutsch and the other 
members of the Subcommittee on Oversight and Investigations. I come 
here today to assist the Subcommittee in its investigation of Global 
Crossing. But, I also come here today for another very important 
reason. I come here to begin the process of clearing my name. It is 
very difficult for me and my family to pick up the newspaper day after 
day and read how Global Crossing and its P.R. machine have accused me 
of being a disgruntled employee. It is also very difficult to live a 
normal life when television crews lurk at our front door. And it is 
very difficult to find out from friends at Global Crossing that after 
spending over three years with the company, its Chairman of the Board, 
Gary Winnick, has the audacity to stand up in front of the entire 
office and call me an extortionist. So I am here today not merely to 
help you in the discovery of the truth, I am also here to help me and 
my family get our lives back.
    As the members of the Committee may know, I began my career working 
as a CPA for Price Waterhouse. I then became the Vice President of 
Finance for Carter Hawley Hale Stores, where I was responsible for 
accounting, internal auditing, all financial reporting and various 
treasury activities including supervising all public and private debt 
and equity offerings. After twelve years at Carter Hawler Hale, I left 
to become Chief Financial Officer of Fedco, Inc. which was a large 
membership-owned mass-merchandise retail company. By the time I 
departed Fedco fourteen years later, I had risen to the title of 
interim Chief Executive Officer. In 1998, after a brief stint as CFO of 
PIA Merchandise Services, Inc.--a company for which I was responsible 
for all financial reporting to investors and the SEC--I was hired as 
the 40th employee of Global Crossing.
    When I was first hired at Global, I was responsible for the 
company's accounting and financial reporting functions, including 
preparation of budgets, consolidated financial statements and filings 
with the SEC. I reported directly to the CFO and I built a staff of 15-
20 people. This was an incredibly exciting time for the company and we 
all felt very positive about its long term potential. At the time our 
primary product was the sale of capacity known as IRUs and we worked 
closely with both the SEC and the FASB to properly understand and 
account for these transactions. We also had substantial assistance from 
Arthur Andersen and, in particular, its partner, Joseph Perrone, with 
whom I worked closely on many issues.
    In May 2000, Global Crossing hired Joe Perrone as its Senior Vice 
President of Finance. Immediately, he took over the accounting and 
financial reporting functions. Most of the people who previously 
reported to me began to report directly to him. My responsibilities 
changed so that I was now focusing on streamlining and integrating the 
operations of what now had become an extremely large company, 
particularly after the merger with Frontier Telecommunications in 
September of 1999.
    In January 2001, I was diagnosed with lung cancer. Shortly 
thereafter, I took a medical leave of absence to allow me time for 
surgery and rehabilitation. While I was on leave, I learned that Global 
was having a very difficult time meeting its first quarter revenue 
projections. I also learned that Global ultimately was able to meet its 
numbers in part due to some large, last-minute transactions where 
Global swapped IRU capacity with other carriers.
    I returned to work in early May 2001 and began the process of 
getting up to speed on what had happened at the company during my 
absence. One of the things I did was to listen to Global's quarterly 
conference call with financial analysts and the public regarding its 
financial results for the first quarter ended March 31, 2001. During 
the call, one of the analysts asked management whether there had been 
any capacity swaps in the quarter. I was very surprised to hear 
Global's CEO, Tom Casey, unequivocally state that ``there were no swaps 
in the quarter.''
    Both before and after this conference call, I spoke with some of 
the financial analysts in the company. I began to learn that there was 
a general sense of uneasiness about these swap transactions and in 
particular about a transaction with 360 Networks. Through discussions 
with various people, I learned that 360 Networks and Global Crossing 
had entered into a last-minute transaction wherein Global booked $150 
million in Cash Revenues even though it had not received a penny in 
cash. While the transaction originally called for Global Crossing to 
pay $200 million to 360 Networks and then for 360 Networks to pay 
Global Crossing $150 million, I was told only the net amount of $50 
million changed hands. It was rumored that the gross amount of cash did 
not actually change hands because Global Crossing was concerned that 
360 Networks was about to file bankruptcy and that, if it sent the 
additional $150 million, 360 Networks might declare bankruptcy in the 
interim and would therefore not be able to return the $150 million to 
Global Crossing.
    At about this same time, I was speaking with Dan Cohrs about my 
responsibilities within the company. He told me that the company needed 
someone to manage its working capital and that might be an appropriate 
role for me. He asked me to speak with Joe Perrone who was scheduled to 
be in town May 31 and June 1. I met with Joe on both days. During those 
meetings, Joe suggested several new responsibilities that I might 
assume for the company. As these responsibilities would require me to 
spend significant time at Global's offices in New Jersey, we discussed 
travel and housing allowances and related issues. At the end of our 
meeting on the second day, we were at a restaurant after which Mr. 
Perrone was scheduled to go to the airport to catch a plane back to New 
Jersey, which was where he was based. Near the end of our meeting, the 
subject of the conversation changed to the financial condition of the 
company. I took the opportunity to express my concerns about Tom 
Casey's statement in the quarterly conference call that there had been 
``no swaps'' in the first quarter, when in fact there appeared to have 
been a significant number and a substantial dollar amount of swap 
transactions. I also told him there were a number of people in the 
office concerned about the accounting for those swap transactions, 
particularly the inclusion of $150 million cash relating to the 360 
Networks transaction in cash revenue and adjusted EBITDA when no cash 
was received.
    Mr. Perrone attempted to brush off my concerns. He stated that he 
had added some language to Global Crossing's press release regarding 
purchase commitments and that he interpreted the question from the 
analyst to which
    Mr. Casey responded as referring only to transactions called 
``Global Network Offers'' and not to capacity swaps. He also said the 
company was getting out of the IRU business. I told Mr. Perrone that I 
disagreed with this interpretation and I also told him that the 
additional language was vague and that analysts and investors would not 
understand the ramifications of the brief mention of purchase 
commitments.
    It was clear that Mr. Perrone did not appreciate my comments and 
didn't want to talk about it anymore. He was visibly upset. He said he 
had to leave to catch his plane. He then turned to me and said that the 
Executive Committee was meeting on June 4th and 5th to discuss layoffs 
of 50 management personnel and that I should call him on June 6th to 
learn the results of the meeting. He said he would have to justify my 
position. He then picked up his bag and walked to the waiting limousine 
without saying another word.
    I was absolutely shocked. Prior to discussing my concerns, our 
conversations regarding my responsibilities within the company were 
very positive and constructive. When I went on my medical leave, I 
received an email from Tom Casey encouraging me to ``hurry back'' 
because I was ``a valuable member of the team'' and that they needed my 
assistance. It had been rumored that the company was considering 
layoffs but I had no idea that it would include me. In addition, Mr. 
Perrone's comments made absolutely no sense to me in light of the fact 
that we had just spent two days delineating my future job 
responsibilities.
    On June 6, 2001, I called Mr. Perrone as he had instructed but I 
was told that he was ``unavailable.'' By June 21, 2001, I still had not 
heard from Mr. Perrone, so I spoke to Dan Cohrs about it. Mr. Cohrs 
told me that Mr. Perrone had been busy but that he would have Mr. 
Perrone call me. It just so happened that when I walked into Mr. Cohrs' 
office, he was working on a press release. Given that I knew the first 
quarter had been difficult, I asked whether the press release was to 
reduce guidance for the rest of the year. Dan Cohrs stated, ``I would 
like to, but the Chairman had just sold 10 million shares of stock.'' 
Mr. Cohrs added that Global's management had advised the Board of 
Directors earlier that month that Global Crossing was considering 
lowering its guidance forecasts for the year but they were still 
reviewing the numbers. He also volunteered that the company had 
recently decided to indirectly guarantee or ``back-stop'' margin loans 
to certain officers, and that he hoped the price of Global's stock 
would increase because this would have to be disclosed in Global's next 
proxy statement.
    During June and July, I again began to hear concerns that the 
company was engaging in last minute ``swap'' transactions as a means to 
boost revenues. At one point, I received a copy of a document known as 
a ``sales funnel'' that indicated that approximately 13 of the 18 
largest IRU transactions completed in the second quarter were last-
minute swaps where identical or substantially identical amounts of 
money were being exchanged along with the underlying capacity. There 
was one set of columns labeled ``CASH IN'' and one labeled ``CASH 
OUT.'' Assuming the swaps of capacity had some business justification, 
I did not understand why they weren't simply accounted for as like-kind 
exchanges of assets. If the substance of the transactions were swaps of 
capacity, I found it hard to believe that the mere expedient of 
roundtripping cash would allow the parties to record revenue.
    By mid to late July, I still had not heard from Mr. Perrone and no 
one at the company was communicating with me on any meaningful basis; 
and I was given virtually no responsibilities. I believed that this was 
occurring because of my conversation with Mr. Perrone back in June. On 
August 2, 2001, I listened in to the company's conference call with 
financial analysts and the public regarding the financial results for 
the second quarter ended June 30, 2001. Again, I heard Tom Casey state 
that there had been no swaps in that quarter. I became deeply concerned 
because I felt that the statement was inaccurate. Pursuant to the 
company's ethics policy, any concerns about the propriety of the 
company's financial reporting was to be directed to the company's Chief 
Ethics Officer, James Gorton. I therefore sent a letter to Mr. Gorton 
on August 6th, which outlined my concerns.
    Shortly after I sent this letter to Mr. Gorton, I received a letter 
from him assuring me that the matter would be fully investigated and 
that, as a member of management, I should keep this matter 
confidential. We now know that while the company issued a press release 
in January 2002 stating that my concerns had been fully investigated 
and found to be without merit, at that point in time they had never 
given a copy of my letter to Arthur Andersen and had never interviewed 
me. This investigation was so inadequate that the company has since 
opened a second investigation which has yet to be completed.
    I want to end by stressing two points. First, when I wrote my 
letter, I did not know all the facts surrounding these transactions. 
While I knew what Global was selling, I had no idea what Global was 
buying. That is important because it could dictate how the transactions 
should be accounted for. Therefore, my letter was not designed or meant 
to conclude that I knew that these transactions were shams; instead, it 
was designed to say that they didn't pass the smell test and should 
therefore be investigated. However, the facts that have been made 
public since that time only seem to further undermine the legitimacy of 
these transactions. In particular, I have reviewed reports that are in 
this Committee's possession from Global's engineers that show that most 
of the IRUs Global received through these swap transactions are now 
considered absolutely worthless. Apparently, this study was completed 
in mid-2001 and therefore it appears that Global management must have 
been aware of the issue prior to my letter of August 6th. I have also 
reviewed the recent pronouncement of the SEC which in my opinion fully 
supports the concept that if all a transaction represents is an 
exchange of capacity, the transaction should be treated as such and not 
be counted as revenue. As Mr. Timothy Lucas, head of the FASB Emerging 
Issues Task Force said, ``An exchange of similar network capacity is 
the equivalent of trading a blue truck for a red truck, it shouldn't 
boost a company's revenue.''
    Second, I have been characterized in the press as a 
``whistleblower'' and I have even heard my counsel use that term when 
referring to me. I do not see myself that way. Rather, I see myself as 
simply an officer of the corporation who was merely attempting to do 
his job. I first aired my concerns with Joe Perrone in June 2001. On 
August 6, I complied with the company's ethics policy and wrote my 
letter to Mr. Gorton. I did so because I was concerned that the public 
was being misled. I concluded that, regardless of the ramifications, as 
an officer of the company, I had an obligation to express my concerns 
about what I thought was potentially over-aggressive accounting. At the 
time, I believed the company would investigate my concerns in good 
faith. I was wrong. Instead, they fired me. I can honestly say that I 
never imagined in my wildest dreams that my letter would contribute 
toward putting in motion a series of events that has led to my 
appearance before this Committee today. However, had I not written my 
letter, I suspect I might be sitting here trying to answer questions as 
to why I didn't express my concerns.
    That all being said, I welcome the Committee's investigation, and I 
will do everything in my power to assist the Committee in its search 
for the truth--no matter what that may be. I now invite your questions 
and hope that I prove to be of service to you.

    Mr. Greenwood. Thank you, Mr. Olofson. You have already 
proven to be of great service to us and to your country. And we 
thank you for your presence.
    Ms. Szeliga, do you have an opening statement?
    Ms. Szeliga. Yes, I do.
    Mr. Greenwood. You are recognized for 5 minutes. I would 
suggest that you bring the base of that microphone right in 
front of you and speak directly into it. There you go. Thank 
you.

                   STATEMENT OF ROBIN SZELIGA

    Ms. Szeliga. Thank you, Mr. Chairman and members of the 
subcommittee. My name is Robin Szeliga. I was the Chief 
Financial Officer at Qwest for approximately 15 months, from 
April 2001 until early July 2002. I am currently an Executive 
Vice President in charge of real estate and procurement for 
Qwest.
    While I served as CFO, I reported to CEO Joseph Nacchio, 
and worked closely with the Audit Committee of the Board of 
Directors. I headed a CFO organization that was comprised of 
nearly 4000 people. Qwest was faced with many important 
challenges during my tenure as CFO. Among those challenges were 
the integration of U.S. West, a Regional Bell Operating Company 
with which Qwest had recently merged; the restructuring of the 
organization and the management team at Qwest following the 
merger; the reentry by Qwest into the long-distance telephone 
market; and the ask of improving telephone service in the 14-
State region previously served by U.S. West.
    As CFO, I was ultimately responsible for Financial Planning 
and Analysis, Financial Operations, Treasury, Internal Audit, 
Tax, Procurement, Corporate Strategy, Billing, Credit and 
Collections, and the Controllership, including accounting 
systems support, technical accounting, financial reporting, 
payroll, and accounts payable. Assisting me in these 
responsibilities were various talented and very dedicated 
people, including the Controller and the Assistant Controller. 
They, in turn, had staffs which included accountants who were 
responsible for various technical accounting issues. I relied 
on, and at times worked with, this team of experienced 
accountants to analyze accounting requirements and apply them 
to specific transactions. The technical accounting group and I, 
in turn, relied on the accuracy of information provided to us 
by those who worked on various transactions for which we 
accounted. These included personnel in management and in the 
engineering and operations departments, various personnel in 
business unit and sales organizations,and finance personnel 
assigned to those business units.
    Qwest's auditors, Arthur Andersen, advised us on our 
financial reporting and accounting. Arthur Andersen worked 
closely, and on an ongoing basis, with Qwest's Controller and 
technical accounting group. In addition, Arthur Anderson 
performed annual audits and quarterly preissuance reviews. 
Arthur Anderson also periodically presented its findings, views 
and opinions on accounting issues to the Audit Committee of the 
Board of Directors. When significant accounting issues arose, 
the technical accounting team reviewed those issues with Arthur 
Andersen's staff to obtain their advice and guidance. Then 
appropriate, those issues were also brought to the attention of 
Qwest's Audit Committee and Qwest's internal audit and legal 
departments.
    During my tenure as CFO at Qwest, I took concrete steps to 
ensure that accounting principles were applied properly. For 
example, I added technical staff to the Controller's staff; I 
created a cross-functional team to review the complex sales 
transaction process; I initiated monthly meetings between the 
Controller and the Financial staff responsible for overseeing 
and directing Business Unit Finance; and I recommended a 
Finance Committee to the Board of Directors, which was 
ultimately established. I also improved the communication 
process between Qwest management and the Audit Committee.
    One of the many types of transactions that Qwest engaged in 
was the sale IRUs or indefeasible rights of use of capacity on 
Qwest's fiber-optic network. As you know, Qwest began selling 
IRUs well before I became CFO. In fact, as early as 1999, 
Arthur Andersen established guidance as to the application of 
accounting principles for IRU transactions. The IRU accounting 
was primarily performed by the Controller and the technical 
accountants in conjunction with finance personnel assigned to 
the business units. This team was responsible for the 
application of Generally Accepted Accounting Principles or GAAP 
in the recording of IRUs. I was not personally involved in 
reviewing the detailed terms and conditions of each of the IRU 
transactions. However, as with other types of transactions, I 
instituted a number of controls around IRUs.
    Mr. Chairman, I appreciate the opportunity to make this 
statement. As you know, I am appearing voluntarily today and I 
have cooperated fully with the subcommittee and its staff. 
However, please understand that I have not had access to, nor 
have I reviewed, all of the documentation that bears on the 
matters of this inquiry. Nevertheless, I will do my best to 
help the committee with respect to its inquiry. And now I would 
be happy to respond to any questions that the subcommittee 
might have.
    Thank you.
    [The prepared statement of Robin Szeliga follows.]
  Prepared Statement of Robin Szeliga, Executive Vice President, Qwest
    Good morning Mr. Chairman and members of the Subcommittee. My name 
is Robin Szeliga. I was the Chief Financial Officer at Qwest for 
approximately 15 months, from April 2001 until early July 2002. I am 
currently an Executive Vice President in charge of real estate and 
procurement at Qwest.
    While I served as CFO, I reported to CEO Joseph Nacchio, and worked 
closely with the Audit Committee of the Board of Directors. I headed a 
CFO organization that was comprised of nearly 4,000 people. Qwest was 
faced with many important challenges during my tenure as CFO. Among 
those challenges were the integration of U.S. West, a Regional Bell 
Operating Company with which Qwest had recently merged; the 
restructuring of the organization and the management team at Qwest 
following the merger; the reentry by Qwest into the long-distance 
telephone market; and the task of improving telephone service in the 
14-state region previously served by U.S. West.
    As CFO, I was ultimately responsible for Financial Planning and 
Analysis, Financial Operations, Treasury, Investor Relations, Internal 
Audit, Tax, Procurement, Corporate Strategy, Billing, Credit & 
Collections, and the Controllership, including accounting systems 
support, technical accounting, financial reporting, payroll, and 
accounts payable. Assisting me in these responsibilities were various 
talented and dedicated people, including the Controller and the 
Assistant Controller. They in turn had staffs which included 
accountants, who were responsible for various technical accounting 
issues. I relied on, and at times worked with, this team of experienced 
accountants to analyze accounting requirements and apply them to 
specific transactions. The technical accounting group and I, in turn, 
relied on the accuracy of information provided to us by those who 
worked on various transactions for which we accounted. These included 
personnel in management and in the engineering and operations 
departments, various personnel in business unit and sales 
organizations, and finance personnel assigned to those business units.
    Qwest's auditors, Arthur Andersen, advised us on our financial 
reporting and accounting. Arthur Andersen worked closely, and on an 
ongoing basis, with Qwest's Controller and technical accounting group. 
In addition, Arthur Andersen performed annual audits and quarterly 
preissuance reviews. Arthur Andersen also periodically presented its 
findings, views and opinions on accounting issues to the Audit 
Committee of the Board of Directors. When significant accounting issues 
arose, the technical accounting team reviewed those issues with Arthur 
Andersen's staff to obtain their advice and guidance. When appropriate, 
those issues were also brought to the attention of Qwest's Audit 
Committee and Qwest's internal audit and legal departments.
    During my tenure as CFO at Qwest, I took concrete steps to ensure 
that accounting principles were applied properly. For example, I added 
technical expertise to the Controller's staff; I created a cross-
functional team to review the complex sales transaction process; I 
initiated monthly meetings between the Controller and the Finance staff 
responsible for overseeing and directing Business Unit Finance; and I 
recommended a Finance Committee of the Board of Directors, which was 
ultimately established. I also improved the communication process 
between Qwest management and the Audit Committee.
    One of the many types of transactions that Qwest engaged in was the 
sale of IRUs, or indefeasible rights of use of capacity on Qwest's 
fiber-optic network. As you know, Qwest began selling IRUs well before 
I became CFO. In fact, as early as 1999, Arthur Andersen established 
guidance as to the application of accounting principles for IRU 
transactions. The IRU accounting was primarily performed by the 
Controller and the technical accountants, in conjunction with finance 
personnel assigned to the business units. This team was responsible for 
the application of Generally Accepted Accounting Principles (``GAAP'') 
in the recording of IRUs. I was not personally involved in reviewing 
the detailed terms and conditions of each of the IRU transactions. 
However, as with other types of transactions, I instituted a number of 
controls governing IRUs.
    Mr. Chairman, I appreciate the opportunity to make this statement. 
As you know, I am appearing today voluntarily, and I have cooperated 
fully with this Subcommittee and its staff. However, please understand 
that I have not had access to, nor have I reviewed, all of the 
documentation that bears on the matters of this inquiry. Nevertheless, 
I will do my best to help the Subcommittee with respect to its inquiry. 
Now, I would be happy to respond to any questions that the Subcommittee 
might have.

    Mr. Greenwood. Thank you very much and being mindful of the 
fact that you haven't seen all of the documents, if we ask you 
to respond to a document, we'll give you plenty of time to 
review it and consult with your counsel if you need to.
    Okay, the Chair now recognizes himself for 10 minutes for 
inquiry and advises the members this will be a 10-minute round 
of questioning. And I'd like to start with you, Mr. Joggerst.
    Is it your understanding that the revenue targets set for 
2001 at Global Crossing were too high and aggressive, given the 
forecasted market?
    Mr. Joggerst. The sales process, generally, what we do is a 
bottoms up view in terms of what we thought was reasonable in 
the marketplace, the communications that we've had with our 
customers, their view of what their spending was and what their 
capital budgets were.
    In looking at initially what was the target for 2001 was 
someplace around $2 billion for an IRU perspective, $3 billion 
for the carrier wholesale business overall, which would have 
been a record number by any stretch of the imagination. And 
yes, I had some concern that that would be an overly aggressive 
target to put to the sales force.
    Mr. Greenwood. Okay, I'm going to ask you to turn to Tab 25 
in the binder there and I'd like you to review a confidential 
set of e-mails from the date, dated August 30, 2000. And I'd 
like you to turn to page--to the bottom of page 2 and you'll 
see what's titled original message from Robin Wright. This was 
sent August 29 at 5:41 p.m. to Gary Brenninger and it was 
copied to you. Do you see that?
    Mr. Joggerst. Yes, I do.
    Mr. Greenwood. And if you'll turn to the top of page 3 I'll 
read you some of the content. It says ``As you know, prices are 
dropping fast and to some extent we are our own worst enemy. 
When saddled with an unreasonable revenue expectations we do 
the crazy deals at the end of the quarter. This, in turn, 
causes prices to drop which makes it more likely that we'll 
need to do another deal at the end of the next quarter.'' Can 
you give us your translation of what means and why would Ms. 
Wright refer to ``crazy deals'' done at the end of the 
quarters?
    Mr. Joggerst. Generally, what we'd do is manage the sales 
funnel very closely and we had conference calls on a weekly 
basis and toward the end of a quarter, it would really be done 
on a daily basis. And what we would look at are the 
opportunities that were already contracted for, where we knew 
money was going to be coming in . We had what we called primary 
targets which were pretty well understood and thought out and 
we had a pretty strong likelihood of being able to capture 
those revenues.
    Then we also had secondary targets which were a little bit 
further out and of course, obviously, for the other quarters a 
much larger sales funnel was----
    Mr. Greenwood. So those would be the noncrazy deals?
    Mr. Joggerst. Those, well, let me explain what would be 
crazy. If you looked at what we normally assumed we could 
collect the money that was due to us, we assume--you'd assume 
we could get the deals that were in the primary category and 
then a portion of the secondary sales final. What is happening 
more and more, particularly in 2001 is that there was a 
requirement, really that we needed to win 100 percent of our 
secondary deals or a large portion of them, much larger than we 
normally would in order to make the revenue targets that were 
put to us. So that, from my perspective, it was something that 
was really pushing the envelope. It was really too aggressive.
    When Robin is talking about crazy deals at the end of the 
quarter, one thing that was clear during my--during that period 
of time at Global Crossing, it was not acceptable to miss your 
end of quarter number.
    Mr. Greenwood. So by ``crazy'' she meant, I assume, that 
this was a deal that was being done not because the bottoms up 
review of the market was driving it, but rather it was being 
driven by the need to meet revenue expectations period. Is that 
fair?
    Mr. Joggerst. It's fair that they are accelerated to close 
in a very compressed timeframe. I've heard members of the 
subcommittee mention that they think some of the transactions 
were, in fact, sham, that there really was no value placed in 
what we were selling or what we were purchasing. That's not my 
belief.
    I clearly believed that Global Crossing was still growing, 
that there was plenty of opportunity going forward and that we 
would have the capital and the ability to integrate those 
resources into the network going forward. What was happening is 
rather than having say weeks to negotiate capacity purchase 
with a customer, sometimes those transactions needed to be 
completed within 48 hours because we would literally watch the 
clock as it ticked down toward the end of the quarter.
    Mr. Greenwood. Did you communicate your frustration about 
meeting the 2001 projected IRU targets to senior management at 
Global Crossing?
    Mr. Joggerst. I recall--I don't recall any particular e-
mails, nor have I been shown any, but I do recall conversations 
with our CEO at the time, Tom Casey saying that really the 
bottoms up forecast doesn't come anywhere near $2 billion and 
the result of that there was a mini task force put in place to 
try and come up with some very large, very aggressive 
outsourcing deals from some of our major customers to try and 
bridge what was really a very large gap.
    Mr. Greenwood. Were any of the quarter IRU swaps entered 
into at the time they were closed done solely for the purpose 
of meeting the quarterly revenue numbers?
    Mr. Joggerst. There were at the end of first quarter, there 
was a transaction with 630 networks that was critical to make 
our quarterly numbers. The transaction could have waited. That 
one was a particular concern in that the financial stability of 
360 at the time was very much in question. There were a number 
of conversations that I had directly with our Chief Executive 
Officer, Tom Casey, as well as others about that.
    Similar kinds of transactions happened at the end of second 
quarter, particularly with FLAG and Cable and Wireless in that 
we needed to very dramatically accelerate some transactions 
that were going to close the quarter and again, the express 
purpose was to make sure that we made that quarter, end of 
quarter number. That's correct.
    Mr. Greenwood. Is it the case that Global Crossing would 
not have met its quarterly numbers, its revenue expectations 
without those deals. Is that correct?
    Mr. Joggerst. Absolutely correct.
    Mr. Greenwood. Can you describe the transaction with 360 
because my understanding that it was clear that 360 was on the 
verge of bankruptcy, that there was a sale made to 360 that 
revenues were--from which the revenues were very realized. Is 
that correct?
    Mr. Joggerst. The transaction with 360 was unusual in that 
we had had on-going discussions. We had other transactions 
where we had sold to 360, where we had purchased from 360. At 
the end of first quarter, we did have a gap in our revenue and 
revenue that we needed to recognize for the end of the quarter 
and I was aware that Tom Casey, our CEO, was having 
conversations with Greg Mafey about a potential transaction 
where Global Crossing would sell to 360 networks capacity in 
the Pacific, across the Pacific to replace a project that they 
had since canceled and Global Crossing would purchase from 360 
networks capacity across the Atlantic which Global Crossing had 
been forecasting a need for for some time. So that wheel was 
put in motion, but again, as I recall it was toward the middle 
of March, giving us a little less than 2 weeks to try and close 
this kind of a deal.
    Mr. Greenwood. Isn't it the case that the capacity was 
never realized because the company went bankrupt?
    Mr. Joggerst. That's correct.
    Mr. Greenwood. And Global Crossing booked $150 million of 
revenue in that transaction?
    Mr. Joggerst. That's correct. We had a number of 
conversations. One that I can recall directly, at the kickoff 
meeting where 360 networks was present. Our Chief Counsel, Jim 
Gorton made a statement, stood up and said he was against the 
deal in the presence of 360 networks because of their financial 
instability.
    Mr. Greenwood. Do you believe that that transaction was 
done fundamentally, given the fact that Mr. Gorton recommended 
against it, given the impending bankruptcy, given the fact in 
retrospect that he never got the capacity that that was done 
fundamentally to boost revenues in order to convince investors 
that the company was in better shape than it was. Is that a 
fair statement?
    Mr. Joggerst. It's a partially fair statement. The only 
caveat I would add is there was a true business need at the 
time for Global Crossing to have additional trans-Atlantic 
capacity. To get it from that company that had dire financial 
needs in a very accelerated timeframe, those factors were done 
just in order to reach the revenue targets. That's correct.
    Mr. Greenwood. Mr. Olofson, in your opening statement, you 
made reference to the fact that you believe 13 out of 18 
transactions were questionable. Will you elaborate about that, 
please?
    Mr. Olofson. Well, what I was referring to was in the 
second quarter of 2001, 13 of the largest, of the 18 largest 
IRU transactions that are shown on the sales funnel had 
exchanges of virtually exactly the same or similar amounts of 
cash. And that just--apparently they were done within the last 
day or two of the quarter and----
    Mr. Greenwood. So what's your interpretation of why the 
companies did that?
    Mr. Olofson. Well, I think again, I think they were trying 
to probably meet their revenue targets and----
    Mr. Greenwood. Was there a business justification for those 
transactions?
    Mr. Olofson. That I don't know. I'm not qualified to answer 
that because I really don't know what was on the other side of 
those transactions. I don't know what the company acquired. I 
do seem to recall that in some cases the capacity may not have 
been defined, that it was more in the nature of a credit and I 
think Mr. Joggerst mentioned the FLAG transactions. My 
recollection is FLAG booked that s some kind of deferred 
credit, so it wasn't really defined at the time. So I really 
can't answer this.
    Mr. Greenwood. Were other people in the company complaining 
to you that these transactions didn't seem to quote, as you 
said, smell right?
    Mr. Olofson. Yes.
    Mr. Greenwood. Can you elaborate on that?
    Mr. Olofson. Well, I mean there were a number of people in 
the Beverly Hills office. We weren't doing the accounting for 
these transactions any longer. It was being done in New Jersey, 
but a number of the analysts were working on parts of analysis 
and some of the statements and footnotes and stuff that went in 
the 10Q and people were becoming more and more uneasy, wondered 
if there were any rules surrounding the accounting for these 
types of transactions any longer because originally when we 
just sold capacity, we didn't swap it, we had some pretty hard 
and fast rules. And it didn't seem like those rules applied any 
longer.
    Mr. Greenwood. My time has expired. I just want to ask you 
one question, Mr. Olofson and then I'll have some other 
questions the second round. Why do you believe you were fired?
    Mr. Olofson. I'm sorry?
    Mr. Greenwood. Why do you think you were fired?
    Mr. Olofson. I think I was fired because I raised these 
concerns. As I said in my opening remarks, I raised them in 
June and I did it again in the letter. I really was working 
within the system. I mean I wasn't out there blowing the 
whistle, but I do think that there's obviously enough concern 
and once and probably maybe the bankruptcy became imminent. I 
got notified the end of December that I was fired retroactively 
until the end of November.
    Mr. Greenwood. My time has expired. The Chair recognizes 
the gentleman from Florida, Mr. Deutsch.
    Mr. Deutsch. Thank you. Mr. Joggerst, I wanted to focus on 
a couple of the responses to the chairman and I have a series 
of questions after that, but if I heard you correctly, some of 
us made comments in our opening statements that at least from 
our perspective the swaps didn't have a business purpose. And 
the analogy, I think Mr. Olofson used very well, the red truck/
blue truck analogy.
    I mean would your position be totally opposite that, that 
these, at least in your case, in the sort of the hindsight of 
time, all the transactions had business purposes?
    Mr. Joggerst. It was my perspective for the transactions 
that I was more closely involved with that there were business 
reasons for that. We needed additional capacity across the 
Atlantic. We needed additional capacity in the North American 
network. We had no presence in the Indian Ocean and certain 
parts of the world. And again, it was my perspective, I still 
believed, that Global Crossing was still growing our global 
network and that we would, in fact, be one of the survivors and 
we needed the network capacity reaching places where we didn't 
currently have it in order to fulfill that promise.
    Now my caveat would be is from a sales perspective, all of 
that made perfect sense. If the company didn't have capital 
sufficient to integrate those network resources that we were 
purchasing into the overall network to create a more robust, 
seamless, all reaching network, then, in fact, I don't believe 
that those transactions were really, the business purpose was 
going to be fulfilled.
    Mr. Deutsch. If I could focus a little bit, I understand 
you don't have capacity across the Pacific in certain companies 
and you do a swap to get that. But my understanding at this 
point is you were swapping basically inside the United States 
in areas you already had capacity and that you were doing the 
blue truck/green truck situation. I mean you're not personally 
involved in any of those?
    Mr. Joggerst. I'm not aware of anything that was actually 
just a blue truck/green truck kind of transaction. I will give 
you an example that would be in an undersea cable environment 
where that kind of a transaction might make sense. For example, 
one of the things the network engineer and my customers, 
wholesale customers require would be geographic or physical 
diversity, so in fact, if I had a facility between New York and 
London on one route and I needed to create another physically 
diverse path, one way of doing that might be to acquire that 
from another wholesale provider. That's just an example.
    I don't know, I can't point to any examples specifically 
where there was just a pure exchange of exact same assets, no.
    Mr. Deutsch. It wouldn't be exact same, but assets that you 
didn't need which is really the question. If it's assets that 
you need, that's one thing; if it's assets that you don't need, 
that you're doing it to create a transaction----
    Mr. Joggerst. I think that they were assets that we were 
purchasing that from my perspective, we needed in the long run. 
They weren't assets that we needed immediately, that we needed 
to close these deals in a very compressed timeframe, very 
accelerated timeframe, but I can't think of any transaction 
that I'm aware of that we bought something that really, that 
there was absolutely never any purpose for.
    I will confirm that clearly there was dissension within the 
company. There were some people who did not hold that belief.
    Mr. Deutsch. You told the staff that in the second and 
third quarters of 2001 you thought the revenue targets were 
unreasonable given the current industry conditions. What were 
those conditions at that time?
    Mr. Joggerst. Prices were dropping. I had a concern that 
thee were--one of the reasons why Global Crossing continued to 
have some success quarter over quarter is we implemented new 
systems to different parts of the world, opening up new 
markets, that we would go to our existing customers. For 
example, if we had an existing customer on trans-Atlantic 
segments, we could now go back, we could come in a couple of 
quarters later and offer capacity into Latin America, then into 
Asia. There were no more regions that we were opening up, so I 
was concerned that in order to--any large deals that were on 
the table, they would have to come from a very large 
outsourcing kind of arrangement of a potential, total outsource 
of one of our customers' networks.
    Mr. Deutsch. Were your revenue goals reduced in 2001?
    Mr. Joggerst. Pardon me?
    Mr. Deutsch. Your revenue goals, were they reduced in 2001?
    Mr. Joggerst. My revenue goals were never reduced in 2001 
from an IRU perspective. In fact, if you consider that we 
looked at--as I recall, there was $2 billion in revenue for 
2001, roughly $500 million per quarter. The first quarter we 
were asked to come up with $550 million; the second quarter, 
$650 million. So we were on a trajectory that would exceed even 
what I thought was an exorbitant target in the first place of 
$2 billion for IRUs.
    Mr. Deutsch. If you could look at Tab 21 which is a July 
14, 2001 e-mail. I'm sorry, Tab 20. It's a July 14, 2001 e-mail 
from Tom Casey to you. In it he says ``the carrier group is 
missing its numbers badly, is forecasting that the second half 
of the year would get even worse.'' But Mr. Casey tells you 
that he does not and I'll quote ``not want to hear about how 
your part of the business is just going to continue to erode. 
When we meet next week, I want to know what you guys are going 
to do to turn around starting immediately.'' Is that the kind 
of pressure that you were talking about?
    Mr. Joggerst. Yes, this is indicative of the kind of 
pressure that I'm talking about.
    Mr. Deutsch. And you pressured your team to meet these 
unrealistic numbers as well?
    Mr. Joggerst. What I did is we looked at ways of really 
engaging upper management, frankly, rather than just apply 
pressure to the sales force directly. What we did is say is 
there any way that we could achieve some large outsourcing 
deals with the help and support of senior management such as 
Tom Casey, Gary Winnick and others and they had oftentimes been 
involved in the process themselves. So rather than just apply 
pressure downward, frankly, my strategy with Mr. Casey and 
others would be to engage them to be part of the solution 
rather than just part of the problem.
    Mr. Deutsch. Are you familiar with the term outscoping?
    Mr. Joggerst. Yes, I am.
    Mr. Deutsch. What does it mean?
    Mr. Joggerst. Outscoping is when there's a customer that 
we're working with and there are--where we increase the size of 
the deal that we're doing with them and they increase the size 
of the deal they're doing with us and typically that happened a 
couple of times that I can recall at the end of the quarter, 
particularly with FLAG and with Cable and Wireless.
    Mr. Deutsch. And the purpose of it would be to?
    Mr. Joggerst. To meet revenue numbers for the quarter.
    Mr. Deutsch. I mean isn't that just tying to our whole 
premise of not having a business purpose? I mean you're just 
moving the numbers up to get to those revenue numbers?
    Mr. Joggerst. I understand your point that the deals were 
made larger, but I don't agree that there was absolutely no 
business purpose ever for those assets.
    Mr. Deutsch. Throughout 2001, Global Crossing increased the 
frequency and size of the reciprocal transaction. It appears 
that it was getting harder for the network people to identify 
assets to purchase. On March 9, for example, Robin Wright wrote 
you and said they didn't have a great deal of enthusiastic 
support for purchasing additional assets. This e-mail is in Tab 
4.
    Is that correct?
    Mr. Joggerst. Yes. As I recall, the network folks were 
becoming alarmed that they didn't have the resources to 
negotiate deals, where they were actually purchasing capacity 
and there were a number of people in the network organization 
that were in support of these kind of purchases. That's 
correct.
    Mr. Deutsch. If you could take a look at Tab 9. This is on 
March 28, 2001. Michael Coghill, a network engineer, tells his 
boss that he can't justify $15 million in U.S. West and now 
sales wants $60 million, which he in good conscious and I'll 
quote, ``cannot pretend to develop a business case that 
justifies that transaction.''
    You just overrode objections like this and particularly, I 
mean, did you?
    Mr. Joggerst. Again, my issue was to work with the sales 
team to identify targets for things for us to sell. Mr. Coghill 
didn't report to me, nor did Mr. Dawson, and you know and they 
were--this looks to me like Mr. Coghill was escalating his 
concern to Mr. Dawson.
    That certainly is his right and again, I was aware at the 
time that not everyone in the network organization were 
enthusiastically supporting these transactions.
    Mr. Deutsch. So in this case, I mean in a sense, you didn't 
care what you were buying, you just cared what you were 
selling?
    Mr. Joggerst. My focus was--the way most of these 
reciprocal transactions took place is my sales force which is 
really one of the largest, most well equipped carrier sales 
forces in the world, we knew what our customers. We knew where 
our network was going in the future and what their requirements 
might be. Increasingly, over--particularly in 2001, those 
customers came back to us and said yes, we'd be happy to buy 
from Global Crossing, but you have to buy something from us. I 
mean at that point it was the role of the sales person to make 
sure that we got the appropriate operations people involved to 
go through what it was that that company was proposing to sell 
to us.
    Mr. Deutsch. Let me just ask one final question. If you can 
refer to Tab 32 which includes a September 26 e-mail from you 
to among others, Robin Wright, you state that ``the network 
people have put out a string of e-mails that will kill a number 
of deals. These deals represent $250 million of our attempt to 
get $675 million in revenue. Someone needs to fix this. I don't 
have time.'' Is this a good representation, really, of the----
    Mr. Joggerst. I'm sorry, what tab was that?
    Mr. Deutsch. 32. 31, I'm sorry, 31. 31 on page 2. On the 
top.
    Mr. Joggerst. Yes, I see it. This is essentially me saying 
that, you know, particularly this was the end of third quarter 
and a number of the deals that are mentioned there, we didn't 
do with Dishnet or with Tycom, but effectively, if the network 
people didn't want to buy capacity, that was fine with me. I 
didn't have time to try and cheerlead or facilitate them 
acquiring something. That really wasn't my purpose. If they 
didn't want to buy it, don't buy it. If we didn't do the deals, 
then don't do the deals. They would have to really be 
accountable to their upper management.
    Mr. Deutsch. But if they didn't buy it, you couldn't sell 
it.
    Mr. Joggerst. I am absolutely convinced that that's the 
truth.
    Mr. Deutsch. So that's really that whole swap----
    Mr. Joggerst. Absolutely.
    Mr. Deutsch. Thank you.
    Mr. Greenwood. I'll recognize the chairman, Mr. Tauzin in a 
second, but Mr. Joggerst, let's go back to Tab 9 for a second 
because I can't help but feel that you should have covered that 
a little bit.
    I'm going to read this to you. It says ``We are now being 
asked to provide business cases to support this transaction. 
This discussion began with U.S. West at $15 million which we 
could not find justification for, let alone $60 million. We 
will be factual in our estimation of the value of usefulness of 
these assets, but in good conscience, cannot pretend to develop 
a business case that justifies this transaction, but rather one 
that will show our economic risk.''
    So what this guy is saying is we didn't need the $15 
million, we couldn't figure out how to justify that on the 
basis of capacity. Now you want to quadruple it to $60 million 
and you're asking us to justify $60 million when we couldn't 
justify $15 million and the only thing they could honestly do 
in good conscience is say this is stupid. Isn't that right?
    Mr. Joggerst. That would be my interpretation of this e-
mail as well.
    Mr. Greenwood. Let's get straight at it here. The Chair 
recognizes the full committee chairman, Mr. Tauzin.
    Chairman Tauzin. Thank you, Mr. Chairman, first of all, let 
me cite for our witnesses a document which you don't have in 
front of you. It's actually a news story from The Rocky 
Mountain News dated 9/11/02 referring to a witness who will 
appear in the next panel, Lynn Turner, I'm sorry, not Lynn 
Turner, but Robin Wright. It refers to Lynn Turner, the former 
top accountant for the Securities and Exchange Commission in 
the last Administration. Lynn Turner is now working for 
Colorado State University Center for Quality Financial 
Reporting indicating at least in Lynn Turner's opinion that the 
memo prepared by Robin Wright of Global Crossing who will 
testify in the next panel explaining to co-workers what needed 
to be done for Qwest to book revenues quickly ends up being the 
smoking gun in this case because it details exactly the 
problem. But we have a lot of documents that some of you are 
aware of that are sort of the paper trail leading to this 
conclusion that indeed this memo may be the smoking gun, if you 
will. And I want to refer them to you and get your thoughts on 
them.
    First of all, Ms. Szeliga, we can go all the way back to 
the year 2000 when you first wrote the note to David Walsh 
which we have at Tab 26 in the book. This was Robin Wright, I'm 
sorry. I've got the wrong Robin. We can go back to that date in 
any effect we'll visit with her tomorrow, in the second panel 
rather, where she writes about being concerned with the IRU 
number. ``I sent the note below to Gary and John and while I 
think they understand, I think the IRU number, indefeasible 
rights of use number, ends up being the plug number in order to 
meet the street's expectations.''
    Do you want to tell me what the business of plug numbers to 
meet street expectations are all about?
    Mr. Joggerst. I can comment. I think I've made the comment 
to Chairman Greenwood in that again, as I mentioned at Global 
Crossing it was unacceptable to not make the number, so the 
IRUs were really what we could do, a deal that could be done 
quickly for a large dollar amount, a contract that could be 
signed, executed quickly and then you could achieve that goal.
    Chairman Tauzin. So literally the plug number is a number 
you've got to meet to meet those Wall Street expectations, 
because if you don't meet them there are some pretty bad 
consequences to the company and these IRU trades was an easy 
way to plug those numbers in and meet those expectations. Is 
that essentially it?
    Mr. Joggerst. What they were was a one-time transaction 
where you receive a bunch of cash up front. The alternate would 
be to sign up a number of deals that would pay over on a 
monthly basis, say 3 or 4 or 5 years, but if you sign that day, 
say on the 2 weeks before the end of the quarter, even though 
you may have a large commitment for hundreds of millions of 
dollars, you wouldn't see that.
    Chairman Tauzin. It wouldn't be a plug number.
    Mr. Joggerst. That's correct.
    Chairman Tauzin. You wouldn't meet the expectations. In 
fact, we have a number of confidential members, one at Tab 30 
and one at Tab 27 that sort of tell the story about what 
happens when a company is anxious to meet those plug numbers 
with deals that might not otherwise be very justifiable.
    At Tab 27 we see a note from Wes Winkler to Joe Becchi 
talking about a deal with Velocita and I quote, ``I have been 
charged with the daunting task of figuring out how to sell the 
junk we obtained over the past few quarters of reciprocal 
deals.''
    And if you look at Tab 30 you'll see Joey Wong of Global 
Crossing writing to someone named Robert and others, you see 
the address on top, ``the problem with the other deals is that 
sales folks don't know exactly what they're getting and the 
product guys haven't figured out what to do with these assets 
and GNO buckets, so this business guy is stuck since there is 
no direction given. What makes it worse is that a lot of the 
assets we're getting, I don't think we can justify them.'' He 
goes on to say ``I wish this company just come clean with the 
street--'' that's Wall Street, right? ``Regarding our guidance. 
This swap crap is going to kill us in the long run and I'm 
personally very fed up with this business case garbage.''
    It gets even stronger when we go all the way to the letter 
that was written by someone named Michael. We don't know who 
that is. That's an anonymous letter on Tab 46. You'll all turn 
to it.
    And then Ms. Szeliga, I want to talk to you about an 
incredible memo that follows on 43, so you might get ready for 
it.
    But at Tab 46 we see a letter, anonymously written to 
someone named Mr. Harad whom the letter writer thought was on 
the board of Qwest Communications. It was sent to him and he 
forwarded it to Philip Anschutz, the chairman of the board, who 
obviously received it. It's a remarkable letter. It's coming 
now in April 2002. It begins by asking that Joe Nacchio and 
Drake Tempest be fired for cause and the letter writer says 
Qwest has violated securities laws, SEC rules, some state 
commission rules. It says ``Joe and Drake did not order 
specifically subordinates to do unethical acts or illegal acts, 
however they set goals and targets'' can I add editorially 
``plug numbers?'' ``That were impossible to obtain without 
engaging in unethical or illegal acts. Basically, subordinates 
were given the choice, Mr. Olofson, of attaining these targets 
or being fired. Unfortunately, at least a dozen Qwest employees 
chose to break the law rather than face dismissal. The SEC is 
searching in some of the right places where some of these 
violations occurred. The people involved were at least smart 
enough to do most things orally and left a very sparse written 
trail. It will either take the SEC getting lucky or employees 
breaking ranks in order for the SEC to uncover the smoking 
guns.''
    The last paragraph this is ``consider your own liability. 
This letter will serve notice on you that illegal things were 
done at Qwest and finally concludes what I'm assuming that you 
learned something from Enron.'' This letter occurs after the 
Enron hearing.
    So the letter indicates that all this stuff is still going 
on. Qwest hadn't come clean with the Street and that employees 
were still being threatened with being fired or breaking the 
law.
    The most important document I want you folks to discuss 
with me in the time we have is a memo written from one former 
audit chairman at Qwest, Audit Committee chairman to then 
current chairman, from Peter Hellman to Tom Stevens. It's at 
Tab 43 and I want to quote it to you and I want to get your 
comments, particularly, Ms. Szeliga and Mr. Joggerst and Mr. 
Olofson.
    It raises the question about how this stuff happens and 
what might be going on and it states an opinion as to what may 
have been wrong. It says ``not that Joe''--I assume that's Joe 
Nacchio--``is not saying the right things'' and then in 
parentheses ``make the numbers and do it the right way, but the 
line people including the divisional CFOs are only hearing make 
the numbers. In my opinion there are well-known consequences 
for not making the numbers.'' Perhaps getting fired for the 
company not making the Wall Street projections, the plug 
numbers being there, the stock going down? We can imagine all 
the known consequences.
    But here's the kicker ``but no clear consequences for 
cutting corners.''
    Further on, ``Finance people in the business unit were 
obscuring the appropriate facts both from AA and Robin to whom 
they directly report. As far as I can determine there were no 
consequences for their actions.''
    Now it appears to me what the Audit Committee, former Audit 
Committee chairman is telling the new Audit Committee chairman 
at Qwest is look, maybe Joe's not saying do anything wrong to 
make the numbers, but all the people are hearing is make the 
numbers. And there are terrible consequences if you don't. But 
there aren't any real evident consequences if you do the wrong 
thing to make the numbers.
    Talk to me a bit about that. Was that the culture by which 
Qwest and Global Crossing found themselves in the mess they now 
find themselves?
    Ms. Szeliga. I don't recall it being the culture that there 
were no consequences for not following process at Qwest. I 
think the record shows that I saw process as being very 
important and there were a number of instances when I 
personally spoke with folks who I thought hadn't appropriately 
followed the policies and procedures we had in place. We 
reminded them of those either orally or in writing on different 
occasions.
    Chairman Tauzin. Give me an example.
    Ms. Szeliga. For example, I don't recall the specific 
reason, but I received from my controller a concern that said I 
think we need to remind folks of some processes and I can't 
remember what the genesis of his concern was specifically, but 
I left a voice mail to a number of folks in our company----
    Chairman Tauzin. Did anybody get fired for doing the wrong 
thing, to make the numbers?
    Ms. Szeliga. I wasn't aware at the time that I left this 
voice mail I'm referring to that anybody had done anything 
wrong, but rather the controller was acting out of a concern 
that controls be followed, trying to be proactive.
    Chairman Tauzin. You know, we found no memos from anyone 
saying don't you dare make the numbers by breaking the laws or 
breaking the rules or by hiding the true nature of one of these 
deals. We didn't find any memos that said that. We found a lot 
of memos of people saying we've got problems with these deals 
and we've got troubles with them. We got conversations, we have 
interviews that say--Mr. Joggerst, you know what I'm talking 
about. There were a lot of people saying there's something 
wrong with this and we shouldn't be doing it, but there were 
also memos saying you're going to get fired if you complain. Is 
that right?
    Mr. Joggerst. I did have the impression, I think I 
mentioned earlier that not meeting the number was absolutely 
unacceptable at Global Crossing. We had to make the quarterly 
number. Whether people would get fired, get shuffled aside, 
given a nonimportant task, I mean I'm not sure what the 
specific penalties might be, but I do contrast it with the 
early days of Global Crossing when there was much more of a 
collegial atmosphere where deals, pros and cons were discussed 
openly and----
    Chairman Tauzin. Something changed, right?
    Mr. Joggerst. And something changed.
    Chairman Tauzin. We learned about the office of the 
chairman when we did our Enron hearings. It's a special kind of 
office. What was it composed of at Global Crossing?
    Mr. Joggerst. The office of the chairman included Gary 
Winnick, Lod Cook, the secretary was Sherri Cook, secretary of 
the company and the CEO, the point in time that we're talking 
about is Tom Casey.
    Chairman Tauzin. And Tom Casey and Gary Winnick were very 
close?
    Mr. Joggerst. It's my understanding that they had known 
each other for some time. Tom joined Global Crossing as our 
head of mergers and acquisitions from Merrill Lynch in London 
and it was generally thought that they were personal friends.
    Chairman Tauzin. If I told something to Tom Casey, was it 
generally assumed in the corporation, Gary Winnick would know 
it?
    Mr. Joggerst. That was absolutely my assumption.
    Chairman Tauzin. They shared everything.
    Mr. Joggerst. That would be my assumption, absolutely.
    Chairman Tauzin. I want to turn to some of the consequences 
of things going wrong and I've got some of your notes, Ms. 
Szeliga, we find them at Tab 87, if you want to refer to them.
    This takes us back to June 20 or so of the year 2001. What 
has just happened is that Morgan Stanley has dropped a 
bombshell. Their analysts have said that Qwest has bloated 
income after its merger with U.S. West and Nacchio was furious. 
There are meetings and discussions about it. These are notes of 
your meetings, apparently, and this is strategy to handle the 
issue.
    I take you down to number 4, and it says ``quietly close 
Morgan Stanley out of company.'' Are those your notes?
    Ms. Szeliga. This is my handwriting, that's correct.
    Chairman Tauzin. So these are your notes, is that right?
    Ms. Szeliga. Yes sir.
    Chairman Tauzin. So is it correct that this is the kind of 
way the company reacted to Morgan Stanley criticizing it for 
bloating income?
    Ms. Szeliga. This is one of the ways that the company 
reacted.
    Chairman Tauzin. Did you, in fact, follow up and try to 
close Morgan Stanley out of the company?
    Ms. Szeliga. I didn't have the personal responsibility or 
the authority to close Morgan Stanley out of our company, but 
Morgan Stanley was no longer employed after the notes came out 
by the company to do significant banking transactions.
    Chairman Tauzin. Was this your idea or are you writing a 
note about somebody else's idea of the meeting?
    Ms. Szeliga. I don't recall specifically writing it, but I 
do believe this was some notes taken following conversations 
that were had with senior executives in a company as they----
    Chairman Tauzin. Give me some names of people who were 
there?
    Ms. Szeliga. A number of folks had conversations after the 
Morgan Stanley note came out including Joseph Nacchio, our CEO; 
Afshin Mohebbi, our COO; Drake Tempest, our general counsel. It 
would be not uncommon for me to participate in those 
conversations where the company was dealing with a very 
significant issue and we would get together and discuss----
    Chairman Tauzin. And this note arose from that discussion. 
You don't know who came up with the idea to close Morgan 
Stanley out?
    Ms. Szeliga. I'm sorry to say I don't exactly remember 
writing the note, but the tone of what I'm saying in this----
    Chairman Tauzin. Do you remember who said that?
    Ms. Szeliga. I know Joe Nacchio was very angry at Morgan 
Stanley and he expressed it publicly on the call that we had 
following the notes that were issued by Morgan Stanley 
analysts.
    Chairman Tauzin. You see where I'm getting at. I mean when 
we read a memo from one Audit Committee chairman to another 
saying look, we got a problem here, this business of just 
meeting the numbers, making the numbers, everybody getting that 
message, having to do it or face the consequences and anybody 
who gets in the way gets rolled, including an investment house 
that criticized the company. Let just run out the company. 
We're not going to do business with them any more. That's the 
culture I'm asking about. If that culture--Mr. Joggerst, if the 
culture of the company changed, and that became the new culture 
of the company, is that not maybe the underlying reason so many 
people may have according to that memo violated rules and law?
    Mr. Joggerst. It is my belief that the pressure to make the 
numbers became really the overriding factor in the company at 
that time. The pressure was uncomfortable. I can tell you 
myself, I remember the sales people literally did not sleep for 
several nights toward the end of a quarter, receiving phone 
calls. I can recall in the case of the 630 Network's deal 
receiving many phone calls, including one from Tom Casey about 
11:35 the night before, that Saturday night before the first 
quarter books closed or before the quarter closed, making sure 
that the transaction with 360 Network was done.
    Chairman Tauzin. And the pressure was coming from whom in 
these cases?
    Mr. Joggerst. The pressure in my understanding was coming 
from the office of the chairman which included the individuals 
that I mentioned. The specific conversations that I had were 
largely with Tom Casey.
    Chairman Tauzin. Although it's rather obvious, and I know 
my time is up, Mr. Chairman, but all of this was designed to 
meet the numbers, to keep the stock prices high so that those 
who enjoyed stock ownership or options in the company might 
profit, is that right?
    Mr. Joggerst. That is my understanding and again, I think 
every company's mission statement says that they're there to 
increase shareholder value. What I didn't understand at the 
time was the financial situation that the company was in and 
what I've since seen is most potentially the financial harm 
that was being done by the company by the sales force and the 
operations people proceeding with a number of these deals.
    Chairman Tauzin. The other two of you, Mr. Olofson, Ms. 
Szeliga, if you would comment on that. Was that the problem? 
Was that the goal? Keep the numbers up, make the Wall Street 
estimates so that the stock prices can continue to benefit 
those who held stock or options in the company?
    Mr. Olofson. In my opinion, I think that was always the No. 
1 consideration. I think from the get go, the company was very 
oriented toward Wall Street and had a good relationship with 
all the financial analysts on the street. Making the numbers in 
the early days was relatively easy and I think that as Mr. 
Joggerst has mentioned, when the market started to decline, 
prices started to drop. It became more difficult to make the 
numbers, but the culture was still there.
    Chairman Tauzin. Ms. Szeliga?
    Ms. Szeliga. The Qwest culture was changing over time quite 
a bit because we had merged with U.S. West and at the time of 
the merger the markets were still doing fairly well. It was 
subsequent to the merger when we were trying to bring two very 
diverse cultures together that we were also faced with the 
market down turn and what appeared to be about a year after the 
merger or maybe a bit longer than that an industry that we all 
believed demand would continue to grow in, in fact, 
contracting. And so I think that the pressure that Mr. Joggerst 
is referring to, my recollection of how that felt and what that 
looked like was it wasn't that hard to make your numbers 
because it was growing and then all of a sudden in the midst of 
what was a difficult time in trying to combine two companies, 
there was this economic downturn and this contraction in the 
market that made it extremely difficult and there was certainly 
a heightened sense of pressure for everyone in the company and 
I believe in the industry to keep going and getting that done.
    Chairman Tauzin. Thank you. Thank you, Mr. Chairman.
    Mr. Greenwood. Mr. Joggerst, I wanted you to look at Tab 32 
for a second before I go to Ms. DeGette, because you've 
testified this morning that you believed that these 
transactions were all, they would have been needed eventually. 
The capacity would have been needed eventually, but you are 
just questioning the timing. Maybe we don't need it right now. 
Isn't that how you've testified this morning?
    Mr. Joggerst. For the transactions that I was aware of----
    Mr. Greenwood. Here's one I think you're aware of. This is 
a confidential memo dated September 27, 2001. It has to do with 
the Qwest deal into Scandinavia and you receive an e-mail from 
Brian Fitzpatrick which says ``I received a call this a.m. 
regarding the Qwest deal, specifically regarding our interest 
for swap capacity into Helsinki. I want to make sure we are all 
operating from the same place. We do not need any capacity in 
Scandinavia. We currently have invested $80 million plus into 
this region and have no customers. To tell ourselves we will 
take this capacity into inventory will add value to our efforts 
of yielding a return on the investment we've already made is 
not what we want to do.'' And then he says ``do not mask a 
business plan to justify an ugly deal'' to which you responded, 
``I'm not kidding. I can't work like this where everyone is now 
in the mode to cover their ass by documenting opinions.''
    Now was that about the capacity you were eventually going 
to need?
    Mr. Joggerst. Clearly, it was my understanding and my 
belief and I did not work directly on many of the Qwest 
transactions, but if somebody would ask me whether there was a 
requirement or a need to get capacity into Scandinavia, since I 
was so early into Global Crossing's tenure, yes, in fact, we 
did have a project called Baltic Crossing where there was even 
a traffic study done to look at what would be the requirements 
into that region of the world, and yes, I did believe that 
there might be some requirement going forward in the future for 
that.
    As I already mentioned----
    Mr. Greenwood. Even though your co-president of sales who 
apparently did understand what was going on in Scandinavia said 
this is ridiculous, we're never going to use this. We've 
already dumped a bunch of money into this place. We have no 
customers. Did you take his opinion to have some value since he 
seemed to understand this?
    Mr. Joggerst. This e-mail was not sent just to me. It was 
sent to a number of people.
    Mr. Greenwood. I understand that.
    Mr. Joggerst. And yes, I did take his opinion into 
consideration.
    Mr. Greenwood. So this morning when you testified that, in 
fact, it is your opinion today that all of these deals were 
done for some--they weren't just done to make the revenue 
figures, they were done because you think eventually this 
capacity would have been needed. Here, when you're looking at 
this and he says we've already got $80 million invested into 
Scandinavia. We have zero customers. Let's go buy some more, 
you thought it made sense to you that that's probably what was 
going to be needed some day?
    Would that have been in this millennium?
    Mr. Joggerst. My reaction, Mr. Chairman, would really be 
that it would be important to aggressively go out and try to 
pursue opportunities there. If none came to be, then we would 
need to look at some large outsourcing deals that I've already 
mentioned that were in the works that Brian Fitzpatrick worked 
on as well. One that would have been in the billions of 
dollars.
    Mr. Greenwood. This was the Baltic deal.
    Mr. Joggerst. No, no, no. Outsourcing of a global network--
--
    Mr. Greenwood. But I'm talking here, the Baltic deal. You 
said the Baltic deal.
    Mr. Joggerst. The Baltic deal, Mr. Fitzpatrick probably was 
not aware of. That was a business case that was done, I think 
prior to Global Crossing and Frontier merging. Global Crossing, 
I came from Global Crossing and Brian came from the Frontier 
organization.
    Mr. Greenwood. I'd like to play Monopoly with you some time 
and I'll trade you Baltic for Boardwalk. The Chair recognizes 
the gentlelady from Colorado, Ms. DeGette.
    Ms. DeGette. Thank you, Mr. Chairman. I'd like to follow up 
a little bit on Chairman Tauzin's questions because I think 
he's hit the nerve.
    Ms. Szeliga, I think you testified that you became the CFO 
of Qwest in April 2001. Correct?
    Ms. Szeliga. That is correct.
    Ms. DeGette. And you were actually acting in that capacity 
since the beginning of 2001, right?
    Ms. Szeliga. Not exactly, Congresswoman. I was an acting 
CFO from approximately the beginning of March 2001.
    Ms. DeGette. Okay. And you also are a CPA by training so 
you know about accounting rules and all of that?
    Ms. Szeliga. Yes, I am a CPA.
    Ms. DeGette. And in your position as Chief Financial 
Officer of Qwest, I think you testified earlier you really 
tried to make sure that proper auditing and accounting 
standards were followed, right?
    Ms. Szeliga. Yes, I did.
    Ms. DeGette. Now you also, I think, said in your opening 
statement or certainly in your written testimony that you 
worked very closely with the Audit Committee of the board, 
correct?
    Ms. Szeliga. Yes, I did.
    Ms. DeGette. How often would you say you spoke with members 
of the Audit Committee?
    Ms. Szeliga. Over time, it changed, but generally at least 
quarterly and then as time went on during my tenure we were 
speaking up to weekly and even day after day in certain 
circumstances where we were resolving issues or having 
important discussions that were time sensitive.
    Ms. DeGette. And would you speak with the entire Audit 
Committee or just certain members of the Audit Committee?
    Ms. Szeliga. Under different circumstances, it could be 
different, yes.
    Ms. DeGette. Now shortly after you became CFO, and maybe 
before, you've been with Qwest since 1997, if I'm not mistaken?
    Ms. Szeliga. That is correct.
    Ms. DeGette. You became concerned about these swaps shortly 
into your tenure, would that be fair to say?
    Ms. Szeliga. I would describe concerned as the swap 
transactions were consuming capital.
    Ms. DeGette. Right, and in fact in the first quarter of 
2001, the capacity swaps ate up the entire international 
capital budget, didn't they?
    Ms. Szeliga. The element I believe you're referring to as I 
recall and came to find out after I became CFO was an approved 
spending budget for international routes that we were trying to 
develop in getting our global network up and running. And in 
the first quarter we spent approximately the amount that we 
thought we would spend for the entire year on the global 
network.
    Ms. DeGette. And that didn't end after the first quarter, 
did it?
    Ms. Szeliga. We continued to spend capital on global routes 
in the second quarter and a smaller amount in the third 
quarter.
    Ms. DeGette. Okay, now around the summer of 2001, you 
started pushing for more disclosure about swaps, didn't you?
    Ms. Szeliga. I actually conferred with folks in my 
controller shop, and our auditors, and decided given the fact 
that we were continuing to build out our global network, that I 
thought it would be prudent to do more disclosure because it 
was a----
    Ms. DeGette. So your answer is yes?
    Ms. Szeliga. Yes ma'am.
    Ms. DeGette. Thanks. Now--I'm sorry, they only give us 10 
minutes, although I know the clock has been stuck a couple of 
times.
    So the controller also wanted more disclosure of these 
swaps too, correct?
    Ms. Szeliga. I would characterize it as we agreed that it 
was appropriate to put disclosure----
    Ms. DeGette. Exactly. Now during the summer of 2001, did 
you start to get wind of--and these swaps, they could have 
perfectly legitimate business reasons, couldn't they, in and of 
themselves. We've heard some of that testimony earlier?
    Ms. Szeliga. Yes.
    Ms. DeGette. The problem, of course, from an accounting 
perspective would be if there was no legitimate business 
purpose for the swaps, right? I'm putting it in lay person's 
terms, but that's, in essence, what it is?
    Ms. Szeliga. One of our processes and procedures was to 
determine by asking those qualified to answer the question, if 
there was a business purpose.
    Ms. DeGette. Right, so in the summer of 2001, you and the 
controller and your staff began to hear about side agreements, 
did you not?
    Ms. Szeliga. There was a concern that we should reiterate 
and codify in writing some of our rules around how we were 
putting contracts together.
    Ms. DeGette. And that was because there was some concern 
about side agreements, right?
    Ms. Szeliga. My controller expressed concerns to me.
    Ms. DeGette. When was that?
    Ms. Szeliga. It was June or July or August.
    Ms. DeGette. And what did your controller say?
    Ms. Szeliga. I can't remember specifically what he said, 
but he was expressing concerns that if there were side 
agreements, outside of the contracts being reviewed by the 
accountants that we may not account for it correctly and we 
need to make sure we had everything together so that we could 
get it right.
    Ms. DeGette. Right, exactly. Well, why would your 
controller think there might be side agreements? Did he say?
    Ms. Szeliga. As I recall, and this is a vague recollection, 
he was getting questions from folks in the business units or 
sales organizations about that sort of thing and that led him 
to believe that----
    Ms. DeGette. It might exist?
    Ms. Szeliga. Or that reiterating the controls----
    Ms. DeGette. If you look at Tab 39 in your notebook, Tab 39 
is a confidential memo from you to a bunch of people. It was 
cc'd to other people and that's what you're talking about, kind 
of trying to codify these accounting treatments of the swaps 
right?
    Ms. Szeliga. This is one of the things I was referring to, 
yes.
    Ms. DeGette. And on page 2 of that agreement, you said 
``note that we are required to provide representation to our 
auditors that no side letters or other verbal or written 
agreements exist between the parties, right?
    Ms. Szeliga. Yes.
    Ms. DeGette. And that's based on the concern that your 
controller was talking about, right?
    Ms. Szeliga. What I believe he and I were trying to 
communicate to the people on the memo was that we were going to 
be making representations and that we were relying on people to 
give us the right information so that we could validly make 
those representations.
    Ms. DeGette. Now when you wrote this memo on August 2, 
2001, were you personally aware of any side agreements?
    Ms. Szeliga. I do not recall being personally aware on 
August 2 and I did not write it myself.
    Ms. DeGette. But your name is on it. You obviously reviewed 
it before it went out.
    Ms. Szeliga. I did review it.
    Ms. DeGette. Okay.
    Ms. Szeliga. And gave comment to it.
    Ms. DeGette. Now some time after August 1, you personally 
found out about a side agreement, right?
    Ms. Szeliga. Yes, I did.
    Ms. DeGette. And when was that?
    Ms. Szeliga. I don't recall.
    Ms. DeGette. It was like in July, right? No, that would--
when was it, October?
    Ms. Szeliga. I don't recall specifically, but it was some 
time in October that I became aware that there was a letter and 
an e-mail that would be, could be termed as side agreements, 
yes.
    Ms. DeGette. And I'm sorry, so you became aware some time 
in October?
    Ms. Szeliga. Yes, I believe that's correct.
    Ms. DeGette. And what deal was that that you became aware 
of?
    Ms. Szeliga. It was brought to my attention that there was 
a letter and an e-mail associated with the C&W transaction.
    Ms. DeGette. Right. And what did you do about that?
    Ms. Szeliga. I asked my controller to, as I recall, follow 
up on it and I went to speak to Mr. Mohebbi, our COO and 
president with regard to the e-mail immediately. I believe that 
same day and I spoke with him as to whether he had written it 
and why it existed and expressed my concerns that it was not 
following processes and procedures.
    Ms. DeGette. And would that be Exhibit 78 in your notebook? 
It's a letter dated December 29, 2000 from Mr. Mohebbi to Nick 
Jeffrey?
    Ms. Szeliga. I believe this is the one that I had when I 
was concerned about it and went and talked to him.
    Ms. DeGette. Okay, and that was dated 2000, but you didn't 
find out about it until around October 2001, right?
    Ms. Szeliga. That's approximately correct.
    Ms. DeGette. Did you ask Mr. Mohebbi were there other side 
agreements like this? He was the COO of Qwest at that time.
    Ms. Szeliga. I don't recall asking him if there were 
others. I was certainly very focused on this one, asking him 
what it meant and how it did come to be.
    Ms. DeGette. What was his response?
    Ms. Szeliga. His response was I don't recall writing it. I 
don't believe I sent it. I'll need to look into it and I'm 
paraphrasing. I can't remember the exact words.
    Ms. DeGette. And in fact, subsequently, we learned that it 
was said. In fact, it was a side agreement, right?
    Ms. Szeliga. I believe we came to understand that it had 
been sent and there was some debate about who had actually sent 
it and at what time, etcetera.
    Ms. DeGette. You had a subsequent conversation with Mr. 
Mohebbi about this, right?
    Ms. Szeliga. I believe I did.
    Ms. DeGette. Tell me about that?
    Ms. Szeliga. It is my recollection that Mr. Mohebbi came 
back and followed up with me after our initial conversation 
saying that although he couldn't specifically remember, he 
didn't think he'd sent it, but had authorized someone to send 
it for him.
    Ms. DeGette. So in fact, this was authorized by the COO of 
Qwest, right?
    Ms. Szeliga. As I recall it, that was generally the 
statement he made to me and he said he did not review it before 
it got sent, as I recall.
    Ms. DeGette. Do we know who he authorized to send it?
    Ms. Szeliga. I cannot remember if he pinpointed an 
individual. I just can't remember.
    Ms. DeGette. Now in the meantime, that really concerned 
you, didn't it because what the side agreement shows is there's 
potentially no reason to book these swaps as legitimate 
business transactions, right?
    Ms. Szeliga. I thought of it more in terms of if this 
particular side agreement had been put in place, that we needed 
to follow up on this particular transaction and bring it to the 
forefront and investigate to determine if we had appropriately 
booked the revenues on it.
    Ms. DeGette. Were you also concerned there might be other 
side agreements that you didn't know about, given the rumors 
that you had been hearing for some months?
    Ms. Szeliga. Yes, I was concerned, not generally from 
rumors, but that this was a break in policy and that we needed 
to look into it and so we took further steps.
    Ms. DeGette. Now, in fact, you were so concerned you asked 
for a special meeting of the Audit Committee of the board, 
correct?
    Ms. Szeliga. Yes, I did.
    Ms. DeGette. And you had a telephone meeting with the Audit 
Committee and you explained these concerns. This is Tab 83 in 
your notebook where you said, Andersen, your auditor and 
yourself were previously unaware of certain terms of the 
transactions and the size of the transactions, but it was your 
view the corporation didn't need to take action with respect to 
the accounting and then you also said you had talked about it 
with Mr. Nacchio, Mr. Tempest and they were comfortable and 
that the committee was comfortable with your recommendations, 
right?
    Ms. Szeliga. That is correct.
    Ms. DeGette. Did you have any subsequent conversations with 
the Audit Committee about these side agreements?
    Ms. Szeliga. On a number of occasions, we discussed the 
policies and procedures that we had in place that would not 
allow for a side agreement to be made.
    Ms. DeGette. Do you know if the Audit Committee or the 
board ever took any action as the result of these revelations 
detailed in the October 29 board meeting or Audit Committee 
meeting?
    Ms. Szeliga. I believe that the Audit Committee had direct 
conversations with our CEO. I'm not aware of the specifics of 
the conversation. I don't know if they spoke to Mr. Mohebbi or 
not.
    Ms. DeGette. In fact, on October--in fact, they had a 
subsequent meeting that you were not at with Mr. Nacchio, 
correct?
    Ms. Szeliga. The Audit Committee spoke to Mr. Nacchio in 
private. I believe it was early December.
    Ms. DeGette. And from what we know they pretty much reamed 
him out. Do you know anything about that?
    Ms. Szeliga. I know they were going to have conversations 
with him and they asked me to leave the room.
    Ms. DeGette. Do you know if the Audit Committee did 
anything after they chastised Mr. Nacchio? Did they ask--did 
they report it to the board at large? Do we know?
    Ms. Szeliga. I believe that the Audit Committee gave full 
updates of our Audit Committee meetings to the members.
    Ms. DeGette. Do we have any written minutes that show that, 
that you know of?
    Ms. Szeliga. I can't say for sure, but the minutes were 
taken at the board meetings where the audit chairmen would have 
had to come forward and----
    Ms. DeGette. So if they did reveal it to the board, it 
would be in the minutes?
    Ms. Szeliga. Our minutes tends to be brief and----
    Ms. DeGette. So you don't know. Do you know if they ever 
asked anyone, any outside auditors to look and see whether the 
income needed to be restated at that time as a result of these 
side agreements?
    Ms. Szeliga. As a result of the C&W conversation we had, 
they did not. As I had recommended after calculating the 
percentage of revenue that it represented, that I would not 
recommend that we go back and restate on that particular----
    Ms. DeGette. There were many more side agreements. Did they 
ever do anything about that?
    Ms. Szeliga. After the meeting where I brought this to the 
attention of the Audit Committee, we agreed with the Audit 
Committee based on my recommendation that we will go back to 
our files, gathering them from many places and look to see if 
we can find any side agreements, amendments or anything like 
that that accounting had previously been unaware of and 
determine if we could find anything that would cause us to 
think we needed to look further about restatement.
    Ms. DeGette. Mr. Chairman, I have many more questions as a 
result of that answer, but I'll ask them in the second round. 
Thanks for your commenting.
    Mr. Greenwood. Thank you. The Chair is going to be flexible 
with the time so that everyone has all the opportunity they 
want.
    Before I go to the next speaker, a question for Mr. 
Joggerst, again, I'm having difficult with your earlier 
testimony today that you believed that the transactions at 
Global Crossing engaged in would have all been justified over 
time, but maybe they were done sooner than needed, but it 
wasn't the case that it wasn't needed.
    I want to read you another quick memo that came to you 
again from Brian Fitzpatrick. It's Tab 19. And it says ``We 
need to make sure we are all solving for the same problem'' 
whatever that means. ``We need the top line revenue by the 
close of the quarter. In order to get it, we have to spend a 
reciprocal amount with key carriers, in this case, Qwest. Our 
option is to spend the same amount of cash and end up with 
nothing. I want to make sure the three of us are 100 percent 
together regarding the fact that the Eastern Europe market, 
Vienna to Prague, nor the Scandinavian market, up to Helsinki, 
would support the numbers that are stated in the attached 
business case. The Euro market is crashing. No one is spending 
$700 million on these routes. I feel like we, you and I, are 
putting our names and careers on the line supporting this type 
transaction without having a discussion with the others about 
what we are really doing.'' When you read that memo on June 28, 
did you take that to mean that eventually even though he's 
saying there's no justification for this purchase of $700 
million, you still believed that it was eventually a capacity 
that the company was going to need?
    Mr. Joggerst. Mr. Chairman, let me just make a comment 
about this e-mail as well as the other e-mail that we looked at 
a moment ago from Brian regarding capacity into Scandinavia. I 
didn't personally work the Qwest deals. I wasn't personally 
involved in negotiating the terms and conditions, and frankly, 
when I looked at this, the e-mail that we looked at before, 
dated 9/27, I'm not even sure that deal was done in third 
quarter.
    Mr. Greenwood. That's not the point here. The point here is 
you saw these e-mails. They were sent to you. And I've got a 
stack of them here and I haven't even read the most scandalous 
ones in which it was brought to your attention over and over 
again, capacity was being acquired for which there was no 
rational business deal at all, business purpose at all, not 
that--they didn't say we don't need this now, we'll need it 
later. They said we don't need this. We can't justify this. And 
yet you testified this morning that you thought all of these 
deals would eventually, this capacity would eventually be 
needed.
    I can't reconcile the two. I don't understand how you could 
have seen all of these e-mails in which you were told there's 
no business justification whatsoever for them and then sit here 
and tell this committee that you thought eventually the company 
would need all of this.
    Mr. Joggerst. First of all, a point of clarification. What 
I said is for the deals that I worked closely with, that I was 
personally involved with, that I knew where we were acquiring 
assets, in those deals specifically, yes, I did believe that 
there was either a short term or long term purpose for them.
    Mr. Greenwood. So are you willing to say under oath to this 
committee that in 2001, last year, you were perfectly aware 
that at least your co-president, Mr. Fitzpatrick, was screaming 
bloody murder, that there were deals being done for which there 
was no business rationale whatsoever. In fact, that any 
rational effort to evaluate the business would have said these 
deals should not be done? Is that right?
    Mr. Joggerst. I was absolutely aware that there were a 
number of people including Brian who were quite upset, did not 
believe that the market was going to continue to grow. I think 
as Ms. Szeliga mentioned, I mean we were at a point where we 
were really sitting on top of a bubble. Some of us believed 
that we would continue to grow and some people foresaw that 
that it was going to burst.
    Mr. Greenwood. The problem is that Mr. and Mrs. America out 
there banking their retirement on the numbers that you guys 
were putting out didn't have the inside information. They 
didn't know that the company was full of hot air, did they?
    Mr. Joggerst. I absolutely understand your point.
    Mr. Greenwood. The Chair recognizes the gentleman from 
Kentucky, Mr. Whitfield, for 10 minutes.
    Mr. Whitfield. Thank you, Mr. Chairman. I'd like to yield 1 
minute to the full committee Chair.
    Chairman Tauzin. I thank the gentleman. I'll be brief. Mr. 
Joggerst, I have the memo of a meeting detailing the 
discussions on the 230 Network financial deal in which the 
counsel, Mr. Gorton, was basically cautioning against this 
deal. The memo is dated 4 p.m. Pacific time. This is right at 
the end of the quarter, get the deal done tonight or don't do 
it. And the pressure is to do it. People are saying don't do it 
on the phone. A bunch of people get kicked off the phone. What 
happens here?
    Mr. Joggerst. Let me explain. For a deal of that magnitude 
it required approval by the Board of Directors or really I 
think what's called a management committee consisting of many 
members of the board. The conference call was held. We very 
quickly went through the transaction in terms of what was 
happening and what the risks were involved and yes, I believe 
in the notes it does mention that Jim Gorton was really taking 
the lead in terms of explaining what the risks were.
    I can recall on the conversation that the independent board 
member, Mr. Conway, expressed some serious concerns.
    Chairman Tauzin. Conway's concern, Gorton's concern, then a 
bunch of you get kicked off the phone and the deal is done.
    Mr. Joggerst. Yes, we were asked to leave the call, leaving 
Gary Winnick and Tom Casey----
    Chairman Tauzin. Now the deal we're talking about was done 
right at the end of the quarter, obviously to plug the numbers, 
meet the numbers. It amounted to a $50 million cash transfer to 
360 Network which goes bankrupt in a couple of months.
    Mr. Joggerst. That's correct.
    Chairman Tauzin. It's a great example of how this deal was 
pushed and done to meet those numbers even though everybody was 
saying it was a bad deal.
    Now there's a memo, I'll try to be quick, on Tab 13 from 
Joe Perrone to Kurt Ross who talks about this. Because there's 
another side to this mess. One side of it is making up income, 
making up income to make those numbers. The other side is it 
takes company cash away. Everyone of these deals the company 
has to put out some cash to make the buy and second, it also is 
acquiring long term debt and the memo talks about that. It says 
in effect that we don't know, we know about our debt issues of 
third parties, but we rely upon the accounting regarding 
capital lease obligations from Treasury, etcetera. It says 
``for the time being, we're using historical balances. But 
additional debt from these categories would be significant and 
result in covenant violations, consequences of violating the 
financial covenant are severe and the time period in which to 
fix it is short. And this is called panic.'' What a diatribe. 
This is panic.
    But the reality is that every time the company in a panic 
made one of these deals to make these numbers, it also bled the 
company of cash and stacked up debt that wasn't accounted for 
and put the company in risk of failing. How could corporate 
executives do this to their company except for the greed of 
personal gain in the stock?
    Could you tell me?
    Mr. Joggerst. I'll tell you, seeing this e-mail, it came as 
a surprise to me. Myself and I can speak for, I believe, the 
rest of the sales team. We're not aware that we were anywhere 
near getting close to breaching debt covenants, that there were 
the kind of capital constraints. It's normal in any corporation 
that I've worked for, operations never has enough capital to do 
what they want to do. Sales never likes the revenue numbers. 
They're always too high. But to have this come directly from 
the financing organization saying that there are some severe 
capital constraints which would lead in 20-20 hindsight for me 
to agree directly with Mr. Greenwood's comment that there would 
be no reason to do a number of these transactions to buy assets 
into Scandinavia----
    Chairman Tauzin. In fact, there was never a reason not to 
do it for the good of the company?
    Mr. Joggerst. There was never any capital or any really 
really true strong will to expand the network, to integrate it, 
integrate those assets and really make them useful.
    Chairman Tauzin. Thank you, sir. I'm sorry I took so much 
time.
    Mr. Whitfield. Mr. Chairman, that actually was some of the 
areas I was going to get into, so I'm delighted that you did 
so.
    Just to reinforce what the chairman, the point he was 
making, these senior executives had a lot of knowledge about 
the financial condition of the company, obviously, including as 
he said this document on Tab 13 in which they talk about--this 
was from Kurt Ross to Joseph Perrone. Who is Joseph Perrone 
again, would you tell us?
    Mr. Joggerst. I'm not sure what his exact title was, but 
worked for the CFO.
    Mr. Whitfield. Okay. And in this memo, of course, it says 
this is the definition of panic we're about to breach our bank 
covenants which is a violation and it's severe and there's no 
cure for it and so forth.
    Have you been aware, like they were aware, that the company 
was in danger of violating its bank covenants and had severe 
capital expenditure constraints on its ability to implement the 
packages, the purchases, what would your opinion of them, what 
would you have suggest that they do.
    Mr. Joggerst. If I had known that there was never any 
intention to continue to invest in the company, other than just 
doing deals to book revenue, then I would have recommended 
against the deals.
    Mr. Whitfield. So you would have recommended against the 
deals?
    Mr. Joggerst. I would have had I know that there was really 
no wherewithal or ability or really will to actually continue 
to expand the network and to activate the assets that were 
being purchased.
    Mr. Whitfield. But those higher up in the company, they 
obviously decided not to do that. Okay.
    Mr. Olofson, I want to ask you just a few questions. In 
your opening statement, you mentioned that Chief Financial 
Officer Dan Cohrs told you that he would like to reduce the 
guidance to the street. I guess that's telling Wall Street what 
we're going to earn, that he would like to reduce that, but he 
could not because Chairman Gary Winnick had just sold nearly 
$10 million shares of Global Crossing stock. Now that's kind of 
interesting. I'd like to be honest with Wall Street, but I 
can't do it, because the chairman had just sold nearly $10 
million shares of Global Crossing stock. Was this the first 
time that you had learned of Mr. Winnick's sale of the stock?
    Mr. Olofson. Was this the first time I learned about Mr. 
Winnick's sale?
    Mr. Whitfield. Yes, when Dan Cohrs told you, made that 
comment to you.
    Mr. Olofson. My recollection was that that was public 
knowledge by that time. I think he sold some time in May and I 
think it was in the newspapers.
    Mr. Whitfield. Did you have any concern at all about the 
sale of that stock, I mean its impact on the company? Did that 
concern you at all?
    Mr. Olofson. I think most people were a little surprised by 
the magnitude of the sale and that the message that it was 
sending to the investors that the chairman is selling a large 
block of stock. It sends a message that he's not very 
optimistic, I guess about the results of the company.
    Mr. Whitfield. Now do you remember the approximate date of 
that sale?
    Mr. Olofson. It was some time in mid-May. I don't remember 
the exact day.
    Mr. Whitfield. Of?
    Mr. Olofson. 2001.
    Mr. Whitfield. 2001. About the time when we already know 
that everyone's aware or at least certain people are aware that 
bank covenants are about to be violated.
    Mr. Olofson. Yes sir.
    Mr. Whitfield. Just what is your sense that, for example, 
of Mr. Winnick's involvement in the company on a daily basis, 
just what was your sense of his involvement? Was he a hands on 
guy or not?
    Mr. Olofson. My opinion, Mr. Winnick was the Chairman of 
the Board, of the company, he's not in my opinion somebody 
that's going to operate a local telephone company and get into 
the details of operations and that type of thing. I think he's 
more of a deal guy. I mean that's been his background, so I 
think that was his involvement with the company at a very high 
level.
    Mr. Whitfield. Would you agree with that, Mr. Joggerst?
    Mr. Joggerst. Yes, even again as I mentioned I was an early 
employee of Global Crossing and I can recall we had weekly 
sales calls and Gary attended every weekly sales call for the 
first 6 months, as I can recall; that he was hands on when it 
came to sales and any large deals that were being done.
    Mr. Whitfield. Can you list any specific deals that you 
know he was involved with?
    Mr. Joggerst. I know, other than we mentioned the 360 
Network's deal. He was clearly involved with that. I recall 
second quarter of 2001 there was actually a press release that 
one of our competitors had won a deal in Asia. A request came 
back from the Office of the Chairman, why is this happening? I 
need to understand what's in the sales final and I want to 
become personally involved, please prepare a summary. That came 
from Tom Casey and I know in here there's an e-mail from Jim 
Gorton to Mr. Winnick with my assessment of the second quarter 
final.
    Mr. Whitfield. Let me just go on and ask another question 
to Mr. Olofson there a minute. You also told us that in your 
discussion with Mr. Cohrs that he told you that the company had 
decided to back stop margin loans to certain officers and that 
he hoped the price of Global Crossing stock would increase 
because this would have to be disclosed in Global Crossing's 
next proxy statement.
    Could you explain the significance of the company's 
decision to back stop margin loans to company officers?
    Mr. Olofson. Well, I didn't know the specifics of what 
arrangements had been made, but my impression was, my 
understanding was that there were individuals and I don't even 
know who the individuals were that would have been forced to 
sell their Global Crossing stock because of the declining price 
of the stock and that rather than making them come up with 
monies or somehow they would essentially backstop that loan.
    My understanding is--I'm not really clear on the term back 
stop, but I think it's kind of a secondary guarantee or some 
type of----
    Mr. Whitfield. Did you know which officers were included in 
that?
    Mr. Olofson. I did not.
    Mr. Whitfield. Now in your opening statement, you mentioned 
that you expressed your concern about what was going on to Mr. 
Perrone.
    Mr. Olofson. Correct.
    Mr. Whitfield. And I think you indicated that he maybe 
threatened to terminate you. Is that correct?
    Mr. Olofson. Correct.
    Mr. Whitfield. Did he do that--did you--you expressed your 
concern in a memo that you wrote to him, right?
    Mr. Olofson. Well, I originally expressed my concern to Mr. 
Perrone about the first quarter transactions, in particular, 
the 360 transaction that we talked about quite a bit this 
morning on June 1 and then eventually I wrote my letter to the 
Chief Ethics Officer. During this period of time the company 
was considering layoffs. That had been rumored for some period 
of time and I think probably from the beginning of the year. It 
was, in my opinion, handled somewhat amateurishly because they 
set dates to meet with people and then cancel them and so on 
and so forth.
    But I later found out that my name was included on a list 
of management people that were to be laid off and I think it 
was dated some time in June. It was going to be part of the 
layoffs that took place in August. And I didn't know that at 
the time.
    Mr. Whitfield. So you were surprised at that.
    Mr. Olofson. Well, I didn't even know it, but then I wrote 
my letter and then I found out that I was on that list and then 
I got a call from Jim Gorton, or he had called my attorney at 
the time, and said that I'd made the cut, so I hadn't seen this 
list. I didn't know I was on the layoff list to begin with and 
he calls him and tells him I made the cut. And then I received 
a letter from Mr. Perrone, dated August 15, saying that he had 
this position on the East Coast for me that we had talked about 
previously and that I should contact him and come back and 
we'll talk about travel allowances and living allowances and 
what have you. And by that time it was obvious that I was not 
going to be laid off. And I was advised not to go back to the 
company until this investigation had been resolved because Mr. 
Gorton had advised me in his letter to me that they were 
investigating the allegations in my letter and until we heard 
from that I didn't want to go back to the company and be 
accused of any complicity with what was going on in the 
company.
    So eventually I got the letter that I was terminated.
    Mr. Whitfield. Okay, I yield back the balance of my time.
    Mr. Greenwood. The Chair thanks the gentleman and in fact, 
eventually 9,000 or 10,000 people were terminated from that 
company. Average American investors lost $54 billion because of 
this falsification in large measure and Mr. Winnick walked away 
with what a half a billion dollars, $700 million?
    The Chair recognizes the gentleman from Michigan, Mr. 
Stupak for 10 minutes.
    Mr. Stupak. Thank you, Mr. Chairman. Mr. Olofson, I was 
looking at your testimony here. I'd like to ask you a question 
or two on it if I may. On the bottom of page 2 you said you had 
substantial assistance from Arthur Andersen and in particular 
its partner, Joseph Perrone, with whom you worked closely with 
on many issues. Did Arthur Andersen just do auditing or did 
they do financial advising? Did they do both of them?
    Mr. Olofson. Arthur Andersen were the auditors for Global 
Crossing.
    Mr. Stupak. They didn't do any financial consulting or 
advising to Global Crossing?
    Mr. Olofson. Oh yeah, there was a lot of consulting work 
done. I think from a systems perspective on the financial side 
I don't recall any specific projects, but there was that.
    Mr. Stupak. Did you also mention in your testimony that 
they did pre-issue reviews?
    Mr. Olofson. Pre-issue reviews?
    Mr. Stupak. Yes, Arthur Andersen helped with the pre-issue 
reviews?
    Mr. Olofson. Yes.
    Mr. Stupak. What are pre-issue reviews?
    Mr. Olofson. Well, I assume by the definition that it would 
be a review that they would make prior to a public offering.
    Mr. Stupak. They would review the financial stability of a 
company before an offering? Is that correct?
    Mr. Olofson. I don't know if financial stability is the 
right term, but I think----
    Mr. Stupak. When they pre-review your financial 
statements----
    Mr. Olofson. Yes, I thought they would review the financial 
statements, sure.
    Mr. Stupak. So----
    Mr. Olofson. It could also have occurred, and I don't know 
the context that you're speaking of, but it could also have 
occurred in terms of a merger or acquisition.
    Mr. Stupak. Sure. But the pre-issue being stock, a public 
offering?
    Mr. Olofson. I know that they reviewed the documents and 
worked long hours for every one of the offerings that we made.
    Mr. Stupak. Did you help with these pre-issue reviews at 
all?
    Mr. Olofson. Did I help?
    Mr. Stupak. Yes.
    Mr. Olofson. Yes.
    Mr. Stupak. The financial statements, did you help on those 
financial statements?
    Mr. Olofson. Yes.
    Mr. Stupak. Are you familiar with the 1995 Private Security 
Litigation Reform Act?
    Mr. Olofson. No sir.
    Mr. Stupak. Also, on page 3, and you talked a little bit 
about the swaps and you talked about the telephone conferences 
in which there were swaps and--or you believe there were swaps 
and that Global's CEO, Tom Casey, unequivocally stated there 
were no swaps in the quarter and that earlier you had heard the 
same thing on another telephone conference.
    Why was that important that the analysts would ask that 
question? Why would that be important to the analysts to know 
whether or not there were swaps?
    Mr. Olofson. I think that these transactions became so 
material in the first and second quarter of 2001 that some of 
the financial analysts were starting to question what this was 
all about and I think, I don't recall the analysts or the 
investment banking firms, but I do recall seeing some of their 
reports raising this question of exchanges of capacity and 
something we'll have to follow up on with the company.
    Mr. Stupak. Okay. You go on to state on page 5 that you 
told Mr. Perrone that, and I'm quoting, ``I disagree with his 
interpretation''--this is on the swaps--``and I also told him 
that additional language was vague and that the analysts and 
investors would not understand the ramifications of the brief 
mention of purchase commitments.''
    I've seen throughout some of the documents the word 
``inventive wording''. Is this inventive wording? Used terms 
and descriptions which would confuse analysts and others, 
financial analysts and others?
    Mr. Olofson. Well, I mean it was pretty vague.
    Mr. Stupak. It's pretty vague and we're telling analysts 
that there are no swaps. Then we have vague language trying to 
clarify. What's the purpose of doing that in your opinion?
    Mr. Olofson. In my opinion, I mean obviously, I don't know 
who wrote it or why. Perrone indicated to me that he put it in 
there, so I assume it's his words, but I assume it's to at 
least--if anybody challenges these transactions that the 
company could say that it was disclosed.
    Mr. Stupak. So we can be vague and we can use creative 
words and we can deny swaps and we can always say it was in 
their vague language, once again mislead the investor, the 
public, right?
    Mr. Olofson. That's a pretty fine line.
    Mr. Stupak. And mislead the analysts who you rely upon to 
offer your stock to the general public, correct? Not your 
stock, but the company stock, correct?
    Mr. Olofson. [No response.].
    Mr. Stupak. I know you're shaking your head a little bit, 
but I need to get an answer on the record.
    Mr. Olofson. Would you repeat the question?
    Mr. Stupak. Sure. The vagueness that you give to the 
analysts in denying the swaps, that's to keep the analysts, 
financial analysts to continue to offer the stock for public 
consumption, to keep the stock prices up and the company going.
    Mr. Olofson. The vagueness wasn't necessarily given just to 
the analysts. It was included in the press release and I think 
probably in the 10Q. The analysts can pick it up from there, 
certainly.
    Mr. Stupak. Sure. And whether it's truthful or accurate, 
that was neither here nor there, as long as the company stock 
was still being sold to the public and keep the price up?
    Mr. Olofson. I think that was probably a very strong 
motivation.
    Mr. Stupak. Sure. And under the Private Securities 
Litigation Reform Act of 1995, as long as we put a disclaimer 
on the front, we're no longer legally actionable by the 
shareholders. They can't do anything. I need an answer. I know 
you're shaking your head, agreeing with me.
    Mr. Olofson. I didn't realize it was a question. I thought 
you were making a statement.
    Mr. Stupak. Do you feel qualified to answer?
    Mr. Olofson. I'm not familiar with that legislation you're 
talking about, but----
    Mr. Whitfield [presiding].
    Mr. Stupak. Okay, all right. Ms. Szeliga, I'm sorry, I 
murdered your last name. Would you say it for me?
    Ms. Szeliga. Szeliga.
    Mr. Stupak. In your testimony, in review of your testimony, 
it indicates that on the swaps, Global Crossing reported the 
amount of the revenue received as GAAP revenue, gradually over 
the life of the contract, a distinctly more conservative 
approach than one taken by Qwest. Why would Qwest take a 
different approach than Global Crossing on how they did these 
swaps, how they reported them?
    Ms. Szeliga. I don't know why there was a difference. I 
believed when we were booking those and I believe now, that we 
were doing our best to follow the technical literature that was 
out there and booking them through our books and records to 
reflect the transaction that we were doing. So I can't really 
speak to why there was a difference of interpretation or how it 
was different.
    Mr. Stupak. Well, your auditor was Arthur Andersen, right?
    Ms. Szeliga. That is correct.
    Mr. Stupak. That's the same for Global Crossing, correct?
    Ms. Szeliga. That is correct, I believe they stated their 
auditors were Arthur Andersen, today yes.
    Mr. Stupak. So this technical advice you got, you're saying 
Arthur Andersen gave you two different interpretations for the 
same transactions between these companies?
    Ms. Szeliga. I can't speak to how they accounted for their 
transactions that they did with us. I can speak to how we 
accounted for it and how we attempted to follow Arthur 
Andersen's guidance and interpret the technical guidance that 
was available to us.
    Mr. Stupak. The technical guidance, where was that received 
from?
    Ms. Szeliga. Well, our technical accounting team, under the 
controllership would use the FASBs, APBs and other 
pronouncements that were issued from the FASBs as well as staff 
accounting bulletins and such, including EITFs which are 
merging issues, task force types of guidance. They would come 
to the auditors and seek guidance and advice as to how to be 
sure they were applying them appropriately. In a particular 
situation of the IRUs, we used the Arthur Andersen white paper 
fairly extensively to guide us in how to book those.
    Mr. Stupak. All right, yet we have two companies, same 
transaction, covering it differently.
    Let me go to Tab 83, the one that Ms. DeGette was asking 
you about, the memo there to the Audit Committee of the Board 
of Directors.
    It says in this that you are going to--``Mr. Iwan stated 
that Andersen agreed with Ms. Szeliga's view of the same'' and 
you informed the committee that you had discussed the matter 
with the chairman and CEO and your assessment of the matters 
and the reasons were the same and therefore they were 
comfortable with your assessment and nothing had to be done. Is 
that basically a good summary?
    Ms. Szeliga. It's a fair summary.
    Mr. Stupak. What was the value of this issue here, this 
swap here that you're concerned about?
    Ms. Szeliga. I don't recall the dollar amount. It was low 
single digits as a percentage of our revenue.
    Mr. Stupak. Right, it's about $109 million?
    Ms. Szeliga. I'm not sure, I'd have to look to be sure.
    Mr. Stupak. Do you have something there you could look to 
see what the value of that is? Anything that you have in front 
of you that could help refresh your memory?
    Ms. Szeliga. I don't know, let me take a----
    Mr. Stupak. Sure, take a look at your notes or whatever you 
have.
    Ms. Szeliga. I believe that the detail that I have here 
shows the fourth quarter transaction as 109.
    Mr. Stupak. Okay, 109. And you didn't need to take any 
action with respect to accounting or financial reporting of 
those transactions, that was your conclusion?
    Ms. Szeliga. The conclusion was based on materiality 
analysis that I did with my controller and talked to Arthur 
Andersen about and talked to the Audit Committee about.
    Mr. Stupak. Sure, but wouldn't you at least have to restate 
your earnings for that quarter or something with $109 million 
that's not there?
    Ms. Szeliga. It was my belief and understanding with the 
support of our auditors that because it was immaterial that we 
did not need to book an adjusting journal entry to restate our 
financial statements.
    Mr. Stupak. And that's within the accepted general 
principles of accounting?
    Ms. Szeliga. Yes sir, I believe it is.
    Mr. Stupak. All right, and you're not required to report 
that to the SEC or anyone like that?
    Ms. Szeliga. To the extent that something is deemed 
immaterial to the reader of the financial statement, I don't 
know of any specific reporting requirements that I had 
overlooked.
    Mr. Stupak. You've since restated that $109 million, 
correct? The company has?
    Ms. Szeliga. I can't speak to the restatement. I've not 
been involved in the calculation of the numbers that were 
reported in the press release.
    Mr. Stupak. Okay. All right. Mr. Joggerst?
    Mr. Joggerst. Yes.
    Mr. Stupak. The chairman asked you a question about and he 
asked you a little bit about these transactions and you felt 
that they would all----
    Mr. Whitfield. Excuse me, you're about almost 2 minutes 
over and if you could finish up here and let us give Mr. 
Stearns of Florida an opportunity and then we'll talk about a 
second round. Is that okay with you?
    Mr. Stupak. Sure. Let me just ask this one question.
    Mr. Whitfield. All right, go ahead.
    Mr. Stupak. The chairman had asked you about the--some of 
the transactions, and you said all the transactions you were 
involved in you felt that they would have been a benefit for 
Global Crossing. And then you were asked a little bit about the 
360 transaction there. And then a few months later they went 
bankrupt. I think that was like the 360, you objected to it. So 
you were really familiar with that one, right?
    Mr. Joggerst. I'm familiar with the 360 deal, correct.
    Mr. Stupak. And how was that going to benefit the company 
when you had just recommended it not be approved?
    Mr. Joggerst. What my comment was was their business 
purpose, did Global Crossing at that time have a forecaster 
requirement for transatlantic capacity----
    Mr. Stupak. Right, and you told Global Crossing it should 
not enter into this one. They're on shaky, financial grounds 
and it was not a good deal.
    Mr. Joggerst. However, yes, there were some strong concerns 
from myself and the entire team whether we should do this 
transaction at that time.
    Mr. Stupak. Did you have any strong concerns then?
    Mr. Whitfield. Mr. Stupak, if you could bring this to 
conclusion.
    Mr. Stupak. This is the last question. Did you have any 
strong concerns then after you were told to get off the phone 
and then they went ahead and made the transaction, $150 million 
cash was received and then about 60 to 90 days later, Mr. 
Winnick cashes in $124 million worth of stock. Did you have any 
concerns or strong reactions then?
    Mr. Joggerst. I can't honestly say that I recall when he 
made his stock transaction.
    Mr. Whitfield. Okay, I recognize the gentleman from Florid 
for 10 minutes.
    Mr. Stearns. Thank you, Mr. Chairman, and Ms. Szeliga, let 
me just ask you some easy questions. What is your educational 
background? It's easy to talk about yourself, I'll give you a 
breather here. I mean you were the CFO, correct, at one time?
    Ms. Szeliga. I was the CFO of Qwest from April 2001 until 
the very beginning of July 2002.
    Mr. Stearns. Can you just tell me your educational 
background? I'm sure the resume is in here, if you just bear 
with me, just tell me you have a bachelor's?
    Ms. Szeliga. I do.
    Mr. Stearns. And what is that in?
    Ms. Szeliga. Accounting.
    Mr. Stearns. And do you have any advance degrees?
    Ms. Szeliga. I do not.
    Mr. Stearns. Okay. So you're not a lawyer.
    Ms. Szeliga. No sir, I am not.
    Mr. Stearns. You probably wish you were now. Having been 
through these hearings and also chairing what's called Commerce 
Consumer Protection and Trade, I have oversight over FASB which 
is the Financial Accounting Standards Board. And we've had 
hearings and some of the things have come up in addition to the 
special purpose entities which Enron used to hide debt.
    Revenue recognition. And the areas I'm going to talk to you 
about is dealing with Qwest's revenue recognition and see if I 
can understand what your policy was and particularly dealing 
with Cable and Wireless which is, as I understand, is a company 
in England that you dealt with.
    If you can just briefly tell me how Cable and Wireless of 
England and Qwest interfaced, because I have here some of the 
agreements that you had where you recognize, for example, on 
December 28, 2000, $109 million of revenue with Cable and 
Wireless.
    Is it possible to tell me in just broad terms how you 
recognize revenue with Cable and Wireless? Would you have a 
written agreement with them and would you buy their ports? Can 
you just take me through that a little bit? Do you understand 
my question?
    Ms. Szeliga. I do understand your question.
    Mr. Stearns. Let me just, Qwest has the fiber optics is 
coming to England and you've got to get to the consumers, so 
you call Cable and Wireless and you say look, can we use your 
services and your ports to get to the customers. Is that true?
    Ms. Szeliga. I'm not a sales person, nor an engineer, but 
we were buying capacity from Cable and Wireless as well as 
selling capacity to Cable and Wireless to transport voice and 
data services. That's my understanding of it, generally.
    Mr. Stearns. So you would sit down with the CEO which I 
guess was Nicholas Jeffries and did you ever deal with Nicholas 
Jeffries yourself as CFO?
    Ms. Szeliga. No, did not.
    Mr. Stearns. Did you deal with anybody in Cable and 
Wireless?
    Ms. Szeliga. Not to my recollection.
    Mr. Stearns. I have a memo here dated August 2, 2001 from 
you to a group of individuals including Grant Graham, Mark 
Shumacher, Bill Evliss and Afshin Mohebbi. Do you know those 
people?
    Ms. Szeliga. Yes, I do.
    Mr. Stearns. And I have this memo here, August 2, 2001, 
dealing with IRU accounting, some rules of engagement. Do you 
want to see a copy of this memo?
    Ms. Szeliga. I believe I have one here if you'll give me a 
moment to find it.
    Mr. Stearns. Sure. It's number 39 in our notebook.
    Ms. Szeliga. I've located it.
    Mr. Stearns. And IRU is indefeasible rights of use, so 
you're talking in this memo, as you say, the rules of 
engagement, when we sit down with companies, Cable and 
Wireless, these are the things we should do. Is that correct in 
this memo?
    Ms. Szeliga. It was not an attempt to outline everything, 
but to deal with some specific issues. I believe we were trying 
to document in writing some of our procedures.
    Mr. Stearns. Okay, you had indicated just moments earlier 
that you did not ever deal with Nicholas Jeffries yourself?
    Ms. Szeliga. I don't ever recall ever dealing with him.
    Mr. Stearns. Now Nicholas Jefferies when he sat down to 
work out these IRUs, agreements, for buying the ports and 
everything, who would he deal with if he wouldn't deal with the 
CFO which is the Chief Financial Accounting Officer. Who would 
he deal with?
    Ms. Szeliga. I believe that the representatives from Cable 
and Wireless who were purchasing service with us dealt 
primarily with our sales organization.
    Mr. Stearns. So you had no interface with Cable and 
Wireless yourself?
    Ms. Szeliga. I have no recollection of ever having a direct 
interface with Cable and Wireless personnel.
    Mr. Stearns. When the sales people signed an agreement with 
Cable and Wireless would you review that?
    Ms. Szeliga. I would not review it directly, but there was 
a procedure in place wherein people within my organization were 
to be given time to look at the contracts that were being 
signed with any customer, given it was a large contract of this 
nature.
    Mr. Stearns. In this memo that you wrote, you said on page 
2, ``in addition to the foregoing, there will be no side 
letters or verbal commitments outside of the IRU, agreement 
that conflicts with the contractual upgrade language or 
specifically indicate that an upgrade will be agreed to.'' 
Right, that's what you said. So let's say that your sales 
people sat down with Cable and Wireless and we said okay, we 
have this agreement. We want to use your ports, but we also 
want to change this port. We can't have a fixed agreement for 
one port because we might have to change it. From your 
standpoint if you have a very flexible contract that allows 
them to change ports, that is Cable and Wireless, could you 
book that easily as revenue or not?
    Ms. Szeliga. It was our policy that we had----
    Mr. Stearns. Could you pull the mike us just a little bit 
closer to you?
    Ms. Szeliga. Is that better? It was our policy that we 
were--had to be able to clearly indicate that we had 
transferred the title to an asset before we recognized the 
revenue up front.
    Mr. Stearns. Right.
    Ms. Szeliga. To the extent that we didn't identify routes, 
I don't know how we could have recognized the assets.
    Mr. Stearns. I think you just made an absolutely accurate 
statement. And I wish I could have said it as well, but you 
cannot accurately book revenue if you don't have a contract 
that identifies the ports that you're using.
    Ms. Szeliga. That was our policy.
    Mr. Stearns. Do you recollect ever having verbal agreements 
with Cable and Wireless?
    Ms. Szeliga. I do not recollect ever having spoken with 
Cable and Wireless myself, as I referred to earlier. I saw a 
letter and an e-mail that were outside of the contract we had 
reviewed when we, Finance, reviewed the contract with Cable and 
Wireless.
    Mr. Stearns. So you're saying today that if there was an 
agreement that did not identify the ports, you would not, your 
company would not book the revenue?
    Ms. Szeliga. Our policy was that we needed to identify an 
asset and transfer title to the asset, as one of many different 
elements to be able to recognize the revenue.
    Mr. Stearns. Okay, so you know, I've got here Cable and 
Wireless contract amendment 3, December 28, 2000; the contract 
amount was $109 million and you recognize it as roughly 
$108,739,000 million, roughly the same amount.
    So that contract was a contract that you could identify all 
the ports and everybody had a full understanding of what they 
were doing and there were no verbal agreements?
    Ms. Szeliga. I can't speak to that----
    Mr. Stearns. But philosophically that's what you're saying?
    Ms. Szeliga. Philosophically, the contract should have 
identified the assets that we were selling specifically.
    Mr. Stearns. Would you be surprised if Nicholas Jefferies, 
we asked him to be a witness and he didn't want to be a 
witness, so he made out an affidavit. And he made it out 
September 24, today.
    Would you be surprised that he can actually identify 
documents where you made verbal agreements? In fact, he can 
give you an e-mail from the person you wrote this memo to. This 
memo you wrote saying no, IRU accounting, please. And you wrote 
it to Afshin Mohebbi and he's got an e-mail from him that would 
indicate that he had verbal agreement. He's got another second 
document, this is now Nicholas Jefferies saying in an 
affidavit, swear under oath, that Qwest did not follow your 
memo and in fact, the people you addressed it to were taking 
oral agreements and the second document is a letter from 
Gregory M. Casey of Qwest to Mr. Coe and so he's saying that 
you went ahead and used oral agreements, contrary to what your 
memo said and he's implying in this that you booked the revenue 
on something which you did not have an accurate understanding 
of the ports and that goes to what I started--my time is coming 
out here, is that a lot of corporations, not just Qwest went 
ahead and booked a lot of stuff that they shouldn't have.
    So I'll be glad to let you look at this affidavit, but this 
is basically the CEO, Nicholas Jefferies saying that Qwest took 
oral agreements and appears they booked these as revenue which, 
in your own words now, you just said, is not correct.
    Ms. Szeliga. I believe that I said that our policy was we 
needed to identify the assets we were selling.
    Mr. Stearns. Say that again, I'm sorry, I was just 
distracted. Go ahead, I'm sorry.
    Ms. Szeliga. I believe that I said it was our policy that 
we needed to specifically identify the assets we were selling 
in order----
    Mr. Stearns. Oh no, I agree with you. I think you did 
right. I'm just telling you some of your people didn't do that 
and somehow, and I'm not making any statement here other than 
it appears the evidence would appear that your company is 
booking revenue it should not have been booking, based upon 
oral agreements in dispute of your own memo of August 2, 2001. 
I think we can give you this affidavit, if someone on the staff 
has it.
    Ms. Szeliga. If I may make a couple of points of 
clarification?
    Mr. Stearns. Sure.
    Ms. Szeliga. The August memo was intended to put in writing 
some of the--what I thought were very important elements of our 
policies and procedures and that was in August 2001 after 
speaking with my controller.
    Mr. Stearns. That's a good point.
    Ms. Szeliga. Yes, and the deal had been done that we're 
referring to, I believe, in the fourth quarter of 2000. 
However, that was not a new policy. It was just a reiteration 
of----
    Mr. Stearns. Ah, it's an accounting policy that has history 
and it's not something new and you're just trying to say to 
these fellows, look, this is the law, this is the way it should 
be done and obviously Qwest was not--your memo is really, 
because Qwest wasn't following what they should be doing in 
your mind?
    Ms. Szeliga. In mind the memo was to make sure I continue 
to communicate in responsible fashion and remind people what we 
were supposed to be doing and how we were supposed to be 
following our processes and our procedures because that's what 
they were set up to do.
    Mr. Stearns. This is a tough question for you. You might 
now want to answer it.
    But in your heart of hearts, didn't you know that there 
were oral agreements being made before and you wrote this memo, 
but before this memo was written, didn't you know in your heart 
of hearts that oral agreements were being made and that you 
were booking revenue based upon oral agreements where you 
didn't identify the ports? Didn't you know that in your heart 
of hearts?
    Ms. Szeliga. I don't recall knowing that, no.
    Mr. Stearns. You didn't have any suspect that this was 
occurring?
    Ms. Szeliga. I believe that my controller, after talking 
with me, was concerned that people thought they might be able 
to get around the rules by doing it, so we ought to 
recommunicate to people and let them know that that was not 
going to be acceptable to us.
    Mr. Stearns. The CEO of Cable and Wireless knew, Nicholas 
Jefferies, he knew. That's in his affidavit that he swore 
today. So it seems like if he knew, somebody in the 
organization should have known, including the CFO. And the way 
he indicates, this is not something isolated.
    Ms. Szeliga. May I take a moment to read this?
    Mr. Stearns. I'm sorry, you should take time. So my time is 
expired.
    Mr. Greenwood [presiding].
    Mr. Stearns. Can I ask you one last question? Why were you 
removed as CFO?
    Ms. Szeliga. Joseph Nacchio who was the CEO of our company, 
exited the business and Dick Notebaert was hired as CEO. Mr. 
Notebaert determined that he wanted his prior CFO from another 
company that he worked at and whom he was very comfortable 
working with, to work alongside him as his CFO. And at that 
point, he communicated that to me.
    Mr. Stearns. So it was an amiable separation in your mind?
    Ms. Szeliga. I did not exit the business. I am still at 
Qwest.
    Mr. Stearns. You did what?
    Ms. Szeliga. I did not exit the business. I'm still at 
Qwest.
    Mr. Stearns. I understand, but generally when you move from 
3 Star or 3 Star General down to Full Colonel, there is a 
reaction.
    Ms. Szeliga. There was a reaction of disappointment.
    Mr. Stearns. Disappointment, obviously.
    Ms. Szeliga. Yes.
    Mr. Stearns. Do you think it was fair for them to move you 
from CFO down to Executive Vice President? I mean a lot of 
people might not know the difference, but at least I do. Do you 
feel it was fair?
    Ms. Szeliga. I don't know that I thought of it as fair, but 
I didn't think of it as surprising because I think lots of 
times when CEOs come in to companies, they want to bring their 
right and left hand with them in order to feel comfortable in 
doing the tasks they're about to do.
    Mr. Stearns. That makes sense.
    Ms. Szeliga. So I explained to Mr. Notebaert that I 
understood it as a common business practice to do that. And we 
understood each other.
    Mr. Stearns. The old President is still there, though, 
isn't he?
    Ms. Szeliga. Afshin Mohebbi is still President and COO of 
our company.
    Mr. Stearns. It would seem like he would want to keep you.
    Ms. Szeliga. Who would want to keep me, sir?
    Mr. Stearns. Mr. Notebaert.
    Ms. Szeliga. Mr. Notebaert asked me to stay at the company 
and I agreed to take over----
    Mr. Stearns. Wouldn't he want to keep you still as the CFO 
because he's the top guy?
    Ms. Szeliga. Well, it seems reasonable to me that he would 
want somebody he knows.
    Mr. Stearns. Who knows the history and knows where 
everything is in the closets and everything in terms of how do 
we find something?
    Ms. Szeliga. That's not what I've been asked to stay and do 
and I've agreed to stay and do. I have not been involved in 
accounting or that element of finance since I was removed as 
CFO. I'm currently in charge of real estate and procurement for 
the company.
    Mr. Stearns. Mr. Chairman, thank you.
    Mr. Greenwood. The Chair thanks the gentleman. The Chair 
would announce that we're going to do a second round of 
questions. It may not take, every member may or may not want to 
take the full 10 minutes, but if they do, it could be another 
hour. So first off, I want to ask the witnesses on our first 
panel, would any of you like a couple minute break?
    Okay, we will take a 5-minute break and then I would also 
notify the second panel that if you haven't had lunch yet, and 
you'd like to have lunch before your ordeal begins, you may 
want to take that opportunity because you will have time to do 
it. There are restaurants or snack bars in this building.
    So we will reconvene in approximately 5 minutes.
    [Brief recess.]
    Mr. Greenwood. The meeting will come to order. Can someone 
pull that door closed in the back, please?
    The Chair recognizes himself for 5 minutes and we'll 
confine this panel to 5-minute periods of questioning.
    Let me return to you, Mr. Joggerst, and I don't mean to 
have been too harsh on you earlier in my questions, but it is 
important for us to understand who knew about what and when. 
You've made it clear in your testimony that you felt that the 
transactions in which you were involved were transactions that 
was acquiring capacity that while not necessarily justified at 
the time, would be justified in the future.
    You also made it clear that you knew at the time that Mr. 
Fitzpatrick was of the view, at least Mr. Fitzpatrick was of 
the view that the company was acquiring capacity for which 
there was no ostensible need, except for the matter in which it 
enabled the company to book revenues, correct?
    Mr. Joggerst. That's correct.
    Mr. Greenwood. Now I would like for you to share with us 
your knowledge about who else in the company, going vertically 
upwards, do you believe was aware of these transactions were 
occurring not for purposes of needed capacity, but just to book 
the revenues to make the world believe the company was doing 
better than it was. Was Mr. Winnick aware about this?
    Mr. Joggerst. Mr. Winnick was definitely aware of 
reciprocal transactions and for example, he had to approve our 
sending money to 360 Network. That's one example.
    Mr. Greenwood. Let's be clear about my question. Of course, 
he was aware of reciprocal transactions.
    The question that I'm asking you was do you have knowledge 
that Mr. Winnick was aware that certain of these swaps were 
being conducted, as we've illustrated in so many of these 
documents today, strictly for the purpose of enabling the 
company to book revenues when, in fact, the capacity wasn't 
needed and when, in fact, it was a bad business decision to go 
ahead and acquire that capacity.
    Did Mr. Winnick know that?
    Mr. Joggerst. It's my belief that both Tom Casey and Gary 
Winnick both were aware that there was a significant amount of 
consternation in the company where people were questioning 
whether we would ultimately need the capacity. I do believe 
they would know that.
    Mr. Greenwood. So is this a fair statement, is it a fair 
statement to say that Mr. Casey and Mr. Winnick were fully 
aware of the fact that Global Crossing was engaging in a series 
of transactions that involved acquisitions of capacity for 
which there was no business purpose and strictly done for the 
purpose of achieving revenues to meet their quarterly numbers. 
Is that a fair statement?
    Mr. Joggerst. I would--I think it's a fair statement with 
the exception of just weighing with absolutely no business 
purpose.
    I can tell you that on the conference call that we had with 
the Executive Committee that included Mr. Winnick and Mr. 
Casey, that one of them and I can't recall who specifically, 
but one of them did say that if we don't do this deal, we won't 
make our quarterly numbers. So again, i mentioned there was a 
need, there was an understanding, a thought that we needed a 
trans-Atlantic----
    Mr. Greenwood. For instance, you said you agreed with my 
statement except for the portion where there was no--I'd be 
happy to go through a whole bunch of more e-mails with you 
where Mr. Fitzpatrick was screaming bloody murder that these 
deals were not only not important in terms of acquisition of 
capacity, were being done just to meet the numbers and in fact 
were bad business, bad business. Right?
    You don't believe that Mr. Casey and Mr. Winnick understood 
that to be the reality? Was Mr. Fitzpatrick not communicating 
that information up the chain?
    Mr. Joggerst. It's my belief that Brian would have fed that 
up the chain of command, that's correct.
    Mr. Greenwood. So let's get it straight here, Mr. Winnick, 
the CEO of the company walked away with $700 million while 
American investors lost $54 billion. Mr. Winnick knew what the 
game was and the game was we've got to meet these quarterly 
numbers. We don't need this capacity in Helsinki or anywhere 
else, these specific cases that I've talked about, but we're 
going to do this even though it's in the long range bad 
business for the company, we're going to do this so we can have 
revenues generated and booked to make the investors believe 
that the company is doing better than it really is.
    Is that a fair statement or not?
    Mr. Joggerst. It's my belief that Mr. Casey and Mr. Winnick 
were definitely aware of those deals, yes.
    Mr. Greenwood. That's not what I asked you. They're aware 
of the deals. Were they aware of the fact--were they aware of 
the nature of the deals? Not just that we bought some capacity 
here and we sold some capacity here. Were they aware of the 
fact that these deals--how could they not be aware that the 
fact that these deals were being done strictly to meet the 
numbers and in complete disregard to the need to actually get 
the capacity? How could they not be aware of that? Weren't they 
aware in negotiating some of these deals?
    Mr. Joggerst. Mr. Casey was involved in discussing the deal 
for 360 Network's deal directly with Greg McFaye, so there was 
a level of personal involvement.
    In terms of Mr. Winnick getting personally involved in 
negotiating deals with customers, I can't recall.
    Mr. Greenwood. Were there conference calls in which this 
information was made clear and Mr. Winnick was participating in 
those conference calls and Mr. Casey?
    Mr. Joggerst. Absolutely.
    Mr. Greenwood. So they knew.
    Mr. Joggerst. Absolutely.
    Mr. Greenwood. Okay, thank you. Ms. Szeliga, earlier Ms. 
DeGette asked you about the C&W cite e-mail sent by Afshin 
Mohebbi. She asked you what Mohebbi told you about who sent the 
e-mail and you said you could not recall. Is that correct?
    Ms. Szeliga. That's correct.
    Mr. Greenwood. But isn't it the case that during your 
interview with the committee staff, you said that Mohebbi told 
you that he had Ken Smiley send it out?
    Ms. Szeliga. I said I believe that it could have been Ken 
Smiley. I don't recall specifically, but I think I told the 
staff that it could have been. I don't recall specifically, but 
I did bring up Ken Smiley's name because I generally recall 
that he may have mentioned it or mentioned her or a number of 
other people who were involved in conversations with him around 
that.
    Mr. Greenwood. Okay, so your testimony today is that you're 
not really certain he said that?
    Ms. Szeliga. I'm not certain.
    Mr. Greenwood. Mr. Anschutz, what is your understanding--I 
want to ask you the same kind of question I asked Mr. Joggerst 
about Mr. Anschutz. Did he know that, in fact, the company was 
entering into these transactions simply to meet the numbers 
when, in fact, it was not a valid business basis for the 
capacity?
    Ms. Szeliga. I believe that Mr. Anshutz believed, based on 
discussions he had with the senior management of the company 
that there was a valid business purpose for the transactions. I 
heard in board meetings that comment being made. And therefore, 
I don't have any reason to believe that he doubted the comment 
or otherwise.
    Mr. Greenwood. Mr. Deutsch is recognized for 5 minutes.
    Mr. Deutsch. We could probably go for 14 rounds. We have an 
excellent staff who really spent more time than any of us 
individually, I think, on this.
    But I want to ask a general question and have each of you 
respond because I think this is more of a global concern. We 
could debate back and forth these transactions. But I think we 
know the result of them in terms of their revenue stream in the 
company and how the market looked at them. I guess a concern I 
have is which other companies are doing this? Obviously, in the 
telecom area, no other companies are doing it right now, but it 
would seem as if you could do swaps in almost any business, if 
you wanted to. And I guess a concern from the, I think from the 
committee perspective is really the devastation from not just 
on a personal basis which we can elaborate and talk about 
millions of individuals in America today, I mean literal 
devastation in terms of their personal lives, untold stories 
and the size. That really from a macro basis, in terms of our 
economy structurally, I mean in a sense what's happened through 
the companies that you either work for or worked for, the 
transparency in the markets have really been destroyed. And 
what else is out there? It's not just these companies, but it's 
a series of companies over the last 12 months that really, you 
know, the devastation to our economy is on par, not quite, but 
getting there of the Great Depression, and I think that if you 
can respond, if you were not with this company, would you look 
at those transactions the same way, that this is just a--if it 
wasn't illegal or improper and I think what each of you have 
said, I think this is different than our committee hearing with 
Enron where I think the Enron activity under the microscope to 
me is clearly illegal. I would not quite say that about this 
because I think there's a real question. I think it should not 
be allowed, but whether it was a gray area where you were able 
to get inside that gray area which, in a sense, I mean pushing 
the envelope consistently and I guess my concern is not just 
what's happened, but what might be out there.
    Ms. Szeliga, if you were a CFO of another company and that 
type of transaction, a similar--it wouldn't obviously be with 
fiber optics, but a swap situation, how would you respond today 
if you were a CFO at a different company today, a widget 
company for that matter, doing swaps of factories or doing 
swaps of trucks as an example?
    Ms. Szeliga. I would generally say I think the exchange of 
goods and services ought to be examined to determine if it's 
providing economic benefit and if it, to the companies engaged 
and the economic benefit ought to be reflected appropriately in 
the financial records because that's how we attempt to 
communicate. So for my way of thinking it's not the swap of 
goods and services that's problematic. It is really the 
understanding that it is economically beneficial to the company 
and have you reflected it appropriately in your financial 
records or otherwise in order for it to be done correctly.
    Mr. Deutsch. And who is the ultimate determiner of that? I 
think that seems to be the area because I think Mr. Joggerst's 
position still is that these were economically viable. I mean I 
think we've gotten some of these statements, the Scandinavia 
issue, with all due respect, I understand your position. It's 
not a very strong position. You can keep arguing it from today 
until tomorrow, but at some point you might be the only one who 
believes it and you've done as good a job as you can 
articulating it here today, but it's hard to see it pass the 
straight face test even.
    Mr. Joggerst. I think what makes it difficult is your 20-20 
hindsight is perfect and when we were caught up in the 
incredible growth and success of the company, where we were 
expanding, we were announcing new systems on a record level. I 
had been involved in under-sea fiber optics and cable since 
1992, selling them to phone companies around the world and 
never did I ever think that private equity and private capital 
would be as attracted to that industry as it was. So yeah, I 
was caught up in what was really this incredible growth swing 
that really, I believed the articles that talked about the 
insatiable demand for internet, that yes, the truly global 
village was here and was here to stay and would require an 
increased amount of bandwidth over and over and over again 
beyond what all of the industry had invested so far.
    Mr. Deutsch. What about the specific question that I'm 
asking. I'm running out of time, but I'll take a little bit 
extra since everyone else has at this point. If you were CEO, 
CFO of a new company that's doing this, have you learned any 
lessons in terms of really this whole concept of swaps and 
really getting a true value in transparency? Because that's the 
concern today.
    I don't want to give a running account of the market, but 
the Dow is down 130 right now. We, in terms of loss of capital, 
I mean it really pales in comparison to the Great Depression, 
in terms of absolute dollars that have occurred and I think 
each of us really have a sense that people's lives, I'm not 
talking about thousands of people who lost their jobs and their 
life savings, but really tens of millions of Americans whose 
lives are fundamentally different today than they were 12 years 
ago about college education, about retirement, about real 
things. America has changed. I mean for real. And a lot of it, 
unfortunately, has to do with companies like yours and other 
companies and hopefully, they'll come back, hopefully, there's 
not--I don't believe there's a structural problem in our 
economy. I think America is strong economically with the 
strongest economy in the history of the world, but what has 
happened, what's real today is this transparency which is 
really the strength of our economy.
    I hate using anecdotal stories, but I had friends over for 
lunch over the weekend and a teenage girl, she was yelling at 
her father for putting some money from her bat mitzvah into 
stocks. I mean if we're at the point where we're ready to call 
HHS and report her father for putting her bat mitza money in 
stocks, I mean that's the transparency issue and what other 
companies are out there? That's the point where we are today, 
that we've got some very bright, very creative people who are 
looking for the edge, but the edge not in terms of creating 
more value in terms of business, but more value in terms of how 
to get an edge in this.
    I keep thinking to myself, did Warren Buffet invest in any 
of these companies? Probably not.
    Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair recognizes the gentlelady from 
Colorado for 5 minutes.
    Ms. DeGette. Thank you, Mr. Chairman. To finish my line of 
questioning before, Ms. Szeliga, you had said that after you 
found the transactions that you took to the Audit Committee in 
October, you went back to see if there were any other side 
agreements, right?
    Ms. Szeliga. Yes, I did.
    Ms. DeGette. In fact, you found about 15 of them as I 
recall from what I've read, is that right?
    Ms. Szeliga. I don't know where that number comes from, but 
we put together a binder, fairly thick binder of amendments to 
contracts, exhibit to contracts and if you might want to call 
them side agreements and went through them with a great deal of 
diligence and showed them to our auditors to determine if any 
of them were inappropriate. By that, I mean unknown to the----
    Ms. DeGette. How many were there?
    Ms. Szeliga. A binder.
    Ms. DeGette. Ten, fifteen?
    Ms. Szeliga. I don't know. It was thick. They weren't bad 
side agreements. They were actually amendments or addendums to 
the contract that were reflected in the original contract.
    Ms. DeGette. Did you ever find any other side agreements 
that you thought were of concern? Yes or no.
    Ms. Szeliga. Yes.
    Ms. DeGette. How many?
    Ms. Szeliga. I recall three specifically that come to mind 
when we're talking about----
    Ms. DeGette. When did you find those?
    Ms. Szeliga. In the fall of 2001.
    Ms. DeGette. In the fall of 2001, so right around this same 
time as all the meeting of the Audit Committee and all was 
happening, right?
    Ms. Szeliga. Yes.
    Ms. DeGette. Now what was the monetary total of those three 
additional agreements?
    Ms. Szeliga. I don't know.
    Ms. DeGette. Was it in the millions of dollars?
    Ms. Szeliga. It was.
    Ms. DeGette. Was it in the hundreds of millions of dollars?
    Ms. Szeliga. If you add the C&W transaction, I think we 
were talking to, which was already over $100 million with that 
individual transaction.
    Ms. DeGette. Okay, but yet it was your business judgment 
that that would not affect the bottom line either, those other 
three agreements?
    Ms. Szeliga. Actually, when we found them all, we had legal 
look into them to determine if there was either an 
inappropriateness in the way we booked them or something that 
would cause us to go back and need to do that. And on the C&W 
one, in particular, we determined that it was not binding to 
the contract and therefore in the fourth quarter I didn't make 
a journal entry to correct that.
    Ms. DeGette. Okay, did you make journal entries to correct 
any of them?
    Ms. Szeliga. We did not restate under my tenure.
    Ms. DeGette. And in fact, I think as you testified before, 
that under generally accepted accounting principles, you can 
only book the up front revenue if it's a legitimate business 
transaction, right? That was the accounting rule before all 
this happened. That's the accounting rule now, right?
    Ms. Szeliga. The intention is to reflect legitimate 
business transactions in the books and records of the company.
    Ms. DeGette. And the way you found about all of these other 
side agreements and oral agreements, you went down to your 
division CFOs and found out about it, right?
    Ms. Szeliga. We went through the contract records of the 
company using internal legal assistants to go through those and 
put those in a binder for review.
    Ms. DeGette. Did the CFOs give you that information?
    Ms. Szeliga. I'm not sure where they got the information.
    Ms. DeGette. Let me ask you this, before the summer of 
2001, the CFOs, divisional CFOs did not report directly to you 
and you changed that so that they did report to you, right?
    Ms. Szeliga. That's not quite correct.
    Ms. DeGette. Okay, who did they report to before the summer 
of 2001?
    Ms. Szeliga. Different people at different times. We were 
reorganizing.
    Ms. DeGette. But they didn't report to you, did they?
    Ms. Szeliga. Before I became CFO, some of them did.
    Ms. DeGette. To that position?
    Ms. Szeliga. They reported into my prior position, some of 
them, not all of them.
    Ms. DeGette. And these were the same--these were the ones 
that had been alleged to make the side agreements, right?
    Ms. Szeliga. No, Congresswoman, I don't believe----
    Ms. DeGette. Who made the side agreements?
    Ms. Szeliga. If we're going to talk about particular ones, 
the C&W side agreements that we were referring to, one was a 
letter from Mr. Casey as referred to by one of the other 
Congressmen earlier, and one was an e-mail from Mr. Mohebbi as 
we discussed earlier.
    Ms. DeGette. And he was the COO?
    Ms. Szeliga. That is correct.
    Ms. DeGette. So did you ever fully ascertain how many of 
these side agreements there were? You know about three, but was 
that it?
    Ms. Szeliga. We had a number of, I'll call them side 
agreements, but they didn't appear to be inappropriate side 
agreements, because they were known at the time of the contract 
and were addended or attached as exhibits, so after we 
completed the review, we felt pretty comfortable that this was 
a limited universe, that we were looking at.
    Ms. DeGette. So to what do you attribute the fact that 
Qwest just recently had to restate $1.4 billion of its----
    Ms. Szeliga. I'm not in a position to respond to that 
because I have not been involved in their assertion as to why 
they restated.
    Ms. DeGette. You don't think it was because of these 
accounting problems that happened back in 2000, 2001?
    Ms. Szeliga. I'm sorry, I'm just not in a position to tell 
you why they reached the conclusion that led to the issuance of 
the press release on Sunday.
    Ms. DeGette. Thank you.
    Mr. Greenwood. The Chair thanks the gentlelady and the 
Chair thanks each of you for your forbearance. You've been here 
for 3\1/2\ hours. Mr. Joggerst, Mr. Olofson, Ms. Szeliga, we're 
going to dismiss you now and excuse you now and thank you for 
your testimony and for your candor.

TESTIMONY OF JACKIE ARMSTRONG, COUNSEL, GLOBAL CROSSING, LTD.; 
 ROBIN WRIGHT, FORMER VICE PRESIDENT OF CARRIER SALES, GLOBAL 
 CROSSING, LTD; GREG CASEY, FORMER EXECUTIVE VICE PRESIDENT OF 
  WHOLESALE MARKETS, QWEST COMMUNICATIONS INTERNATIONAL INC.; 
SUSAN CHASE, VICE PRESIDENT OF INTERNATIONAL WHOLESALE MARKETS, 
  QWEST COMMUNICATIONS INTERNATIONAL INC.; KYM SMILEY, FORMER 
   DIRECTOR OF STRATEGIC NEGOTIATIONS, QWEST COMMUNICATIONS 
INTERNATIONAL, INC.; AND KENNETH F. FLOYD, DIRECTOR OF SALES IN 
                  NORTH AMERICA, FLAG TELECOM

    Mr. Greenwood. And I would call forth our second panel 
consisting of Ms. Jackie Armstrong, Counsel at Global Crossing, 
Ltd.; Ms. Robin Wright, the Former Vice President of Carrier 
Sales at Global Crossing; Mr. Greg Casey, the Former Executive 
Vice President of Wholesale Markets, Qwest Communications; Ms. 
Susan Chase, Vice President of International Wholesale Markets, 
Qwest Communications; Ms. Kym Smiley, former Director of 
Strategic Negotiations for Qwest; and Mr. Ken Floyd, Director 
of Sales in North America of FLGA Telecom.
    Mr. Deutsch. Mr. Chairman, if we can just before they get 
set up, there's been a number of either e-mails or memos that 
have been mentioned by other members, including the chairman of 
the full committee and others. If we can just make sure that we 
get those as part of the record, I'd appreciate it.
    Mr. Greenwood. The entire binder from whence all those 
documents came will be part.
    Mr. Deutsch. Our staff is telling us that some of those 
were not in the binder.
    Mr. Greenwood. We'll have the staff work that out and any 
documents to which members referred to today will be part of 
the record.
    [Pause.]
    Mr. Greenwood. We welcome all the panelists. We note the 
absence of Mr. Floyd. We trust Mr. Floyd will be joining us and 
will go through the administering of the oath should he return.
    We welcome each of the panelists. I think all of you are 
aware, most of you watched the first panel. You're aware that 
this is an investigative committee and when we hold an 
investigative hearing we take testimony under oath, so I would 
ask if any of you have objections to providing your testimony 
under oath?
    Okay. I also tell you pursuant to the rules of the 
committee and pursuant to the rules of the House, you are 
entitled to be represented by counsel and so I would ask if any 
of you are represented by counsel and we'll start with you, Ms. 
Armstrong, are you represented by counsel this morning, this 
afternoon? And could you identify your attorney, please, and 
also if you will push your button. Thank you.
    Ms. Armstrong. Jeffrey Canard and Ralph Ferrara.
    Mr. Greenwood. Okay, we welcome you, sir. Ms. Wright?
    Ms. Wright. Yes, I'm represented by counsel, Jeffrey Canard 
and Ralph Ferrara.
    Mr. Greenwood. All right, very well. Mr. Casey, are you 
represented by an attorney?
    Mr. Casey. Yes, Mr. Chairman, I'm represented by Michael 
Trager of Fullbright and Jaworski.
    Mr. Greenwood. Very well. Ms. Chase, are you represented by 
counsel?
    Ms. Chase. Yes, Mr. Greenwood. I am represented by Ty Cobb.
    Mr. Greenwood. Okay, Mr. Ty Cobb. And Ms. Smiley?
    Ms. Smiley. Yes. I'm also represented by Ty Cobb.
    Mr. Greenwood. Very well. If you will stand and raise your 
right hand, I'll swear you in.
    [Witnesses sworn.]
    Mr. Greenwood. You are under oath. I would ask if any of 
you have an opening statement to make? None of you has an 
opening statement to make, very well. The Chair will recognize 
himself for the purpose of questioning and I will begin with 
Mr. Casey, a Qwest former Executive Vice President for 
Wholesale Markets who is here with us today under subpoena.
    Mr. Casey has refused to be interviewed by committee staff 
and it is my understanding that upon advice of counsel, Mr. 
Casey likely will rely on his constitutional right not to 
testify at today's hearing. I believe that this privilege 
should be personally exercised before the members as we have 
done in the past and that is why we requested Mr. Casey's 
appearance today.
    It is my hope that given the importance of his testimony to 
our investigation, he will reconsider his decision to invoke 
his Fifth Amendment rights and will answer the subcommittee's 
questions today.
    Mr. Casey, let me ask you, did you or your employees 
provide written side or oral agreements that would permit the 
purchase of Qwest capacity to trade in or upgrade that capacity 
subject only to availability, contrary to what the written 
contract provided for and with the intent of deceiving Qwest's 
auditors and investors so that Qwest could book the revenue all 
at once and meet its quarterly revenue targets?
    Mr. Casey?
    Mr. Casey. Mr. Chairman, ranking member, members of the 
subcommittee, I recognize and respect the important 
responsibilities of the subcommittee and I would like to answer 
your question today.
    While that was my strong preference, upon advice of 
counsel, I am invoking my rights under the Fifth Amendment of 
the Constitution and as such I respectfully decline to provide 
testimony or to answer your questions today.
    Mr. Greenwood. So you will invoke your Fifth Amendment 
rights in response to all questions here today?
    Mr. Casey. Yes, Mr. Chairman.
    Mr. Greenwood. You are certainly entitled to do that and 
you are excused from the witness table at this time, but I 
advise you that you remain, subject to the process of the 
committee and if the committee's need is such, then we may 
recall you.
    The Chair ask unanimous consent that I may continue with an 
additional 5 minutes to question the remaining witnesses on the 
panel and without objection, I will do so except that I see 
that Mr. Floyd has arrived.
    Welcome, sir. Mr. Floyd, let me advise you as I have 
advised the other members of this panel and ask you to pull 
that microphone, stand right up in front of you and make sure 
the button is on. You're aware, I believe that we're holding an 
investigative hearing and that when we do that, we take 
testimony under oath. Do you have objection to giving your 
testimony under oath?
    Mr. Floyd. No, I don't.
    Mr. Greenwood. Okay, then I would also let you know that 
pursuant to the rules of this committee and the rules of the 
House, you are entitled to be represented by counsel. Do you 
wish to be represented by counsel today?
    Mr. Floyd. Yes, I do.
    Mr. Greenwood. Would you then identify by name the attorney 
who will represent you?
    Mr. Floyd. Mr. Michael Flannigan and Ms. Veronica Pastore.
    Mr. Greenwood. Okay, then I'm going to need to ask you to 
stand and raise your right hand.
    [Witness was sworn.]
    Mr. Greenwood. You are under oath, Mr. Floyd. Did you have 
an opening statement that you wish to make?

                 TESTIMONY OF KENNETH F. FLOYD

    Mr. Floyd. Very simply, my name is Ken Floyd. I've been 
working with FLAG Telecom, U.S.A., Ltd. as director of sales 
for North America. I've been working there since February 1999. 
Before joining FLAG, I worked for more than 7 years in a 
wholesale carrier function at RCI Long Distance which had been 
Frontier Communications, now Global Crossing out of Rochester, 
New York. My primary function was the international business 
relationships.
    I do appreciate the opportunity to participate in this 
forum and I am happy to cooperate and answer any questions that 
this committee might have.
    [The prepared statement of Kenneth F. Floyd follows:]
   Prepared Statement of Kenneth F. Floyd, Director of Sales, North 
                         America, FLAG Telecom
    My name is Kenneth (Ken) F. Floyd and I have been working with FLAG 
Telecom USA Limited as Director of Sales, North America since February, 
1999. Before joining FLAG, I worked for more than seven years in the 
wholesale carrier sales function at RCI Long Distance/Frontier 
Communications in Rochester, New York, with a primary focus on 
international business relationships.
    I appreciate the opportunity to participate in this forum and I am 
happy to cooperate and answer any questions that the Committee members 
might have.

    Mr. Greenwood. Thank you, Mr. Floyd. The Chair will correct 
himself. I will recognize myself for 10 minutes for questioning 
and each of the members will have 10 minutes as well.
    Let me turn to Ms. Smiley. How are you this afternoon?
    Ms. Smiley. I'm fine, thank you.
    Mr. Greenwood. Good. Were you involved in drafting the side 
letter in the side agreement that's been referred to earlier 
today?
    Ms. Smiley. The side letter for which----
    Mr. Greenwood. Let me ask that question a little bit 
better.
    Are you aware--this is the C&W side agreement. Were you 
involved in drafting that side agreement?
    Ms. Smiley. During the fourth quarter of 2000, yes.
    Mr. Greenwood. Who else was involved in drafting these 
agreements?
    Ms. Smiley. Roger Hoaglund, Greg Casey, and some members 
from Cable and Wireless, I believe, Alan Coe.
    Mr. Greenwood. It is our understanding that Qwest cannot 
determine who sent the Mohebbi e-mail out. We understand that 
Mohebbi cannot recall if he did so. Did you send the e-mail out 
to C&W?
    Ms. Smiley. No, I did not.
    Mr. Greenwood. Would you look at Tab 75, please?
    Do you have that document?
    Ms. Smiley. Yes, I do.
    Mr. Greenwood. It shows that at 3:38 p.m. on December 29, 
you learned that Mohebbi's assistant was not in the office to 
send the e-mail out and we have been told by Mohebbi that he 
also was not in the office that day. Did you contact Mohebbi 
after you learned that his assistant was not in the office?
    Ms. Smiley. No, I did not. I did not have direct contact 
with Afshin Mohebbi.
    Mr. Greenwood. Did you have indirect contact with him?
    Ms. Smiley. Other than sending the e-mail? I sent the e-
mail to both Mr. Mohebbi and his assistant and called her 
subsequent to find out to say here it is, please make sure it 
goes out and if you have any questions, contact Greg Casey. And 
that's basically what I'm saying in this e-mail. After I found 
out that she was not in the office, she meaning Mr. Mohebbi's 
assistant, I let Mr. Casey know that and that was the end of my 
participation in this.
    Mr. Greenwood. But with regard to Mr. Casey, how did you 
inform him?
    Ms. Smiley. This e-mail shows that I said I just tried to 
call Pam and she's out until January 3. I may have also called 
him on the telephone, but I can't remember.
    Mr. Greenwood. You don't remember, recall that, okay. Do 
you know who sent the e-mail out?
    Ms. Smiley. I do not. I assume Ms. Mohebbi did.
    Mr. Greenwood. Okay, did you ever have a follow-up 
conversation with either Mr. Mohebbi or Mr. Casey about this e-
mail and whether or not it had actually been sent out?
    Ms. Smiley. At this time, I did not. Later on, I believe 
maybe October 2001, people at Qwest were asking questions about 
it and people asked me whether I sent it out and I said no, I 
didn't. I just always assumed Mr. Mohebbi sent it out.
    Mr. Greenwood. Let me turn to you, Ms. Wright, and make 
sure your microphone is right in front of you and turned on, if 
you would, please.
    Would you turn to Tab 5 in your binder there? Do you see 
that document at Tab 5?
    Ms. Wright. Yes, I do.
    Mr. Greenwood. You wrote an e-mail entitled ``First Quarter 
Reciprocal Deals.'' The beginning of the second paragraph 
starts, ``Right now it looks like we'll need to make network 
purchases in the neighborhood of $250 to $350 million in order 
to meet the revenue target.''
    Why is Global Crossing having to make hundreds of millions 
of dollars of purchases to meet a revenue target?
    Ms. Wright. The sales team came up with a list of 
opportunities for--that they were wanting to close in the 
quarter. When that was added up, we knew that we had a 
shortfall and knew that there were some potential reciprocal 
deals on the table. My purpose here was to try and let the 
heads of the region who also had some responsibility in the 
capital budget process know that these things were on the table 
and that we would probably need to make the purchases along 
with the reciprocal deal in order to make the revenue targets.
    Mr. Greenwood. Was there, in your opinion, a business 
purpose for everything Global Crossing purchased from counter 
parties in reciprocal deals?
    Ms. Wright. My role at this point was to track results, to 
work with the sale team on the opportunities. I didn't have any 
direct contact with any of the customers other than Qwest, so I 
really don't have any knowledge of the business purpose for 
those transactions.
    Mr. Greenwood. Would you turn to Tab 9, please? And Tab 9 
is a memo from Michael Coghill to Wallace Dawson. It says, ``in 
reviewing the latest Qwest deal status, I see that U.S. 
Domestic Waves has been increased to $60 million. We are now 
being asked to provide business cases to support this 
transaction. This discussion began with U.S. Waves at $15 
million which we could not find justification for, let alone 
$60 million.''
    Doesn't this indicate that Global Crossing was buying 
millions of dollars of assets for which there was no business 
justification?
    Ms. Wright. What I believe this e-mail says is that a 
member of the network planning organization who worked for 
Wally Dawson who was head of the network had obviously severe 
reservations with a purchase size of $60 million. However, 
there were people, other people in the company who had a 
different opinion. David Walsh, who was my boss at the time was 
a very strong believer in the market for WaveLinks and was 
working with a number of customers in the carrier markets, was 
expanding the media and entertainment, business and building of 
extranet. We had some opportunities on the table with carrier 
customers. His viewpoint was that there was a strong market for 
WaveLinks, so clearly within the company there were very 
differing opinions about the market potential here.
    Mr. Greenwood. Would you turn to Tab 25, please? There, 
you'll find an e-mail dated August 30, 2000.
    You wrote some thoughts which can be found beginning on the 
second page of the e-mail chain. At the beginning of your e-
mail you express, ``I am very concerned about the number for 
IRUs here.'' What was the nature of your concern with the 
number of IRUs?
    Ms. Wright. If I can take a moment to just clarify----
    Mr. Greenwood. Please do, absolutely.
    Ms. Wright [continuing]. About IRUs. IRUs are not 
inherently bad. In fact----
    Mr. Greenwood. Of course not.
    Ms. Wright. IRUs are great for the business. When Global 
Crossing started and I was the 25th employee, that's all we 
sold at that point was IRUs and that's how traditionally 
carriers built their networks was through IRUs. So I just want 
to say that IRUs are really a good thing.
    Mr. Greenwood. We understand that.
    Ms. Wright. Okay.
    Mr. Greenwood. It's like trucks are a really good thing 
except if you trade a blue truck for a red truck just to book 
the revenues.
    Ms. Wright. I hear your point. My concern was that I was--
my concern that I was articulating to Gary Brenninger who was 
the finance, head of finance for the product management 
department was that the number that they had given us, in my 
opinion, was too high for the year and that there was no way 
that we were going to be able to meet that target, given what I 
knew about the market and the falling prices that we had been 
experiencing.
    Mr. Greenwood. Did you feel pressured to meet a target 
number of sales in that quarter?
    Ms. Wright. Yes.
    Mr. Greenwood. You also wrote, ``as you know, prices are 
dropping fast and to some extent we are our own worst enemy. 
When saddled with unreasonable revenue expectations, we do the 
crazy deals at the end of the quarter.''
    Did you have concerns that the targets set for sales were 
unreasonable?
    Ms. Wright. I did have concerns, yes.
    Mr. Greenwood. What did you mean about a crazy deal? Why 
did you refer to it as a crazy deal?
    Ms. Wright. Well, this panel has been talking predominantly 
about reciprocal transactions. What I was talking about in this 
particular e-mail, I believe, was that at the end of the 
quarter we were--I believe we were discounting too much in 
order to get the business. We had the best network in the 
world. We were built everywhere and because of some end-of-
quarter pressures we were discounting and I believe that we 
were our own worst enemy in that we were beginning to cause the 
degradation in pricing since we had a lot of the inventory.
    Mr. Greenwood. Was the increase in numbers of Global 
Crossing's capacity swaps over the quarters a result of the 
pressure sales incurred to meet target numbers each quarter?
    Ms. Wright. I believe that's true.
    Mr. Greenwood. Okay. The Chair recognizes the gentleman 
from Florida, Mr. Deutsch for 10 minutes.
    Mr. Deutsch. Ms. Smiley, did you work for Debra Petri?
    Ms. Smiley. Yes, I did.
    Mr. Deutsch. Ms. Petri told us that your role was strategic 
negotiation and that you were the one who was supposed to get 
the deals. Is that correct?
    Ms. Smiley. I'm sorry, that I was supposed to do what?
    Mr. Deutsch. Get the deals.
    Ms. Smiley. Get the deals?
    Mr. Deutsch. Get the deals.
    Ms. Smiley. I did not bring the deals to the table. I did 
not approve the deals. I had no authority to approve the deals 
so getting the deals, no. Assisting in the negotiation of the 
contract, yes.
    Mr. Deutsch. Can you explain to us why some of the biggest 
deals that you worked on, those with Qwest, FLAG and Cable & 
Wireless all claim that they had side or oral agreements 
outside of contract that allowed them to port the capacity they 
purchased from one asset to another, that they might select 
later?
    Ms. Smiley. I did not make any oral agreements with any of 
the customers on the contracts that I negotiated. We negotiated 
the upgrade provision of the contract very hard. Qwest 
maintained and I maintained that we had to have upon mutual 
agreement of the parties. Was there a reason for them to expect 
that we would not give mutual consent? No. Because in my 
opinion that would be bad faith negotiation if I'm negotiating 
a provision that I know that says upon mutual consent and going 
into it, I know that we're never going to consent. So when we 
were negotiating, we had no reason to believe that we would not 
give the consent.
    Did I say or do anything that would contradict the contract 
terms that we are negotiating? No.
    Mr. Deutsch. Mr. Floyd, could you respond to that as well? 
The question? Because our understanding is that Qwest, FLAG and 
Cable and Wireless claim that they had side or oral agreements. 
And why would they claim they had side or oral agreements?
    Mr. Floyd. During one of the deals that we had put 
together. There was an agreement to upgrade at a later time to 
a different system increased capacity. And that is FLAG's 
position.
    Mr. Deutsch. And that was an oral agreement?
    Mr. Floyd. Yes.
    Mr. Deutsch. Ms. Smiley, with Cable and Wireless deal that 
you were involved in at the end of 2000 with Mr. Casey and Mr. 
Mohebbi, Cable and Wireless wanted a side letter to the 
agreement for the swap or capacity. It was Alan Code, Cable and 
Wireless who asked for that letter. Is that correct?
    Ms. Smiley. That's my understanding. I was not involved 
with the conversations between Qwest and Cable and Wireless as 
to why Cable and Wireless wanted that. I was just asked to 
change language in a document and forward it for approval Mr. 
Deutsch. Did Cable and Wireless also draft the letter?
    Ms. Smiley. Yes, they did.
    Mr. Deutsch. The letter states the following. ``Cable and 
Wireless may exchange some or all of the original capacity for 
OC 192 WaveLink capacity on the routes indicated in Exhibit A 
on other routes that Qwest may have available to which Cable 
and Wireless U.S.A. agree before December 31, 2001, the 
exchange capacity.''
    This would allow Cable and Wireless to trade in capacity 
purchase uncertain routes for other routes, is that correct?
    Ms. Smiley. Is there a copy I can take a look at?
    Mr. Deutsch. Yes, 76 and 77.
    Ms. Smiley. Okay, I'm sorry, could you repeat your 
question?
    Mr. Deutsch. 76 and 77.
    Ms. Smiley. Oh, I have the tab. Could you repeat your 
question?
    Mr. Deutsch. Well, the question is, is this a cause that 
would allow Cable and Wireless to trade in capacity of purchase 
uncertain routes for other routes?
    Ms. Smiley. It does allow for an upgrade upon mutual 
agreement of the parties. It's my understanding that the 
auditors had approved certain language that would be in the 
contract that would say under certain terms and conditions the 
purchaser could sell back capacity to Qwest and Qwest would 
sell them exchange capacity.
    Mr. Deutsch. But Cable and Wireless was not satisfied with 
this letter. It wanted further e-mails from Afshin Mohebbi, 
Qwest present. Is that correct?
    Ms. Smiley. Again, I wasn't involved in those 
conversations. I don't know why they asked for it. The only 
thing I was told--again, I wasn't personally involved in those 
discussions, I was told it was more of a comfort--this was a 
letter about pricing and then the subsequent e-mail was more of 
a comfort e-mail that we worked with you in the past. We're 
going to work with you in the future.
    Mr. Deutsch. I mean if you don't know about the letter, how 
do yo know it was about pricing, if that was the issue?
    Ms. Smiley. That's what I was told.
    Mr. Deutsch. By who?
    Ms. Smiley. I believe Roger Hoaglund, but I'm not positive 
sitting here today. This was a long time ago and it wasn't 
something that stuck out in my mind.
    Mr. Deutsch. Who would have drafted that e-mail?
    Ms. Smiley. Who would have drafted the e-mail? Are we 
talking about the e-mail or the side letter?
    Mr. Deutsch. The e-mail.
    Ms. Smiley. The e-mail from Mr. Mohebbi? It's my 
understanding that Cable and Wireless created the original 
draft and forwarded it to Qwest and it was negotiated between 
Roger Hoaglund and Greg Casey and Alan Coe.
    Mr. Deutsch. According to an e-mail that you did send on 
December 29 which is Tab 75 to Pam Deatru, Mr. Mohebbi's 
assistant, this e-mail was supposed to be sent by Mr. Mohebbi 
to Nick Jeffries at Cable and Wireless in London. Is that 
correct in London?
    Ms. Smiley. Yes.
    Mr. Deutsch. And the e-mail states as follows ``Qwest 
understands your concerns regarding the language in that side 
letter as agreed upon by the parties. This e-mail is intended 
to assure you that in accordance with Qwest past practice Qwest 
will honor the understanding and intention of the parties with 
regard to any request by Cable and Wireless to obtain a full 
and fair trade of the capacity in Exhibit A of the agreement, 
of the 192 WaveLink capacity. Qwest guarantees that Cable and 
Wireless requests such a trade prior to December 31, 2001 and 
Qwest shall provide such capacity.''
    Was Pam Deatru in the office on December 29, 2000?
    Ms. Smiley. It's my understanding that she was not.
    Mr. Deutsch. And you e-mailed Greg Casey to that effect 
that 3:38 p.m., is that coarct.
    Ms. Smiley. Yes.
    Mr. Deutsch. And what did Greg Casey tell you to do at that 
point?
    Ms. Smiley. Nothing. I did not do anything further 
regarding this e-mail. I sent it off. It was sent to Afshin and 
his assistant and I informed Greg Casey that Afshin's assistant 
wasn't in and that he need to contact Afshin. I had no further 
involvement after that point.
    Mr. Deutsch. So how did you know his instructions were 
carried out?
    Ms. Smiley. I saw an e-mail in October 2001 that was sent 
to us from Cable and Wireless and they had received around this 
timeframe and the e-mail had come from Mr. Mohebbi's computer.
    Mr. Deutsch. So at that point you went home and you forgot 
about it? This is $109 million transaction as far as we're 
aware at this point?
    Ms. Smiley. I did my part of it. I revised the language as 
I was requested. I forwarded the e-mail as I requested. I 
didn't have direct contact with Afshin Mohebbi so it would not 
be my place to follow up with him and call on him. I did what I 
was asked to do and then I went home.
    Mr. Deutsch. Was that contract singed in that quarter, the 
fourth quarter?
    Ms. Smiley. Yes, it's my understanding it was.
    Mr. Deutsch. Earlier today, Robin Szeliga testified that 
when she found out about the Cable and Wireless letter and the 
e-mail from Mr. Mohebbi she asked Mr. Mohebbi about it. Mr. 
Mohebbi said he was not in the office that day and had not read 
the e-mail, but he authorized someone to access his computer 
and send out the e-mail. According to Ms. Szeliga, that person 
may have been you, is that correct?
    Ms. Smiley. It absolutely was not me. I have never accessed 
Mr. Mohebbi's computer. I have never sent any e-mails on his 
behalf. That is absolutely not correct.
    Mr. Deutsch. Did you have Mr. Mohebbi's access code to his 
computer?
    Ms. Smiley. No sir, I did not.
    Mr. Deutsch. Mr. Floyd, you represent FLAG which is one of 
several companies which has told us that sales people from 
Qwest promised that if they bought certain capacity from them 
it could be traded for other capacity at a later date. Is that 
correct?
    Mr. Floyd. The premise was that we were buying a certain 
amount today and being able to get some capacity later when it 
became available. It was not available at the time that we 
contracted for it.
    Mr. Deutsch. At Tab 67, there was an e-mail dated June 4, 
2001 from Susan Chase to Greg Casey. Ms. Chase states that for 
Qwest to start recognizing revenue on this $20 million IRU it 
would sell FLAG 10 STMs on Pacific Crossing. FLAG would then 
pour it over to 16 STMs on Japan U.S. within 2 or 3 months once 
Japan U.S. is turned on. Who are Susan Chase and Greg Casey and 
what exactly are they proposing?
    Mr. Floyd. Who are they?
    Mr. Deutsch. That's correct.
    Mr. Floyd. Susan Chase is sitting to my left as the Vice 
President of International Wholesale Markets. Greg Casey was 
the President of that group. What they are suggesting here was 
exactly as I was just saying. We bought a certain amount of 
capacity today and getting an increased capacity in the new 
system when it was available. It hadn't been available as of 
yet, the Japan U.S.
    Mr. Deutsch. Thank you.
    Mr. Greenwood. The Chair recognizes Chairman Tauzin for 10 
minutes of inquiry.
    Chairman Tauzin. Thank you, Mr. Chairman. We thank this 
panel for appearing and for testifying and let me first take 
you back, Ms. Smiley and Ms. Armstrong, to April 2001. I passed 
out a document to you indicating a series of e-mail 
communications in which you, Ms. Smiley, apparently communicate 
to Robin that ``I understand the issue with the end points. I 
really do not want to lose the flexibility we currently have 
and that we can designate which end points we want when we 
choose to activate them, etcetera. I know this is a quirky 
request but it's something our auditors are not requiring.''
    Can you tell us, Ms. Smiley, what your auditors were 
telling you you had to have in the deal?
    Ms. Smiley. Yes sir, I can.
    Chairman Tauzin. What exactly were they telling you?
    Ms. Smiley. At that point in time and prior to that point 
in time when Qwest purchased capacity from another provider 
such as Global Crossing, Qwest was not required to activate the 
capacity it purchased by the end of the quarter. In contrast, 
when Qwest sold capacity, Qwest was required to activate it and 
the customer accept it before the end of the quarter.
    Around this timeframe what happened was the auditors came 
out and said if you're doing a transaction where Qwest is 
making a purchase from a customer to whom it is also selling 
capacity, if we sell them capacity and they pay for it and we 
deliver our capacity, then if we buy capacity from them and we 
pay for it and they don't deliver it, then it has the 
appearance that we're financing our own transaction. So 
therefore they said at that point if we are paying for capacity 
that we are purchasing at the same time we were selling 
capacity, then we needed to have it activated. That was, to my 
knowledge, a new requirement this quarter and I was asking them 
to activate the capacity for us.
    Chairman Tauzin. That was a problem because the contracts 
didn't require that it be activated in that quarter. You had 
that flexibility in the contracts, is that correct?
    Ms. Smiley. Sir, the point of flexibility that I'm talking 
about here is when Global Crossing sold the capacity to Qwest. 
There were a couple of different POPs, points of presence, that 
Qwest could have the capacity activated to in Japan as well as 
three different options in the United States. It was over the 
same trans-Pacific cable system so it's still the same 
capacity, but it's either going to go from the cable landing 
station and land at one area in Japan or another.
    Chairman Tauzin. Why were the auditors requiring that, for 
what purpose? What difference did it make for Qwest?
    Ms. Smiley. It was my understanding that they needed it for 
the revenue recognition.
    Chairman Tauzin. What is revenue recognition? What is that?
    Ms. Smiley. I'm not an accountant, sir.
    Chairman Tauzin. Doesn't it mean to get the revenue 
recognized for purposes of that quarter?
    Ms. Smiley. That's my understanding of the term.
    Chairman Tauzin. That's to make the numbers. So to get 
Qwest to make the numbers, you had to somehow deal with this 
flexibility issue.
    Ms. Armstrong, you responded, I believe, in this same 
series. ``I understand quirky. We do quirky all the time. We'll 
be happy to help as long as we don't go to jail or something. 
Let me know what you find out.''
    And then you came back and responded, I believe, Ms. 
Smiley, with ``Believe me, I would never ask you to do 
something that would end up with that result. I don't like 
orange, although I like black and white, I don't prefer those 
stripes.'' Is that correct?
    Ms. Smiley. Yes sir. I made very clear that I would not 
ever ask her to do anything that would end in that result. I 
was not asking her to do anything improper. And I made a joke.
    Chairman Tauzin. You sent some interesting e-mails around 
not too long after in June and it's Tab 55 if you want to 
follow with me. It's entitled a ``Bump in the Qwest Road.'' 
``We agree to move forward but I want to alert you to an issue 
that came up this evening and has to do with portability and 
here's the deal. In our deals with Qwest, our capacity of stock 
fiber that we buy from them has to be activated in order for 
them to get revenue recognition'' and you go on to say that 
``Susan and I agree with Greg Casey and David. We'll talk some 
time tomorrow and just get gentlemen's agreement and we'll work 
out together to establish pricing, the purchase price. David, 
I'll work it out with Jean.''
    The issue on pricing also came apparently from the 
accountants. ``Our argument has been that we do not want to be 
penalized for their rev recognition problems. Now their 
accountants are insisting that it has to be fair market value 
instead of what you paid for it.''
    So you had two problems. You had the portability issue, the 
accountants are saying you can't do that in the contract and 
get Qwest its numbers and you also have to have agreement on 
pricing that reflects something other than what you paid for 
it, something like fair market value. Is that right, Ms. 
Wright?
    Ms. Wright. Yes, there are a couple of issues here and let 
me see if I can walk through them.
    Chairman Tauzin. All right.
    Ms. Wright. First of all, on the issue of portability, 
portability gave us the flexibility to move the capacity based 
on customer requirements. We had had a history of having 
portability in our contracts with Qwest and during the first 
quarter of 2001 we were working on the language for 
portability. They always knew that it was a requirement of ours 
to have portability. We were not interested in pursuing it if 
we didn't have portability.
    Chairman Tauzin. You had to have it and you also had to 
have an agreement from them that they would consent. Isn't that 
correct?
    Ms. Wright. That is correct.
    Chairman Tauzin. In effect, you had to have an agreement 
from them that they would give you consent, you had consent 
guaranteed to you, according to your understanding in these 
contracts on portability, and yet the accountants are telling 
Qwest that if you do it that way, you can't get revenue 
recognition.
    So where did you get these agreements that they would 
consent? Is that in the documents?
    Ms. Wright. I believe the documents actually said good 
faith efforts--I don't remember the exact----
    Chairman Tauzin. What do they explain to you about revenue 
recognition? Do you understand it the way I just understood it, 
that if they give you consent agreements like that in 
documents, they could not get revenue recognition. Did they 
explain that to you?
    Ms. Wright. Revenue recognition was an issue with every 
customer that we dealt with and every customer, every contract 
was different in terms of requirements. Testing of circuits, 
accepting of circuits----
    Chairman Tauzin. What did Qwest tell you?
    Mr. Ferrara. Excuse me, Mr. Chairman? Mr. Chairman, one of 
the regrettable risks in inviting a witness to have counsel to 
a company representative and advise her, I would respectfully 
ask the Chair to ask Chairman Tauzin to let the witness finish 
her answer before there's a second question, please. She's been 
interrupted twice. We'd like her to finish her answer if that 
would be agreeable.
    Chairman Tauzin. Mr. Chairman, I'm going to interrupt any 
witness who is not answering the question I asked them. I 
didn't ask the gentlelady to go in that discussion. I asked the 
gentlelady to tell me what did Qwest tell her about their 
understanding of revenue recognition and I'll be glad to hear 
her out if she'll explain that to me.
    Mr. Ferrara. With respect, thank you, sir.
    Chairman Tauzin. Thank you, sir.
    Ms. Wright. We didn't have an extensive discussion about 
what they needed for revenue recognition other than some 
circuits had to be activated, had to be designated and 
activated prior to the end of the quarter.
    Chairman Tauzin. Now Ms. Armstrong, in again a memo that is 
Tab 63, regarding some e-mails that you sent, if you'll follow 
with me, this is a memo apparently entitled--the whole thing is 
entitled ``From Robin Wright to Jamie Lorinia.''
    You write, ``As everyone involved knows the portability 
language is not great, we need their consent to the swap and we 
had their word that they would consent.''
    Is that correct?
    Ms. Armstrong. Yes.
    Chairman Tauzin. Who had given you their word that they 
would consent?
    Ms. Armstrong. The written agreement that we had with them 
on portability.
    Chairman Tauzin. I didn't hear you, I'm sorry.
    Ms. Armstrong. I'm sorry. The written agreement that we had 
with them on portability provided that the right for Global 
Crossing to exercise its portability option was subject to the 
consent of both parties, both Global Crossing and Qwest.
    Qwest indicated to us in meetings and on conference calls 
that they would, in fact, give that consent.
    Chairman Tauzin. So it's your testimony that Qwest in their 
conference calls and meetings orally committed to consent in 
order that you might get mutual agreement on portability?
    Ms. Armstrong. Yes. They weren't saying anything that was 
contradictory to the agreement and the agreement did give us 
the right to portability, but it was subject to their consent. 
And what they were saying basically was we will give you that--
--
    Chairman Tauzin. Don't worry about it, you'll get consent.
    Ms. Armstrong. Yes.
    Chairman Tauzin. Who at Qwest was giving you those oral 
assurances?
    Ms. Armstrong. It was Susan Chase.
    Chairman Tauzin. I'm sorry?
    Ms. Armstrong. Susan Chase. She was the principal 
negotiator for the----
    Chairman Tauzin. It's your testimony that Susan was giving 
you oral, Susan Chase, was giving you oral commitments, not to 
worry that the consent would be available to you on these 
mutual agreements, is that correct?
    Ms. Armstrong. Yes.
    Chairman Tauzin. Ms. Chase, would you like to comment, 
please?
    Ms. Chase. I did not give oral consent----
    Mr. Greenwood. Ms. Chase, pull your microphone up nice and 
close.
    Ms. Chase. Sorry about that. Yes, Congressman Tauzin, I did 
not give oral consent. I'm not in a position to make those 
types of decisions. I have a large group of people behind me 
that look and review every transaction and every issue and I 
also have a senior vice president and executive vice president 
that I reported to.
    However, I had no reason to believe that my company would 
not give mutual consent. During that timeframe I cannot recall 
any transaction that I had ever been involved with whereby we 
did not give mutual consent.
    Chairman Tauzin. You are testifying you didn't have the 
authority to say that, but did you say that?
    Ms. Chase. I did not say that.
    Chairman Tauzin. You never told Ms. Armstrong in these 
conversations that your company would guarantee consent on 
these agreements?
    Ms. Chase. I never expressed that Qwest would guarantee 
consent.
    Chairman Tauzin. Ms. Armstrong, you're saying that's 
exactly what you got from Qwest.
    Ms. Armstrong. Yes, Susan Chase and Robin Wright were the 
business people involved in this deal. I'm a lawyer. I was 
there to document the transaction and so the assurances were 
made to Robin, but obviously I was on the call in the meeting 
and heard them.
    Chairman Tauzin. Ms. Wright, you're here to tell us whether 
or not you believe--you've heard two different stories here. 
Who's correct?
    Ms. Wright. I believe Jackie is correct. It's my firm 
belief that we had their oral assurance that we could port the 
circuits.
    Chairman Tauzin. Ms. Armstrong, if you didn't have the oral 
agreements that you would get consent on portability, would you 
have entered into those contracts? Would you have recommended 
the company enter those contracts?
    Ms. Armstrong. That wouldn't have been my decision, but I 
would be very surprised if the company had done the deal 
without those representations.
    Chairman Tauzin. You'd be very surprised if it had done the 
deals without the consent being guaranteed?
    Ms. Armstrong. Yes, the background to this was that Qwest 
and Global Crossing had been doing business together for 
several years and had very good relationship. Whilst we were 
relying on what they were telling us, clearly it would make 
business sense for them to agree to give us the portability in 
the future when the occasion arose.
    Chairman Tauzin. Later on in December, Tab 65, if you want 
to follow with me, 65, Ms. Armstrong, you sent an e-mail to Ms. 
Smiley at Qwest.
    It reads as follows: ``I cannot stress enough how concerned 
and frustrated we are with this. As you know, when we did this 
deal and the other similar deals with Qwest, where portability 
was involved, the capacity which was activated was for Qwest's 
internal reasons that which you were able to activate by the 
end of the quarter, rather than that which we actually 
required. Everyone involved was clear that the only reason this 
was accepted was in reliance on Qwest's unequivocal 
representation that the capacity would be ported to the 
required routes after the event.''
    In effect, saying the only reason anybody agreed with these 
deals was upon those assurances of consent. Is that correct?
    Ms. Armstrong. Yes, I mean this is backing up exactly what 
I've just told you, that that was the understanding we had when 
we did the deal.
    Chairman Tauzin. That was addressed to Kym Smiley, is that 
correct?
    Ms. Armstrong. Yes, because Kym was present on conference 
calls and meetings when this was said. I can't actually 
remember what Kym said and whether she said anything on this, 
but she was definitely present.
    Chairman Tauzin. So what we have is a situation, as I 
understand it, and correct me if I'm wrong now, but I think 
I've got it.
    Is that you signed some deals and the deals say that part 
of the deal will give you the right to portability, the right 
to make these choices when you need them?
    Ms. Armstrong. Yes.
    Chairman Tauzin. But the oral understandings are that 
you're going to get their consent to whatever you need in terms 
of that portability when you require it, right?
    Ms. Armstrong. No, the terms of the deal were that we would 
get portability, but it was subject to their consent. All we 
were saying was we will give you that consent. It wasn't 
contradict to what was written down.
    Chairman Tauzin. That's my point.
    Ms. Armstrong. Yes.
    Chairman Tauzin. You've got a deal that said you had 
portability, subject to mutual consent, but then you got an 
oral agreement saying don't worry about mutual consent because 
you're guaranteed it.
    Ms. Armstrong. It didn't say don't worry about mutual 
consent. It said we will give you that.
    Chairman Tauzin. We'll give it to you.
    Ms. Armstrong. Yes.
    Chairman Tauzin. And at the same time the accountants over 
here are telling Qwest you can't do that. You can't do that and 
make the numbers.
    Ms. Armstrong. I mean I have no idea what Qwest's internal 
accounting and revenue issues were.
    Chairman Tauzin. But you referred to it in your e-mail, Ms. 
Armstrong. You basically say ``because of Qwest's internal 
reason.'' You knew where they were, didn't you?
    Ms. Armstrong. No.
    Chairman Tauzin. You didn't know?
    Ms. Armstrong. They told us that the reason they wouldn't 
put it in writing, they would say, they wouldn't take out 
basically the requirement for consent so that it was an 
unequivocal right for Global Crossing was that they had 
accounting or revenue issues with it. I have no idea what those 
issues were.
    Chairman Tauzin. They never explained that to you?
    Ms. Armstrong. No.
    Chairman Tauzin. All you knew was that they had revenue and 
accounting issues involved and therefore they couldn't put it 
in writing?
    Ms. Armstrong. Yes.
    Chairman Tauzin. You never asked are we participating in a 
fraudulent scheme here?
    Ms. Armstrong. No.
    Chairman Tauzin. Are we trying to defraud anybody if we 
can't put it in writing, we have to hide it in an oral 
agreement?
    Ms. Armstrong. No, of course, I didn't.
    Chairman Tauzin. Nobody ever asked that question?
    Ms. Armstrong. No. Every customer we dealt with had lots 
of--had different, as far as I could see, and I don't even 
understand completely Global Crossing's accounting and revenue 
requirements. But every customer we dealt with had different 
accounting and revenue requirements. We could not possibly 
understand what they were.
    Chairman Tauzin. But Ms. Armstrong, again, just as a layman 
looking at this, is it ordinary to have secret, unwritten 
agreements that have to be kept secret because otherwise it 
will threaten revenue recognition which I understand to be 
reporting revenue to the public, publicly traded company, is 
that normal?
    Ms. Armstrong. There's nothing, as far as I was--there was 
nothing secret about this.
    Chairman Tauzin. How many other oral agreements have you 
had with other companies like that?
    Ms. Armstrong. Well, things are often said in the context 
of negotiations about how a company is going to perform in the 
future.
    Chairman Tauzin. But you thought this was pretty binding.
    Ms. Armstrong. I'm sorry?
    Chairman Tauzin. You thought this was pretty binding to the 
agreement. You told me that you don't think your company would 
have entered into the agreement without it and yet it was an 
oral agreement that you had to count on and the persons giving 
you the oral agreement are telling you we can't put that in 
writing because our accountants won't let us. Doesn't that 
raise a red flag to you?
    Ms. Armstrong. I said that--I'm sorry, I have forgotten the 
beginning of your sentence.
    Chairman Tauzin. Let me try it again. Again, you're 
representing a company that's about to enter into a deal with 
another company. You tell me the consent to portability in your 
opinion was so important that you don't think your company 
would have made the deal but for that consent by guarantee.
    Ms. Armstrong. Uh-huh.
    Chairman Tauzin. You also tell me the company is telling 
you we can't put that in writing though because our accountants 
tell us that gives us revenue recognition problems.
    Ms. Armstrong. Well, they didn't go into that much detail.
    Chairman Tauzin. Doesn't that raise a red flag to you, that 
an essential part of your agreement has to be kept secret, 
otherwise the accountants can't treat it a certain way for 
revenue purposes? Doesn't that tell you this is a bad deal, I 
better not touch this thing?
    Ms. Armstrong. It doesn't raise any flag at all.
    Chairman Tauzin. None at all?
    Ms. Armstrong. Not for Global Crossing. We weren't keeping 
anything secret. This was----
    Chairman Tauzin. Was this the biggest deal you did?
    Ms. Armstrong. I'm sorry?
    Chairman Tauzin. Wasn't this the biggest deal that you 
didn't, the one with Qwest? Wasn't it $300 million?
    Ms. Armstrong. No, no.
    Chairman Tauzin. How much was it?
    Ms. Armstrong. I can't remember exactly how much it was. It 
certainly was one of the bigger deals I worked on, yes.
    Chairman Tauzin. It was pretty big.
    Ms. Armstrong. Yes, very big.
    Chairman Tauzin. Yes. And it would not have been connected, 
in your mind, in your opinion by your company without this 
guarantee which the party who gave you the guarantee is not 
denying you got it. How could you recommend to the company that 
they do a deal where you had to count on Ms. Susan Chase 1 day 
saying yeah, that was the deal or no, that wasn't the deal?
    Ms. Armstrong. That was not a decision that I made. It was 
not my decision whether or not we did the deal based on these 
oral assurances. In fact, my advice to the company was that we 
are taking a real business risk by relying on these oral 
assurances because it would be very difficult, if we went to 
court on this, we probably wouldn't win.
    Chairman Tauzin. Yes. But you don't think that it raised 
ethical concerns or legal concerns about whether or not the 
other company was dealing fairly and ethically with you?
    Ms. Armstrong. As far as, you mean ethical concerns within 
Qwest?
    Chairman Tauzin. Yes. You were dealing with a company that 
was saying I know you're going to have consent, but we can't 
put it in the contract because our accountants won't let us. 
That didn't raise any ethical or legal issues?
    Ms. Armstrong. I wasn't representing Qwest. It may well 
have raised concerns within Qwest. What I'm saying is it didn't 
raise concerns within Global Crossing.
    Chairman Tauzin. Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentlelady from Colorado, Ms. DeGette for 10 
minutes.
    Ms. DeGette. Thank you, Mr. Chairman. I think this is the 
essential issue, so if you folks could all go to the memo that 
we just handed out. It's not in the notebook. The chairman was 
asking about it a minute ago. At the top of the three page 
document it says ``From Stout, Kimberly sent April 23.'' Does 
everybody have that document?
    Because I think this document more than anything we've 
looked at, while also having some amusing jokes by the parties, 
it says what the essence of the issue is here, so I'd like you 
all to follow with me. Take a look at page 2 of this. It's an 
e-mail from Ms. Smiley to Ms. Chase and everyone sitting here 
just about has received a copy of it and it says ``Robin and 
Jackie, as Susan explained, we need to execute acceptance 
letters for the capacity that Qwest purchased from Global 
Crossing during first quarter 2001.'' And then it goes on.
    Then the next e-mail which is dated April 23, 3 days later 
it's from Ms. Wright to Ms. Smiley and again everyone had it, 
this is it. ``Can you give us some clarification of what you 
require? In actuality, you have prepaid circuits, but have not 
designated the end points. Since for our revenue recognition 
that would be Global Crossing, we are not required to actually 
activate the circuits. There is nothing to formally accept 
until we have received the order from you. Do you want to say 
that you are accepting 20 circuits from Tokyo to Seattle and 80 
circuits from Tokyo to Hong Kong? If that's the case, I need to 
check with Legal since we have not actually delivered them.''
    Now let me start with Ms. Wright. Ms. Wright, you knew when 
you wrote this e-mail that the way Qwest did its revenue was it 
amortized it over time and so you did not actually have to have 
the end points designated because of your accounting 
principles, right?
    Ms. Wright. For our accounting principles, we did not have 
to activate circuits prior to the end of the quarter.
    Ms. DeGette. Right, but you also knew that Qwest's 
accounting office did require it because they were booking the 
revenue quarter by quarter, not amortizing it over time, right?
    Ms. Wright. I did not know the reason why they required 
something different. As I mentioned, we've had many contracts 
with all kinds of different requirements. I knew it was 
different, but I didn't know why.
    Ms. DeGette. And you also knew that they had to actually 
book a deal, they had to have a sale of actual goods. They had 
to have the end points, in other words, right? Did you know 
that?
    Ms. Wright. Of their sale to us?
    Ms. DeGette. Right.
    Ms. Wright. Correct, I did know that.
    Ms. DeGette. Let me ask you, Ms. Chase, from Qwest's 
perspective, when you did these deals, you knew that Global 
Crossing did not require the end points to be designated from 
its accounting perspective, but you guys had to have an actual 
sale, right?
    Ms. Chase. What we were selling to Global Crossing, we had 
a set process in which we needed to follow in how we sold our 
services.
    Ms. DeGette. Right, and if it didn't have end points, then 
you couldn't close the deal by the end of that quarter, right?
    Ms. Chase. Correct.
    Ms. DeGette. So this is what this memo, this series of 
memos is about, isn't it, Ms. Chase?
    Ms. Chase. No, it's not. This is about the assets that we 
purchased, that Qwest purchased in Asia. And it was after the 
first quarter transaction, one of our finance guys came back 
and said that we needed a document showing that we accepted 
service in Asia.
    Ms. DeGette. Right, exactly.
    Ms. Chase. That was the Asia piece, not what we sold to 
Global Crossing, it's what we bought.
    Ms. DeGette. Right, okay.
    Ms. Chase. It doesn't have anything to do with revenue 
recognition.
    Ms. DeGette. Now Ms. Smiley, there's another e-mail sent 
also on April 23 from you to Ms. Wright and others and you say 
``I understand the issue with the end points. I really do not 
want to lose the flexibility in that we can designate which end 
points we want when we choose to activate them. So I'm checking 
internally to see how we should handle.''
    Right? That's what you said.
    Ms. Smiley. Yes ma'am.
    Ms. DeGette. And then that's when Ms. Wright writes back 
and she says that she would be happy to help you, so long as 
and here's the first of the jokes, ``you don't go to jail or 
something.''
    Now what you were recognizing there, Ms. Wright, is you 
understood that there could be a potential problem if you both 
gave Qwest the flexibility they wanted, but you didn't have any 
kind of designated end points, right?
    Ms. Wright. No, that's not true.
    Ms. DeGette. Well, tell me then.
    Ms. Wright. Okay, they sent us a request to activate 
circuits. Let me back up. Initially, what we normally would do 
would be activate from a cable station to a cable station so 
that we have a place holder for that customer for those 
circuits on that undersea portion only.
    Ms. DeGette. I understand.
    Ms. Wright. So that when they tell us where they want the 
end points, then we activate them for them Ms. DeGette. Right.
    Ms. Wright. I'm just trying to clarify what it is that 
she's asking us to do and I wanted to check with legal on it 
once I----
    Ms. DeGette. Did you ever get it resolved?
    Ms. Wright. No, as far as I know, this was the end of this.
    Ms. DeGette. Okay, if you can turn quickly to Tab 57, 
here's some more e-mails and the first thing, page 3 of it, 
there's a whole series of e-mails. It looks to me like 
everybody was copied on all of these e-mails and on page 3 a 
gentleman named Martin A. Ritt, an attorney from Perkins Coohey 
says ``Qwest accounting people are focused on the issue of 
whether the repurchase price should be used based on fair 
market value as Qwest prefers versus what was paid for the item 
as GC prefers. I think that Robin and Susan Chase need to close 
the loop on this question.''
    Ms. Armstrong, were you aware of those conflicting policies 
between Qwest and Global Crossing?
    Ms. Armstrong. I was aware of it when I got this e-mail. I 
understand the issue, yes.
    Ms. DeGette. Okay, and so my question is how did you ever 
resolve it with respect to the transaction in this e-mail? Did 
you ever resolve how it should be determined?
    Ms. Armstrong. Yes, the agreement, we reluctantly conceded 
and agreed that the agreements would say fair market value.
    Ms. DeGette. And in fact, it did say fair market value?
    Ms. Armstrong. It did say fair market value, yes.
    Ms. DeGette. Here's an e-mail on the first page of Tab 56 
which is from Ms. Wright to Ms. Chase and others and it says 
``Kym and Susan, this is an issue that keeps raising its ugly 
head. As we've agreed, because we're both being delivered what 
we probably don't want in the long term, we've agreed on both 
sides that the repurchase price is the actual amount paid, not 
the fair market value. You know the issue. We are taking 
capacity in order to help with revenue recognition issues.''
    Now I want to ask you, Ms. Wright, what is the business 
purpose of this deal? You're taking--you're being delivered 
what you don't want in the long term. You've agreed that the 
repurchase price is the actual amount paid and you know that 
you're taking capacity in order to help with revenue 
recognition issues.
    Ms. Wright. As we discussed, Qwest required to have the 
circuits activated prior to the end of the quarter. There were 
cases that we were waiting and sometimes it's a matter of a few 
weeks for them to have the locations that we wanted, the 
circuits extended to, ready for service, and in a lot of cases 
we were waiting for our own customers to tell us where they 
wanted their end points. So we wanted the flexibility to be 
able to port that.
    Ms. DeGette. So what you're saying is you closed the deal 
so that Qwest could recognize the revenue by the end of the 
quarter, when in fact, the final ports weren't determined yet? 
Right?
    Ms. Wright. We closed the deal because----
    Ms. DeGette. No, is that what happened?
    Ms. Wright. No, that's not what happened. We closed the 
deal with the understanding that we had the flexibility to move 
the circuits where we wanted them to be ultimately.
    Ms. DeGette. Okay, and so in that case, you took circuits--
I'm sorry, in that case you took capacity that you didn't need 
because you wanted to close the deal before the quarter was 
out?
    Ms. Wright. We took capacity that they had available with 
the understanding that we could move it to the locations that 
we wanted as soon as it was available.
    Ms. DeGette. And was that in the written agreement, the 
understanding that you could move it to the locations as it was 
available?
    Ms. Wright. As Ms. Armstrong has outlined, it required 
their consent.
    Chairman Tauzin. Mr. Chairman?
    Ms. DeGette. I'd be happy to yield.
    Chairman Tauzin. I want to ask if the gentlelady could have 
an additional 2 minutes and I ask her to yield quickly?
    Ms. DeGette. I'd be glad to.
    Chairman Tauzin. I thank the gentlelady. I want to go to 
Ms. Chase real quick. Now you just heard at Tab 65 again, you 
just heard the testimony of Ms. Wright regarding this e-mail. 
You responded to it. And you said as follows: ``I agree with 
your comments below. It is our intention to keep you whole.'' 
That sounds like you're agreeing to what Ms. Armstrong has 
testified, that you did, in fact, have an oral agreement to 
keep them whole.
    Am I wrong? What does this mean?
    Ms. Chase. Congressman Tauzin, my comment here on--that I 
agree with your comments below was that I agreed I thought we 
should be able to give them what we refer to as purchase price 
versus fair market value. So I was very surprised that we were 
reverting our agreement to fair market value versus purchase 
price.
    So the issue here was that I wanted to try to help Robin 
and Global Crossing get what they wanted which was purchase 
price. So I followed back to see what we had done before and 
was asking had we done this before for you to try to figure out 
why we weren't doing it in this particular quarter.
    Chairman Tauzin. Isn't purchase price, however, the issue 
of purchase price or fair market price connected to the 
question of portability as to whether it's revenue 
recognizable?
    Ms. Chase. I don't know. I don't know. I'm not in that 
area.
    Chairman Tauzin. How could you have a new agreement if 
you're going back to the old agreement which had a purchase 
price in it?
    Ms. Chase. I'm sorry, I don't understand.
    Chairman Tauzin. Your oral agreement had a purchase price 
in it.
    Ms. Chase. Yes.
    Chairman Tauzin. Now you're saying we had to go to a new 
agreement that says we're not going to go by purchase price. 
We're going to go by fair market value.
    Ms. Chase. Right.
    Chairman Tauzin. How could you have that without an oral 
agreement to do that?
    Ms. Chase. Well, no, our company, Qwest, as we go through 
the process with our pricing offer management group, our 
accountants, our attorneys, they review all of the pieces of 
the agreement. At this point, I guess it was toward the end of 
the quarter they came back and stated that we needed to have 
fair market value.
    Chairman Tauzin. Why did you ask did we put it in a side 
letter?
    Ms. Chase. Because I was trying to figure out if we had 
done in a prior agreement which would be in a prior quarter.
    Chairman Tauzin. The point was it wasn't in--the purchase 
price issue was not in the original agreement and so you were 
saying did we put it in a side letter? Is there some way we 
agreed to do this? Is that what you're saying?
    Ms. Chase. No, not at all. That's not what I'm saying.
    Chairman Tauzin. Tell me, please.
    Ms. Chase. It turned out that in a prior agreement that we 
had with Global Crossing that we had purchase price, that upon 
mutual consent, if Qwest agreed to allow Global Crossing to 
trade a circuit in, they would get the purchase price that they 
paid for it.
    Chairman Tauzin. I accept that. But you're basically 
saying, I agree with your comments, and it is our intention to 
keep you whole. Isn't that the guarantee? Isn't that the 
guarantee that you're going to give your consent to this new 
pricing arrangement?
    Ms. Chase. Not at all.
    Chairman Tauzin. Thank you, Mr. Chairman.
    Ms. DeGette. Reclaiming my time. Let me just ask, listening 
to what Ms. Wright just told me, Ms. Chase, would you disagree 
with the statement that the reason the contract was structured 
the way it was, was so that Qwest could recognize the revenue 
because there was such pressure to book this by the end of the 
quarter even though they knew that they were both negotiating 
for something they didn't want and that would be changed later.
    Ms. Chase. I don't agree with Qwest not needing what they 
were purchasing.
    Ms. DeGette. So you don't agree with what Ms. Wright told 
you in her e-mail. In fact, actually, thank you, Edith, the e-
mail right above that from you dated June 25 says ``I agree 
with your comments below.'' So you did agree with Ms. Wright.
    Ms. Chase. I agreed that our intention, as I said here, was 
to keep you whole, not if you were to change in your network 
upon mutual consent that it was our company's intention to put 
you in a position where you'd have to pay more money, but 
again, I'm not in the position to make that type of decision. 
So I did not make a commitment that we would do something one 
way or another because we have certain processes within our 
company and agreements that need to be made within Qwest that 
go into the actual contract itself.
    Ms. DeGette. So it's your testimony that in that deal, both 
sides got what they wanted and there was no need to modify it 
later on? Is that your testimony today?
    Ms. Chase. It was what was contracted.
    Ms. DeGette. Thank you, Mr. Chairman. I yield back.
    Mr. Greenwood. The gentleman from Michigan is recognized 
for 10 minutes.
    Mr. Stupak. Thank you, Mr. Chairman. Now Mr. Floyd, I want 
to pick up a little bit where Mr. Deutsch left off. I'm looking 
over on Tab 67 here in your book. And it's an e-mail here from 
Susan Chase and it goes on to say that ``the fair market value 
for the Japan/U.S. capacity will be from $16 to $20 million 
although that cannot be stated.''
    Then she goes on to say ``the bottom line FLAG is willing 
to trust us. It would be great if you could call Ed McCormack 
and assure him that we have no trust issues.''
    Did Ms. Chase make that statement to you?
    Mr. Floyd. Which statement specifically?
    Mr. Stupak. That ``the bottom line FLAG is willing to trust 
us. It would be great if you could call Ed McCormack to assure 
him that we have no trust issues.'' Did Ms. Chase make that 
statement to you?
    Mr. Floyd. No. I believe she's talking to Greg Casey.
    Mr. Stupak. Okay. All right. Who's Ed McCormack then?
    Mr. Floyd. Ed McCormack is FLAG's COO, Chief Operating 
Officer.
    Mr. Stupak. Of FLAG?
    Mr. Floyd. Right Mr. Stupak. Do you know if Greg Casey ever 
called him about a trust issue?
    Mr. Floyd. Most definitely. Most definitely. You're asking 
as far as this e-mail.
    Mr. Stupak. Sure.
    Mr. Floyd. As far as she say me to call Ed McCormack, 
whatever, I took it out of context.
    Mr. Stupak. Okay. Well, what were you looking for in this 
e-mail then, on behalf of your client? What was FLAG looking 
for?
    Mr. Floyd. FLAG was looking for 16 STM-1s on the Pacific.
    Mr. Stupak. And it hadn't been completed yet, had it?
    Mr. Floyd. The Japan/U.S. system had not been completed. We 
were looking for 16 STM-1s on the Pacific, period.
    Mr. Stupak. And the other option would have been to build 
your own, correct?
    Mr. Floyd. A little different cost position on that. 
Billions versus millions.
    Mr. Stupak. Sure. So it would have been better to deal with 
someone like Qwest who had this route.
    Mr. Floyd. At that time looking for a carrier who had 
capacity on one of the available systems or one of the new 
systems, yes.
    Mr. Stupak. All right, and in late February or early May, 
did you have a meeting in New York with Kym Smiley and several 
other representatives of Qwest?
    Mr. Floyd. Yes, we did.
    Mr. Stupak. And was Susan Chase on the phone during the 
meeting?
    Mr. Floyd. At times, yes.
    Mr. Stupak. And did Qwest tell you then that for $20 
million they'd sell you 10 STM on their PC-1, but trade them 6 
to 9 months later for 16 STMs on the Japan-U.S. route?
    Mr. Floyd. Yes.
    Mr. Stupak. And actually, would you get more later, in 
other words, for your money? Would you get more access later on 
these lines?
    Mr. Floyd. The 16 later, yes. The market value----
    Mr. Stupak. Was dropping, right?
    Mr. Floyd. No, no, no. The market value at the time that we 
bought them was $20 million for 16.
    Mr. Stupak. Okay.
    Mr. Floyd. So what we were willing to pay was $20 million 
for 16 STM-1s.
    Mr. Stupak. Did you anticipate getting more later with the 
price?
    Mr. Floyd. No.
    Mr. Stupak. No?
    Mr. Floyd. No. 16, that was what we were contracting for.
    Mr. Stupak. All right and that's what you wanted at that 
time was 16?
    Mr. Floyd. Exactly.
    Mr. Stupak. Was there an ability to port from one route to 
another in the contract?
    Mr. Floyd. No, nothing specific in the contract.
    Mr. Stupak. Why wasn't then that ability to port from one 
to the other where Ms. Chase was talking about porting from one 
point to the other? Why wasn't that in the contract?
    Mr. Floyd. We were trying to put in the contract, actually 
it talked about a side agreement and they had asked us we not 
put it in writing to do it on trust.
    Mr. Stupak. Who asked you not to put in writing, but put it 
based on trust?
    Mr. Floyd. I'm not sure who it was, but the Qwest team. 
There was a lot of negotiations going back and forth with all 
of us.
    Mr. Stupak. Was this negotiation the meeting in New York 
we're talking about?
    Mr. Floyd. Not that portion of it, no. The oral came in 
later, prior to the end of June.
    Mr. Stupak. Okay. So you were still willing to pay $20 
million even though the agreement wasn't going to be in 
writing, was based upon this trust agreement?
    Mr. Floyd. Yes, it was by trust.
    Mr. Stupak. All right. Who made the representations to you 
about this trust? Here you're going to spend $20 million based 
upon trust. Who had made that representation to you?
    Mr. Floyd. We had, in the conversations that we'd had, I've 
known the parties for a while. I was willing to do trust, but I 
couldn't commit my company to that as well, that it had to come 
from a higher authority per se. And even with the group that I 
was dealing with, we were inquiring from a higher authority 
within Qwest. And they were the ones that had agreed that trust 
was indeed how we wanted to proceed with this and we would get 
the capacity we were looking for.
    Mr. Stupak. So the final say on the trust deal is between 
Mr. McCormack and Greg Casey?
    Mr. Floyd. Yes.
    Mr. Stupak. After this agreement on trust, did you get your 
PC-1 that you were looking for?
    Mr. Floyd. No. Still waiting for it to be turned up.
    Mr. Stupak. When did you have this agreement on trust and 
you're still waiting for it to be turned on, how much time has 
elapsed now?
    Mr. Floyd. July 2001.
    Mr. Stupak. So it's been 15 months. Have you gone back to 
Qwest and tried to get this thing turned on so you can start 
doing business?
    Mr. Floyd. Most definitely.
    Mr. Stupak. What happened when you went back to Qwest?
    Mr. Floyd. These were issues on both parts, as far as FLAG 
changing some of the endpoints. It was very long and drawn out. 
We actually had stopped that PC-1 at one point and asked that 
they stop activating that and turn it all over to Japan/U.S. as 
that was now in service.
    Mr. Stupak. At any time in these last 15 months did anyone 
say well, we understand but now some issues have come up and 
it's not in writing?
    Mr. Floyd. Issues have come up because it wasn't in 
writing, yes.
    Mr. Stupak. So that trust agreement didn't hold up?
    Mr. Floyd. Exactly.
    Mr. Stupak. Okay. Ms. Smiley, were you involved in these 
negotiations or side agreement, we'll say?
    Ms. Smiley. I was involved in parts of the negotiation. I 
was in and out of the FLAG deal while I was simultaneously 
working a couple other transactions.
    Mr. Stupak. Were you in during this discussion about trust 
us, we'll get this thing turned on for $20 million?
    Ms. Smiley. That's not my recollection of the events. I 
recall that we had specific discussions about FLAG's desire to 
have Japan/U.S. as opposed to PC-1 when it became available. 
Our lawyer, as well as our business person, Dan Nimps, was also 
in the discussions and our lawyer made it very clear that there 
was a possibility that we may not be able to sell Japan/U.S. on 
an IRU basis. So therefore they would not be able to trade out 
PC-1 for Japan U.S.
    Mr. Stupak. Did you ever tell Mr. Floyd or anyone else from 
FLAG that they misunderstood the verbal agreement that they had 
between Qwest and FLAG on this U.S./Japan route?
    Ms. Smiley. I do not believe that there was a verbal 
agreement and yes, Mr. Floyd and I have had conversations 
back--an audit letter was requested.
    Mr. Stupak. Wait a minute. You didn't understand there was 
this verbal agreement?
    Ms. Smiley. I don't believe, at least in the conversations 
I participated in, there was not a verbal agreement that would 
allow----
    Mr. Stupak. Did you learn there was subsequently a verbal 
agreement?
    Ms. Smiley. No. I understand it is FLAG's position that 
there was a verbal agreement. I have no personal knowledge of a 
verbal agreement.
    Mr. Stupak. And my question before I interrupted you, did 
you ever tell anyone from FLAG or Mr. Floyd that they 
misunderstood a verbal agreement?
    Ms. Smiley. Yes, when he was filling out the information 
for the audit letter for Arthur Andersen, I told him I 
disagreed.
    Mr. Stupak. If you didn't know there was a verbal agreement 
how could you tell him there was a misunderstanding about the 
verbal agreement?
    Ms. Smiley. Because he told us that his concern was that 
there was this oral agreement and that he needed to disclose it 
on the audit letter and it was my position that there wasn't an 
oral agreement.
    Mr. Stupak. That it was not an oral agreement?
    Ms. Smiley. That it was not an oral agreement.
    Mr. Stupak. All right, do you have any personal knowledge 
of any oral agreements in your capacity there at Qwest?
    Ms. Smiley. I am not aware of conversations where there--
I'm sorry, where there were oral agreements.
    Mr. Stupak. Someone from FLAG told you about their oral 
agreement and you said that didn't count because you don't 
recognize that.
    Are there any other oral agreements that you've been made 
aware of that you don't recognize now?
    Ms. Smiley. I have been told that Global Crossing thought 
we had an oral agreement.
    Mr. Stupak. Okay, FLAG, Global Crossing, anyone else?
    Ms. Smiley. Cable and Wireless.
    Mr. Stupak. Cable and Wireless, anyone else?
    Ms. Smiley. That's all to my knowledge.
    Mr. Stupak. And only one verbal agreement with each one of 
these companies, FLAG, Global Crossing and Cable and Wireless 
or were there numerous oral agreements with each one of these?
    Ms. Smiley. I don't know sir, respectfully, I didn't 
participate in any oral agreements that would vary the contract 
terms.
    Mr. Stupak. If you didn't, who did? Aren't you the chief 
negotiating person for these agreements?
    Ms. Smiley. I was the negotiator for FLAG and Global 
Crossing and Cable and Wireless. Again, I wasn't involved in 
every conversation for every deal. I did not negotiate every 
term and condition of every deal. That just wasn't humanly 
possible.
    Mr. Stupak. So as former Director of Strategic 
Negotiations, Qwest Communications International, you weren't 
aware of these oral agreements until you were told?
    Ms. Smiley. I was not.
    Mr. Stupak. Ms. Wright, would you agree with that? Were you 
aware of these oral agreements?
    Ms. Wright. I was aware of an oral agreement, yes, between 
Qwest and Global Crossing.
    Mr. Stupak. And how about Cable and Wireless?
    Were you aware of oral agreement there?
    Ms. Wright. Global Crossing didn't have any oral agreement 
with C&W. I don't know about----
    Mr. Stupak. I realize that. It's just the coziness of all 
of this.
    Ms. Wright. I was not aware.
    Mr. Stupak. All right. I brought up an e-mail of yours 
earlier in my opening statement, so I think it's only fair you 
should comment on it. It's under Tab 24 and it's on the bottom 
of the page where it says ``Robin Wright wrote Susan told me 
Greg is ready to write a check for $75 million this quarter for 
capacity on SAC. What the hell are we going to buy?``
    What kind of response did you get on that? Or what did you 
buy?
    Ms. Wright. I'm not positive what we did buy in the third 
quarter of 2001.
    Mr. Stupak. What was your concern here, I guess is what I'm 
trying to ask. I'll let you explain it since I've highlighted 
it in my statement.
    Ms. Wright. My concern was that over time and again, this 
is getting into the third quarter where in my view we were 
having to dig deeper and deeper to find things to buy.
    Mr. Stupak. Right.
    Ms. Wright. And I was concerned that it would be great to 
have Qwest buy more capacity. There is no bad sale, but I 
didn't know if we could come up--I knew that they would not do 
a deal unless it was reciprocal and I was concerned that we 
would not be able to find $75 million worth of things to buy.
    Mr. Stupak. And that's to meet your revenue expectations 
for the quarter?
    Ms. Wright. The $75 million came from Susan, so and I don't 
know where we were at at that point in the quarter.
    Mr. Stupak. Thank you. Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes himself for 10 minutes and we're going to back to 
this tedious business with you again, Mr. Floyd and I think 
this demonstrates the detailed the section that we have to go 
through to try to understand how these transactions occurred 
and American investors lost $54 billion at Global Crossing 
alone.
    Now let's go back to whether or not you believed that you 
had a verbal agreement that FLAG could port its capacity when 
it was completed. Did you believe you had that verbal 
agreement?
    Mr. Floyd. Yes.
    Mr. Greenwood. And from whom did you get that verbal 
agreement?
    Mr. Floyd. Ultimately Greg Casey to Ed McCormack and from 
the group that we negotiating the deal.
    Mr. Greenwood. You used the word ultimately, did you 
discuss that with others at Qwest?
    Mr. Floyd. Yes. It would have been Kym, Susan, the 
negotiating team.
    Mr. Greenwood. They told you verbally that you would have 
this portability opportunity?
    Mr. Floyd. Collectively, yes; individually, I can't say 
which one spoke the words, but it was a--the two companies were 
doing a deal.
    Mr. Greenwood. Were you sitting at a table? Were you on the 
telephone?
    Mr. Floyd. On the oral side, no. So it had not gotten to 
that position at that point as far as----
    Mr. Greenwood. Now you've said that you had an oral 
agreement. You said that ultimately it came from Mr. Casey, but 
you said prior to that it came collectively. Is this something 
you heard? These are words spoken into your ear on the 
telephone?
    Mr. Floyd. The words were spoken in my ear during a meeting 
in New York.
    Mr. Greenwood. Those words were spoken by whom?
    Mr. Floyd. It would have been Susan Moorehead. It would 
have been Shawna Lee. Kym was there. Tanna Sumard, the attorney 
and Dan Nimps, their revenue analyst.
    Mr. Greenwood. Is that your recollection, Ms. Smiley, that 
you were there?
    Ms. Smiley. Yes sir, I was in New York.
    Mr. Greenwood. And you were aware that there was a verbal 
commitment made at that meeting?
    Ms. Smiley. I dispute the fact that there was a verbal 
agreement there. The staff has documents from Mr. Floyd himself 
which show that there was a dispute as to whether Qwest can IRU 
Japan/U.S. and we made very clear that we may not be able to 
offer Japan/U.S. as an IRU and if we could not offer Japan/U.S. 
as an IRU, then FLAG would not be able to trade in PC-1 for 
Japan/U.S.
    The upgrade provision in the contract clearly specifies 
that must be on similar terms and conditions. And so it was 
very important to Qwest that if Qwest could not offer Japan/
U.S. as an IRU, that FLAG could not sell back PC-1 and trade in 
for Japan/U.S. and that was a point of discussion in New York. 
We were very clear. We did not know whether we'd be able to 
sell it as an IRU. There are documents the staff has that 
reflects that and to date Qwest has not been able to sell 
Japan/U.S. as an IRU.
    Mr. Greenwood. Okay, Ms. Chase, do you still have Tab 67 in 
front of you? Do you have it?
    Ms. Chase. Yes, I do.
    Mr. Greenwood. It says, ``for Qwest to start recognizing 
revenue on the $20 million IRU, we are planning to sell FLAG 10 
STM-1s on PC-1. FLAG will then port over to 16 STM-1s on Japan/
U.S. within 2 or 3 months once Japan/U.S. is turned up. Qwest 
does not have an issue with this. Bottom line is FLAG is 
willing to trust us.''
    Would you interpret that for us?
    Ms. Chase. Sure. We were still in the process of 
negotiating our arrangement. Initially, FLAG had intended to 
lease these services, however, we were unable to do that, so we 
found a way in which we could sell the PC-1 capacity as an IRU. 
They prefer to be on Japan/U.S., so we tried to find a way upon 
which we could potentially get them to Japan/U.S. so we looked 
at an option that would be, if upon mutual consent, we would 
allow them to use the language in the agreement to go to Japan/
U.S. which is where they ultimately wanted to be in the end and 
I was stuck and sent a note to Greg to see if he could have a 
discussion with Mr. McCormack about what they wanted to do----
    Mr. Greenwood. When you said, ``bottom line is FLAG is 
willing to trust us,'' what does that mean?
    Ms. Chase. FLAG believed that Japan/U.S. would be able to 
become an IRU. They believed it to the extent that they, FLAG, 
sent us a note stating that they would help us figure out how 
we could make Japan/U.S. as an IRU because of the fact that we 
didn't agree that we could ever sell Japan/U.S. as an IRU. So I 
was stuck, didn't know how we would be pursuing this and 
basically escalated it to my senior vice president and then 
ultimately to Greg who's our executive vice president that 
talked to Ed about what they wanted to do. That's the point. I 
didn't guarantee, we didn't give them a verbal commitment that 
we would do anything one way or the other. We hadn't even 
gotten to the agreements yet, but wanted to give Greg an 
opportunity to talk to Ed McCormack and send them this note 
because this is where we were in the transaction.
    Mr. Greenwood. Let me turn to Ms. Smiley. Do you believe 
there was an implicit understanding in all negotiations that 
FLAG would be allowed to port based on the past practice and 
business relationships?
    Ms. Smiley. That's hard to answer because I know that in 
the negotiations I participated in, there was not an express 
hey, don't worry about mutual consent. That was never an issue. 
It was like we need to have mutual consent. This is the 
language we required.
    None of us had any reasonable expectation that we wouldn't 
give our reasonable consent, so if by that you mean implicit, 
then yes. Because sitting here today and sitting there when we 
negotiated those transactions, we had no reason to believe that 
we would not give them mutual consent. So in my opinion, I 
don't understand why people are saying there's this side deal 
because I didn't see a need for a side deal. You've got this 
language that says upon mutual consent. You've got parties that 
work together and there was no reasonable basis to believe that 
we wouldn't give mutual consent.
    Mr. Greenwood. Did you tell FLAG that you would port or did 
you explain that you might not?
    Ms. Smiley. We explained that the contract terms of the 
contract, there are certain requirements that you have to meet 
in order to exchange capacity and that's, those are the 
discussions that I had. Ms. Chase wasn't in New York with us 
when Tanna Samard, our lawyer, made very clear that there was a 
possibility that we could sell Japan/U.S. on an IRU basis. And 
so she wasn't there when we said we can't sell this.
    Mr. Greenwood. Let me turn to Mr. Floyd. FLAG received an 
audit letter from Andersen, asking FLAG to set forth all 
agreements between the companies including all side letters and 
verbal assurances.
    If you turn to Tab 69, you raise the auditor's letter to 
both Kym Smiley and Susan Chase. And you ask that an accounting 
person be on the call because the audit letter, ``may have a 
direct impact on your previous quarters' revenue recognition.''
    What did you mean by that?
    Mr. Floyd. The oral agreement was unusual and the fact that 
we were getting 10 STM-1s today, we'd bought 16. It was going 
to be a delivery of 10 and 6, for a total of 16. There was an 
issue. I don't know what it was. The idea was as a courtesy, we 
do have this letter. We do have to fill it out and be honest 
with it as far as exactly what the deal was and we are going to 
disclose it.
    Mr. Greenwood. Ms. Smiley and Ms. Chase, what did you 
understand these comments to mean?
    Ms. Chase. Which page are we referencing?
    Mr. Greenwood. This is Tab 69?
    Ms. Smiley. It's my understanding that Shawna Lee had a 
conversation with Ken Floyd after which she sent us an e-mail 
that explained Ken's concern and Mr. Floyd's concern was about 
this alleged oral representation that we would trade out PC-1 
capacity for Japan/U.S. And that's my understanding of what his 
concern was.
    Mr. Greenwood. Turn to Tab 70. There's an e-mail sent to 
you, Ms. Smiley, and copied to Ms. Chase. It raises several 
questions, concerns and questions regarding FLAG and their 
response to the audit letter. It says, this is to you from 
Shawna Lee. It says, ``I spoke with Ken Floyd this evening 
regarding an audit letter from Arthur Andersen. Concern, 
possible exposure on both parties based on 'verbal/oral 
agreements'. Question: how should FLAG handle responding to the 
requests to list the verbal oral agreements between the 
companies?''
    What's your interpretation of that?
    Ms. Smiley. It's my understanding that Shawna Lee is 
recapping the issues that she discovered from Ken Floyd and 
this is her repeating what Ken Floyd's concerns were. That's my 
understanding.
    Mr. Greenwood. What do you think ``possible exposure on 
both parties'' means? What kind of exposure?
    Ms. Smiley. I would have to assume revenue recognition 
issues, but that's just my assumption.
    Mr. Greenwood. If there was no oral agreement, then why was 
the concern expressed?
    Ms. Smiley. Again, you'd have to ask Shawna Lee, but I 
believe that she is repeating what he said and she's not 
talking on behalf of Qwest.
    Mr. Greenwood. Mr. Floyd, will you turn to Tab 73, please?
    It's the audit letter and it says, ``for the contract dated 
27 June 2001, there is a verbal agreement and that Qwest will 
convert the capacity purchased into 16 STM-1s on the Japan/U.S. 
cable system when available.''
    Can you explain that?
    Mr. Floyd. This is for point 2?
    Mr. Greenwood. Yes.
    Mr. Floyd. Yes. The verbal agreement, I guess I'll start 
from the beginning. The value for an STM-16 in June was $20 
million and that's what we wanted in the end. So the deal was 
such that Qwest could not give us 16 at that point in time. We 
only could give you 10, but we will give you the extra 6 later 
and that was from an accounting issue that they had with the 
value of the PC-1 capacity that they had in inventory at the 
time. FLAG agreed to take the 6 later and Japan/U.S. because 
the cost position was better on that system. And what this is 
saying and outlining very short term is that the verbal 
agreement with the contract was that we would be able to get 16 
STM-1s on Japan/U.S. when it was available.
    It's a system, the Japan/U.S. system was being built. It 
had been delayed. We weren't sure when it was going to be in 
place. There was also a stipulation on the owners of that cable 
system that they could not resell it to others until I think it 
was 75 or 80 percent of the system had been sold. So that's the 
question mark as far as when it was. Since then, we have bought 
IRUs on Japan/U.S. from other carriers because we needed to 
have that specific capacity and we couldn't wait any longer for 
it to be delivered.
    Mr. Greenwood. I suspect that anyone watching this hearing 
at home on C-SPAN has long ago gone to a soap opera because 
this is so tedious, but the bottom line of this hearing all day 
long has been that this committee has serious concerns about 
the fact that the telecommunications companies in question were 
conducting transactions fundamentally, fundamentally in order 
to meet revenue numbers and that all of the rest of this and 
that those revenue numbers were being pursued to keep the stock 
price from inflating and that that information deceived the 
investors into believing that the companies had more real 
revenues based on real legitimate business practices than they 
actually had and that's why a lot of people kept throwing their 
money at these companies and that's how they lost it all.
    Now I just want to ask each of you, as I conclude my 
questions for the day, did this occur to you at any time during 
any of these transactions, were you--did it not occur to you 
that the tortuous ways in which these transactions were 
construction were, in fact, having the effect of falsifying the 
image of your companies that was presented to the investors?
    Mr. Floyd?
    Mr. Floyd. If I look back at the small slices of reciprocal 
transactions that I did, it was one of those where FLAG was 
identifying a need first and then find another company out 
there that could actually come back and purchase something in 
return to offset the cash outlay and if it works, it works out 
great. For a small company like ours, just getting started, 
that's a nice way of doing it.
    You look back now, I guess 2 years later, 3 years later, 
you can say the impact was steamrolling, not just Qwest and 
Global Crossing, I think it was the industry as a whole, and 
our expectations that industry as well. I think that's the part 
that failed.
    Mr. Greenwood. Ms. Smiley?
    Ms. Smiley. With regard to the purchases that Qwest made, 
it was always my understanding that there were business cases 
for those. I wasn't personally responsible for those and it's 
just, I was told that we needed that capacity and my role was 
just negotiating the contract for the terms.
    Mr. Greenwood. And in retrospect, what is your view?
    Ms. Smiley. In retrospect, it's really hard to say because 
I have been told that Qwest this desire to be a global player, 
that we wanted to be in Latin America, that we wanted to be in 
Asia, that we wanted to be in Europe. And so based on those 
representations the business case for these assets makes sense 
to me.
    Mr. Greenwood. Still does?
    Ms. Smiley. It still does, but I have heard different 
things on well, is the market supporting this now? The market 
has completely changed. I'm not a financial person. I'm not a 
person that can look at it and say we need this. I'm not a 
network person. All I know is that I was told there were needs 
for this capacity and here's the deal you need to negotiate and 
this is the deal you need to close.
    On our cell side, I do know that the contracts were drafted 
so that we could get up front revenue recognition. I don't 
think that was a secret and I didn't think there was anything 
wrong with that. I was told if you followed these rules, you 
get up front revenue recognition treatment and the deals were 
structured that way because Qwest intended to book the revenue. 
I didn't have anything to do with what deals were booked in 
what quarter and how they're treated. That wasn't my role. My 
role was simply to negotiate the contract and then provide it 
to the other departments for approval and treatment.
    Mr. Greenwood. Ms. Chase?
    Ms. Chase. I believe that the agreements that I was 
personally involved with were exciting to the point that we had 
an opportunity to be in other parts of the world. I think being 
a global provider is important and I was excited about being 
able to enter into new business relationships so I looked at 
the positive side and view that most of the transactions were 
very good transactions.
    Mr. Greenwood. Ms. Wright?
    Ms. Wright. I believe the deals that we did with Qwest in 
the third quarter of 2000, the third quarter of 2000, the 
fourth quarter of 2000 and the first quarter of 2001 were good, 
sound deals based on customer requirements. And certainly some 
proactive buying for what we thought--where we thought the 
market was going.
    In all honesty, I thought that as we went further we were 
getting more and more desperate to do the deals and I think in 
retrospect the people who thought these should be more 
conservative about buying were probably right. Having said 
that, however, I also wonder if the whole, the collapse of the 
whole market sort of--excuse me, is a bigger issue and I'm not 
sure anything would have overcome that.
    Mr. Greenwood. How about the second quarter?
    Ms. Wright. The second quarter I didn't feel as good about.
    Mr. Greenwood. Ms. Armstrong--well, why didn't you feel as 
good about it?
    Ms. Wright. I felt like we were pushing to buy capacity--I 
look at sort of a continuum of here's a firm customer 
requirement on one side and on the other side a future, almost 
speculation. We were moving down that continuum in the second 
quarter.
    Mr. Greenwood. Sometimes I'm not sure anybody is still 
getting this. From the point of view of the investor, if your 
loved ones were investing in the company at this period of time 
would you have said yeah, keep investing and you wouldn't want 
to tell them, by the way, we're so desperate to meet our 
numbers that we're doing all these crazy swap deals, you would 
say it's still a good investment?
    Ms. Wright. I can tell you for myself, I lost a great deal 
of money on the stock. I thought the end of the first quarter I 
exercised my options because I was feeling so bullish about 
Global Crossing, so the situation changed drastically in 2001 
and would I have recommended it? Probably not in the second 
quarter, but it was not my call.
    Mr. Greenwood. Right, but everyone else is recommending.
    Ms. Armstrong?
    Ms. Armstrong. I don't think I'm really qualified to say 
whether the business decisions that were made were the right 
ones which was really the question I think you're asking. I 
think it's clear there were differing opinions within the 
company as to whether or not we should be doing these deals. 
But as far as transactions being a sham, I certainly--we worked 
very hard on these transactions. There was a lot to negotiate. 
I certainly didn't think the transactions were a sham. I don't 
think Robin did and I don't think Kym and Susan did. We were 
the ones who were sitting there until late in the night 
negotiating these deals and negotiating them hard on things 
like price as well as the legal terms because they were, as far 
as we were concerned, genuine deals.
    I wouldn't have wasted my time if I didn't think they were.
    Mr. Greenwood. Okay. Mr. Deutsch for 10 minutes.
    Mr. Deutsch. Thank you, Mr. Chairman. Ms. Wright, what 
happened with FLAG is very similar to your experience with 
Qwest in 2001. Is that correct?
    Ms. Wright. That's correct.
    Mr. Deutsch. You thought you had a deal in the first 
quarter that allowed Global to trade in its capacity at a later 
date. Is that correct?
    Ms. Wright. We thought we had a deal with Qwest that 
allowed us to trade in the capacity and trade it in at the 
price at which we purchased it.
    Mr. Deutsch. If you can refer to Tab 49. In a March 28, 
2001 e-mail from Susan Chase to Roger Hogan which states in 
part ``that Global Crossing is buying $60 million in U.S. Waves 
service with portability with additional $45 million for 
European service with the ability to port to dark fiber,'' what 
was your understanding of the deal you had?
    Ms. Wright. I'm sure--we could hear the page number?
    Mr. Deutsch. Tab 49 where Global Crossing is buying $60 
million in U.S. Waves services with portability with an 
additional $45 million for European service with the ability to 
port to dark fiber. What was your understanding of the deal 
that you had?
    Ms. Wright. We had the ability to trade in that capacity 
for dark fiber. Actually my understanding was that anything 
that was purchased during that quarter was completely portable 
to any other service.
    Mr. Deutsch. Ms. Chase, you wrote this e-mail and sent it 
to 16 people at Qwest including Matthew Scott, your Director of 
Finance. Did anyone object to your understanding as stated 
here?
    Ms. Chase. To which?
    Mr. Deutsch. The portability issue.
    Ms. Chase. Portability. On what Qwest is buying or what we 
are selling?
    Mr. Deutsch. What Qwest is buying and what you're selling.
    Ms. Chase. What we're selling. Our standard language has 
always been upon mutual consent, so the group of people that 
the note was sent to was to show the company where we were in 
the negotiations.
    Mr. Deutsch. Let me just ask the question again, did anyone 
object to this to the way it's written?
    Ms. Chase. Object to it? It was just--we just continued on 
the negotiations. We just kept going. It was going toward 
agreement.
    Mr. Deutsch. I mean there's nothing in the e-mail about 
mutual consent.
    I mean you're representing to us that there's mutual 
consent, but there's nothing about mutual consent in the e-
mail.
    Ms. Chase. It's in the agreement.
    Mr. Deutsch. Ms. Wright, what was your understanding?
    Ms. Wright. My understanding, now I don't know the specific 
timeframe here because the situation was fluid during the last 
week and the issue of mutual consent came up at the last 
possible minute, so I don't know if they had introduced that 
concept at that time, but at the beginning of the negotiations 
it was clear that we had complete and total portability.
    Mr. Deutsch. What about at the end?
    Ms. Wright. At the end of the negotiations, we had I 
believe we had the language mutual consent while acting in good 
faith and we had again the oral assurance that they would honor 
that commitment.
    Ms. DeGette. Will the gentleman yield?
    Mr. Deutsch. Yes.
    Ms. DeGette. Ms. Wright, would you have entered into these 
agreements without the oral understandings that you just talked 
about?
    Ms. Wright. No, I would not have and I was not authorized 
to approve this, so I went to David Walsh, explained the 
situation and told him that I felt like we had a long lasting 
relationship with Qwest and that they had ever intent to honor 
the portability.
    Ms. DeGette. It wouldn't have made business sense for you 
to enter into these agreements without the side or oral 
agreements, would it have?
    Ms. Wright. Probably not.
    Ms. DeGette. Thank you. I yield back. Thank you.
    Mr. Deutsch. Ms. Armstrong, is it true that Global Crossing 
would sometimes take assets it didn't want so that Qwest could 
just recognize revenue?
    Ms. Armstrong. I don't really know the answer to that 
question.
    Mr. Deutsch. If we look at Tab 54 which is a June 24, 2001 
e-mail from you to Ms. Wright, Ms. Smiley and others at Qwest, 
you say that that and I'm quoting, ``we are only acting in the 
capacity we are buying by 30th of June because this is Qwest's 
requirement. It would be unreasonable that in say 6 months' 
time when we activate what we actually need we suffer because 
of a falling price.''
    Ms. Armstrong. Yes, this goes back to the portability 
issue. We intended that what we bought we would exchange for 
capacity under this portability assurance in the future and my 
concern here was at what price would that capacity be 
exchanged.
    Mr. Deutsch. The next day, Ms. Wright, you sent an e-mail 
stating that ``in our deals with Qwest any capacity to dark 
stock fiber that we may buy from them was to be activated in 
order for them to get revenue recognition since many cases we 
buy a bucket of services, they just activate what they and we, 
in turn, have the right to port that what we want once we 
decided what we want.'' We have copies, obviously, this is at 
Tab 55. Is that a correct understanding of your past deals with 
Qwest?
    Ms. Wright. That's correct.
    Mr. Deutsch. But in June, Qwest accountants were insisting 
these later tradeoffs be at fair market value which could 
result in losing money in the market when prices are falling 
and at that point is that correct?
    Ms. Wright. That's correct, toward the end of the 
negotiations, they said that they were required to change the 
language and have it at fair market value rather than purchase 
price.
    I had a severe objection to that because it was a change in 
the deal structure and subsequent to that I let Susan know that 
as far as I was concerned that was a deal stopper and we went a 
couple of different routes at this point. Jackie and Kym, I 
believe, negotiated the language that would change our contract 
to be fair market value to mirror their contract so the risk 
would be equal and let me just, if I could, take a second just 
to frame out what that risk would be. If you have a circuit 
that you bought for $1 million from New York to Los Angeles and 
let's say that we activated or they activated that circuit for 
us to be able to, according to their revenue recognition rules, 
where we wanted New York to San Francisco. If that price fell 
10 percent then we were going to take that hit. However, 
mitigating that is typically if that one is going to fall 10 
percent so is the other one. So I didn't feel there was a huge 
risk, however, I didn't feel comfortable in pursuing it, so I 
talked it over with my boss, David Walsh, and Susan suggested 
that Greg Casey give David Walsh a call so that they could have 
this gentleman's agreement on the pricing because Susan had 
told us that that was their intent, to make us whole.
    Mr. Deutsch. And again, about this so-called gentleman's 
agreement, what was that price the gentleman's agreement would 
be at?
    Ms. Wright. In the contract, I believe, were some 
negotiated prices, so we had agreed on the $1 million or 
whatever.
    Mr. Deutsch. The initial purchase price?
    Ms. Wright. I believe the contract did have some purchase 
prices in it.
    Mr. Deutsch. Ms. Chase, would you agree with what Ms. 
Wright has just described?
    Ms. Chase. I agree that we had issues between the fair 
market value and purchase price. I wasn't exactly--didn't 
remember how we resolved that particular issue. I believe that 
I personally didn't guarantee that we would provide 
portability, but I had no reason to believe that our company 
would ever deny it because at that period of time I hadn't been 
involved in a transaction whereby we did deny it.
    Mr. Deutsch. Let me ask just one last question to Ms. Chase 
and Ms. Smiley. I want to refer you to Tab 62 which is an e-
mail dated September 19, 2001 from Matthew Scott to you and 
several other people. It refers to an effort by Global Crossing 
to trade in some capacity bought in the second quarter. After 
meeting with Arthur Andersen and Ms. Szeliga, Mr. Scott reports 
to you that ``this cannot be done with seriously jeopardizing 
all future IRU revenue recognition. All of this implied that 
it's a service and not an asset. This means we do not complete 
the earning process with the original sale and should not have 
booked any revenues. That pertains to all future IRU sales as 
they will never know if the earning process has been 
completed.'' Was this the first time you had heard this 
position?
    Ms. Smiley. I'm sorry, could you help us find this. I can't 
find where you're reading from.
    Mr. Deutsch. I believe it's 62.
    Ms. Chase. 62? It's not 62.
    Mr. Deutsch. It's 62.
    Ms. Smiley. What page?
    Mr. Deutsch. Let me just check. Second page. ``Met with 
Robin Szeliga.'' On top of page 2.
    Ms. Chase. I've never seen this before.
    Mr. Deutsch. On the bottom of page 1 going up to page 2. 
Top of page 2, bottom of page 1.
    Ms. Smiley. Could you please repeat your question?
    Mr. Deutsch. My question is this position is that there's 
obviously a question how they're treating the IRU sales, that 
it's no longer a--it's a service, not an asset and you would 
deal with it differently from an accounting perspective.
    Was this the first time that you've heard this position? 
Was this irrelevant to how you were treating it?
    Ms. Smiley. I guess I really don't understand your 
question. I think what he's explaining here is that you've got 
your inventory and these are the different things that you have 
to have with regard to buy-backs and these are the issues that 
they've identified with regard to buy-backs. And they're saying 
that any sales of PT&E should be structured as an operating 
lease and not an asset sale.
    So I apologize, I just don't understand your question.
    Mr. Deutsch. You don't think this is a change in position 
in terms of how they're treating the sale, the contracts?
    Ms. Smiley. This is concerning a buy-back of capacity of 
original capacity that we sold. We are requesting on, I 
believe, Global Crossing's behalf to repurchase some of the 
capacity pursuant to the terms of the original contract and I 
believe here what Matthew Scott is saying is there's some 
issues with that. I don't know, I know we had changes in 
accounting at different points in time. I don't know whether 
this is a new change or if this just tightening up of existing 
procedures, so again, I just don't really know how to answer 
your question.
    Mr. Deutsch. But you're negotiating contracts without 
knowing how they're treating this capacity?
    Ms. Smiley. How Qwest chooses to account for it is not my 
issue. I take what the sales team tells me and they say we want 
you to negotiate a contract for the purchase of X capacity, say 
for example, PC-1 from Global Crossing and then the sale of 
domestic capacity. We negotiate those. There are a whole team 
of people, price and upper management, legal. If there are 
issues that we believe may raise accounting issues, we'll send 
those to the accountants and ask their advice on it. After the 
deal is signed, the contracts are turned over to accounting and 
they make the call as to how it's treated.
    The intent is when we sell IRUs to work within the 
parameters so they can be booked up front. Are they always 
booked up front? I don't know the answer to that.
    Mr. Deutsch. On No. 2 on top of the second page of this 
tab, ``the buy-back of assets tolled just after the last 
quarter.'' I mean it seems as if he's saying you can't use 
that, you can't use that if the buy-back is after the last 
quarter or can you?
    I mean that would seem as if it would affect how you're 
selling.
    Ms. Smiley. I'm sorry, I'm just not getting what you're 
asking.
    Mr. Deutsch. All of this implies that the service is not an 
asset, that it has no relevance to your sale and that this 
means that we did not complete the earnings process with the 
original sale and should not have been booked and should not 
have booked any revenues. I mean that means you're booking any 
revenues if you're going to get it done in that quarter.
    Ms. Smiley. It's my understanding there are a number of 
conditions that have to take place in order for Qwest to book 
the revenue up front. I'm not an accountant. I don't know the 
exhaustive list. During negotiations, I learned a few things 
such as it does need to be activated before the end of the 
quarter. There needs to be partial patient, those sorts of 
things. There needs to be a clearly identifiable asset and I do 
know that there's a distinction between a service and an asset.
    Mr. Deutsch. Would you be spending your time though 
negotiating contracts that don't book revenue?
    Ms. Smiley. I'm sorry?
    Mr. Deutsch. Would you be spending your time negotiating 
contracts that don't book revenue?
    Ms. Smiley. Yes. I've negotiated a number of contracts that 
book over the life of the contract. That's the distinction. 
It's either up front revenue recognition in the particular 
quarter that the transaction occurs or it's over the life of 
the contract and I have negotiated numerous contracts that have 
revenue booked over the life of the contract rather than up 
front revenue.
    Mr. Deutsch. Would that include an IRU contract?
    Ms. Smiley. I don't know if any of the IRUs that I have 
worked on were given the recurring revenue treatment versus the 
up-front. I know that there was a capital lease that I 
understand that we sold, I believe to Global Crossing and we 
sold a capital lease one quarter and I believe that was treated 
as recurring revenue, but again, I'm not involved with that. I 
don't know precisely what they do with the contracts after 
they're negotiated and how they treat them.
    Mr. Deutsch. Ms. Chase, do you want to respond at all to 
this issue?
    Ms. Chase. I have no comment. Sorry.
    Mr. Greenwood. Ms. DeGette?
    Ms. DeGette. Thank you, Mr. Chairman. Let me ask you, Ms. 
Smiley, when you negotiated all of these deals, who was your 
superior and did you take--what was your requirement of 
clearing these deals through someone?
    Ms. Smiley. First, let me make very clear I didn't have any 
approval authority for any term or condition on these deals.
    Ms. DeGette. So who approved these deals?
    Ms. Smiley. Our price and upper management group.
    Ms. DeGette. Who was in charge of that?
    Ms. Smiley. It varied on different deals. Dan Nimps was on 
some of the deals. Martha Pye was on some of the deals. Roger 
Hoaglund was their superior and he was involved in certain 
aspects of the transactions, but pricing and upper management 
had ultimate authority and approval on all the deal terms, not 
me. I was just a mouth piece----
    Ms. DeGette. So you presented them with all the terms and 
conditions?
    Ms. Smiley. They participated in the negotiations. We 
worked as a team.
    Ms. DeGette. Mr. Chairman, I'd ask if this witness could 
supplement her answer today in writing, specifying, because I 
think this will really help us in our investigation, specifying 
exactly who approved of all of these deals, particularly the 
deals with Global Crossing and also the deals with FLAG.
    Mr. Greenwood. Will you do that, Ms. Smiley?
    Ms. Smiley. We could, but just to let you know the staff 
does have sign-off sheets as part of document production which 
have line items that show that network planning, if someone 
signs off on behalf of that, someone signs off on behalf of 
legal. Someone signs off on behalf of price and upper 
management and the staff has those.
    Mr. Greenwood. For how long has that been the case, if the 
gentlelady will yield?
    Ms. Smiley. I believe, I don't know whether it was 2000 or 
2001 that that took place. Prior to that, if the request is to 
go back and look at the deals and figure out who was involved, 
assuming counsel has no issue with that, I'm fine.
    Mr. Greenwood. I would suggest that staff prepare questions 
of that nature in writing and present them to Ms. Smiley.
    Ms. DeGette. That would be great, Mr. Chairman, and I'll 
tell you why I can't rely just on the sheets that were produced 
because I don't personally have all of the documents. Committee 
staff has that, so we'll go through it. We'll ask committee 
staff to prepare questions and I would ask that the answers be 
supplemented maybe within 10 days after the questions go out, 
seeing as this is an on-going investigation.
    Ms. Smiley. I'd be more than happy to cooperate.
    Mr. Greenwood. Thank you, Ms. Smiley.
    Ms. DeGette. I want to ask you a question, Mr. Floyd, Qwest 
sold PC-1 capacity to FLAG for $19,921,767. Is that accurate?
    Mr. Floyd. I was calling it $20 million. I'm not sure what 
the rest of it is.
    Ms. DeGette. We've had so many accountants in here rounding 
around, I thought I might be specific for one moment, but 
roughly $20 million?
    Mr. Floyd. Yes.
    Ms. DeGette. And let me ask you, did that capacity, did 
that ever get delivered to FLAG?
    Mr. Floyd. Not as of yet, no.
    Ms. DeGette. Now, Ms. Smiley, I guess it would be Ms. 
Smiley, in documents that have been provided to us by your 
attorneys, it indicates that roughly $20 million was recognized 
by Qwest that very quarter.
    Let me ask you, how often did Qwest do deals where it 
recognized revenue, but never actually delivered the capacity?
    Ms. Smiley. It's my understanding that the capacity was 
delivered, that we had acceptance letters signed by FLAG, so 
it's my understanding that the capacity was delivered.
    Ms. DeGette. Is that accurate, Mr. Floyd? Do you have 
acceptance letters signed that you did, in fact, receive the 
capacity?
    Mr. Floyd. Yes, we did.
    Ms. DeGette. But you never got the capacity?
    Mr. Floyd. It was helping Qwest as far as through their 
internal processes. We did not mind signing an activation 
letter. The understanding is that we're going to get it turned 
on.
    Ms. DeGette. But has it been turned on?
    Mr. Floyd. No.
    Ms. DeGette. Who signed that letter?
    Mr. Floyd. It may have been something in the provision. I 
do not know. I do not know who that would be.
    Ms. DeGette. So what you're saying is someone at FLAG 
signed an activation letter in order to help Qwest. Qwest 
booked the revenue, but you guys never got the capacity?
    Mr. Floyd. We're waiting on the local loop at this point. 
It's not as urgent. Our immediate requirement to get trans-
Pacific capacity, we went out and bought an IRU from somebody 
else just to--we had some World Cup transmission we wanted to 
get going and the World Cup wasn't going to wait for us.
    Ms. DeGette. When did you give Qwest the $20 million?
    Mr. Floyd. We gave them $15 million at the time of--right 
after signature.
    Ms. DeGette. When was that?
    Mr. Floyd. June 2001.
    Ms. DeGette. But you didn't have any of the capacity turned 
on as June 2001?
    Mr. Floyd. Right.
    Ms. DeGette. And you don't have it turned on today, but you 
signed the activation letter?
    Mr. Floyd. We're still trying to work with them.
    Ms. DeGette. Who asked you to sign the activation letter?
    Mr. Floyd. It would have been the team, the negotiations 
team.
    Ms. DeGette. Any particular person?
    Mr. Floyd. I'm not sure.
    Ms. DeGette. You don't remember. Have you done any other 
deals like this with anyone else where you give some $20 
million for something, but you don't actually get it?
    Mr. Floyd. No, I can't say that we've done that one yet.
    Ms. DeGette. Ms. Chase, did you negotiate that deal?
    Ms. Chase. I was involved, yes.
    Ms. DeGette. You need to pull the microphone closer.
    Ms. Chase. Yes, I was involved.
    Ms. DeGette. Did you ask for the activation letter from 
FLAG?
    Ms. Chase. I actually believe that we delivered the 
capacity between the points in which we were asked to deliver 
it, but if I can recall correctly that requirement changed and 
they wanted the capacity to go to another cable station on 
another side.
    Ms. DeGette. Is that accurate, Mr. Floyd?
    Mr. Floyd. Whether it was activated, I'm not sure. Susan is 
very correct in that we decided to change the activation point. 
That's when we had the problem with that one and then we said 
just give us the Japan/U.S. and it kind of snowballed from 
there, said okay, stop just go back, give us the PC-1 and we're 
just, I think we're in the process of finalizing that right 
now.
    Ms. DeGette. Let me ask you, Ms. Wright----
    Mr. Greenwood. Would the gentlelady yield for just a 
moment?
    Ms. DeGette. I'd be happy to yield.
    Mr. Greenwood. I'm looking at a document, Mr. Floyd, about 
this transaction, this FLAG Telecom, Japan Ltd., FLAG Telecom 
Network, U.S.A., Ltd., FLAG. There's a letter of agreement, 6/
27/01 and the contract amount was $20 million and I think you 
said that you paid $15 million for it?
    Mr. Floyd. The payment process was $15 million on 
activation and $5 million after 1 year.
    Mr. Greenwood. And I understand that Qwest for the $20 
million recognized revenue of almost the full $20 million, 
$19,921,767.
    Can you explain that?
    Mr. Floyd. I don't know how they worked that piece of it.
    Mr. Greenwood. How about Ms. Smiley or Ms. Chase, can you 
explain how, if you received $15 million you would have 
recognized revenue of $19.9 million?
    Ms. Smiley. Again, I don't have anything to do with what 
amounts in the contracts we recognized.
    Mr. Greenwood. Ms. Chase, can you shed any light on that?
    Ms. Chase. I cannot.
    Mr. Greenwood. I thank the gentlelady for yielding.
    Ms. DeGette. Thank you. Ms. Wright, if you could turn to 
Exhibit 55 in the notebook. This is a memo from you to a number 
of people and what it says is ``in our deals with Qwest in a 
capacity dark fiber that we buy from them has to be activated 
in order for them to get revenue recognition since in many 
cases we buy a bucket of services. They just activate what they 
can and we have the right to port it, what we want once we 
decide what we want. We've always agreed that the value is what 
we paid for, not fair market value'' and then it goes.
    Now the truth is this is pretty much a summary of the deals 
that you guys negotiated with Qwest, isn't it?
    This is how the deals were structured, right?
    Ms. Wright. I would say that's accurate.
    Ms. DeGette. And my question is why would you contract with 
somebody for something that you didn't already have? What was 
the business reason to do that?
    Ms. Wright. Why would we contract?
    Ms. DeGette. Why would you make a contract with Qwest for 
something that's not specified? In other words for an undefined 
port for something that's unspecified?
    Ms. Wright. What we try to do is for the things that we do 
know that we absolutely have an urgent need for, we specify 
those in the contract. The rest, we wait until we get 
information from customers to determine what the end points 
might be.
    Ms. DeGette. In fact, you did the deals, you structured the 
deals the way you did because of Qwest's revenue recognition 
that the revenue had to be recognized by the end of the 
quarter, right? That's what you also say in this memo.
    Ms. Wright. We structured the deal to accommodate what they 
told us was revenue recognition issues, yes.
    Ms. DeGette. And would there have been any reason for you 
to structure deals the way you did other than Qwest revenue 
recognition rules?
    Ms. Wright. Well, there are a lot of different reasons to 
structure the deals in certain ways. I'm not sure if I 
understand your question.
    Ms. DeGette. Well, I think you said it yourself in many of 
your memos that we've been talking about today where you're 
negotiating deals with Qwest and you are buying things that you 
don't need or want. You say that in your memos, right, some of 
your memos?
    Ms. Wright. As we went on in time, that was my position, 
yes.
    Ms. DeGette. What would the business reason for that, to do 
that be without portability?
    Ms. Wright. Without portability?
    Ms. DeGette. Why would you structure deals without 
portability? What would the business reason for that be?
    Ms. Wright. We would not structure a deal without 
portability.
    Ms. DeGette. But you did structure deals like that, didn't 
you? No.
    Let me try to back up and restate my question. The deals 
you structured, as you increasingly went along with Qwest, the 
deals that you structured, why would you do that if they didn't 
have anything to give to you in return at that time, as you 
said in your memos?
    Ms. Wright. Sometimes, it depended on what the circumstance 
was. Sometimes if it was a dark fiber, it takes a while to 
activate that and we were doing deals the last few days of the 
quarter. There was no way you could activate dark fiber, so we 
took--in essence, we bought a gift certificate.
    Ms. DeGette. And that was no problem with your accounting 
because you guys were amortizing the revenue over the life of 
the contract, right? So you could buy dark fiber just fine.
    Ms. Wright. I'm not an accountant, but I didn't know there 
were any issues. You're right.
    Ms. DeGette. But even Qwest admitted to you during these 
negotiations that they were forcing you to say that you took 
things that you didn't really want, right? I mean you took 
routes, you took all kinds of things that you really didn't 
need on the assumption that you could then later change those 
agreements?
    Ms. Wright. That's true.
    Ms. DeGette. So without that side agreement, you would have 
never made the agreement in the first place, right? It wouldn't 
have made business sense for you.
    Ms. Wright. Without the side letter on portability, you're 
correct, it would not have made business sense.
    Ms. DeGette. Right. And some of the agreements were not in 
writing, they were oral, correct?
    Ms. Wright. The only oral agreement that we had was 
relative to the fair market value versus the purchase price.
    Ms. DeGette. And would it have made sense for you to do the 
deal without that side oral agreement?
    Ms. Wright. That one actually, the risk was not too great 
because of what I explained in terms of the drop in prices, so 
obviously we wanted the purchase price honored, but we settled 
for the oral agreement.
    Ms. DeGette. Okay, thank you. I have no further questions.
    Mr. Greenwood. The Chair thanks the gentlelady. The Chair 
thanks each of our witnesses. We know this has been a long and 
tedious day for you and one you've not looked forward to, but 
you've all acquitted yourself well and we appreciate your 
cooperation.
    This hearing is now adjourned.
    [Whereupon, at 3:50 p.m., the hearing was adjourned.]
    [Additional material submitted for the record follow:]





    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]








CAPACITY SWAPS BY GLOBAL CROSSING AND QWEST: SHAM TRANSACTIONS DESIGNED 
                           TO BOOST REVENUES?

                              ----------                              


                        TUESDAY, OCTOBER 1, 2002

                  House of Representatives,
                  Committee on Energy and Commerce,
              Subcommittee on Oversight and Investigations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9 a.m., in 
room 2322, Rayburn House Office Building, James C. Greenwood 
(chairman) presiding.
    Members present: Representatives Greenwood, Whitfield, 
Tauzin (ex officio), Deutsch, and DeGette.
    Also present: Representative Slaughter.
    Staff present: Jennifer Safavian, majority counsel; Casey 
Hemard, majority counsel; Ann Washington, majority professional 
staff; Kelli Andrews, majority counsel; Tom Dilenge, majority 
counsel; Mark Paoletta, majority counsel; Brendan Williams, 
legislative clerk; Edith Holleman, minority counsel; and Nicole 
Kenner, minority research assistant.
    Mr. Greenwood. The committee will come to order. Please be 
seated.
    Good morning. Welcome to the Subcommittee on Oversight and 
Investigations' second day of hearings focusing on a series of 
highly questionable business transactions involving the Global 
Crossing and Qwest Corporations.
    We began this hearing last Tuesday by examining a central 
question: were these transactions to swap fiber optic capacity 
done for substantive business purposes? Or were they, instead, 
essentially sham transactions, merely designed to provide the 
appearance of increased revenues, aimed at deceiving both Wall 
Street analysts and ordinary investors alike?
    Our inquiry has centered on actions by senior employees and 
executives of both Qwest and Global Crossing who established 
and implemented the policies, and who made the key decisions 
for these companies.
    But our inquiry also concerns broader matters--matters of 
accounting and accounting oversight by the executives, 
corporate boards, and the appropriate regulatory bodies. Our 
duty here is not just to expose what may be wrongdoing by a 
handful of individuals, though there is considerable public 
value to that, but to also determine if there are more 
substantive accounting policies and oversight issues that the 
Congress and the executive branch need to address.
    During our first day of hearings into this matter, we 
explored in detail some of the capacity swaps entered into by 
Global Crossing and Qwest. We examined the ostensible reasoning 
behind these swaps and whether there were side or oral 
agreements that allowed Qwest, in particular, to account for 
them illegitimately.
    We heard from both current and former employees of both 
companies involved in these transactions. And we learned of the 
pressure placed on them from executives at the highest levels 
to complete these transactions in order to show revenues, 
however fictitious, during a time of shrinking markets and 
declining business volume.
    As knowledgeable as these witnesses were, however, they 
were not the ones who determined the high--most knowledgeable 
observers have said unrealistically high--revenue targets that 
drove the deal-making decisions. Nor did they create the 
numbers-obsessed environment in which these deals were made.
    The people who created this environment, who made these 
fateful decisions, are before us today to speak to these 
matters this morning. Our investigation suggests that these 
executives continued to find ways to artificially produce 
quarterly revenue numbers through capacity swaps, even when 
their employees objected that it had become too difficult to 
sell substantial amounts of capacity. Now we can hear their 
side of the story and question them directly about these 
matters.
    In particular, we can ask these executives and board 
members the same questions that many current and former 
employees of these companies would ask if they had an 
opportunity to do so.
    Consider Mr. Gary Winnick, Chairman and Founder of Global 
Crossing, who is before us today. He reportedly cashed in $735 
million from his stock in the company, including over $100 
million in stock sales at a time in May of last year when 
Global Crossing executives were beginning to realize the extent 
of the company's financial problems.
    Unfortunately, Global Crossing employees and investors were 
not so lucky. Approximately 10,000 employees lost their jobs, 
their health care, and their life savings, while investors lost 
$54 billion.
    We have before us today a woman who was one of the 
unfortunate investors in, and employees of, Global Crossing. 
For 31 years, Lenette Crumpler worked at Frontier, which Global 
Crossing acquired in 2000. Ms. Crumpler had invested $86,000 in 
her 401(k) while working for Frontier, which could not have 
been easy for her to do as a single mother with two children.
    She believed in the statements made by Global Crossing 
executives that the company was in sound financial shape and 
would successfully ``weather the storm.'' As a result, she held 
on to her stock, while the boys in the big corner offices did 
just the opposite. Sadly, Ms. Crumpler has lost her entire 
retirement savings.
    We also have before us Paula Smith. Ms. Smith is a former 
Qwest employee who lost $400,000 in her 401(k) as the price of 
Qwest stock had fallen significantly. She believed that placing 
her money into Qwest was a conservative investment. It was her 
dream to use that money to put her two daughters through 
college.
    I know that they and the many other Global Crossing and 
Qwest employees who have lost their jobs and their retirement 
savings want to hear from these executives.
    In addition to our focus on past executive actions, we will 
also hear today from some of the current executives and board 
members about the future of these companies. They will be able 
to address our questions concerning Global Crossing and Qwest's 
future business plans.
    I am also eager to learn more about Qwest's recent 
restatement of its previous financial statements due to its 
accounting for these capacity swaps, and to learn if we can 
expect to see similar restatements by Global Crossing. I would 
also like to learn whether the corporate environment has indeed 
changed at these companies, and what lessons these current 
leaders have drawn from these past problems.
    Let me thank the witnesses for coming this morning for what 
promises to be an informative hearing.
    The Chair recognizes the ranking member of the committee, 
Mr. Deutsch of Florida, for 5 minutes for his opening 
statement.
    Mr. Deutsch. Thank you, Mr. Chairman. Mr. Chairman, I also 
have an opening statement that I would like to submit for the 
record and just share with the committee a couple of thoughts.
    You know, in this situation I guess of really suffering, as 
you have well stated, not just of tens of thousands of 
Americans, but really of millions of Americans, who have lost 
more money than has ever been lost in the history of humankind 
in the last not much more than 18 months to 2 years, you know, 
where we have retirees who have put off retirement, families 
who saved for college, money wiped out.
    You know, I guess last Thursday's Wall Street Journal had 
an article in some ways hopefully an optimistic thing--a front 
page story, which I would like to submit for the record, and 
the lead headline ``Past Crisis Offer Hope for Economy Warnings 
to Watch. Railroads in 1870's overcame a fiber optic style 
glut, 1929--viability,'' and actually have a graph of railroad 
stocks, which basically looks pretty similar to the stock 
market over the last 24 months or so. But then, as you can see 
the graph, had a dramatic change afterwards.
    And, obviously, I think all of our hope is that that is, in 
fact, what will happen, that the economy will kick back into 
high gear, which I believe it will. I think we have a unique 
economy in the history of the world.
    Hopefully this will be a very constructive hearing. We had 
I think a good start last week, and we have done a lot of work 
over the last 18 months in this committee really looking at 
some of the crisis and really the dislocations that have 
occurred on a both macro and micro level. And I think this very 
well might be our last series before the election at this point 
today.
    But I guess, you know, the focus can very well be in this 
area for this hearing the whole issue of the capacity swaps. 
And hopefully at the--by the end of the hearing we will have a 
better understanding and really a better understanding about 
that particular issue.
    I think, as I said last week, when we had Enron--and I 
think I am--both the chairman and myself have worked very well 
together, and I think I am proud of the work that we have done, 
but, really, as importantly, if not more importantly, our staff 
has done.
    When we had Enron in here not that long ago, which was 
really the first of this series of hearings that Congress has 
had, I held up a chart describing what Enron had done and 
talked about--it was in--you know, a number of national papers 
took pictures of it.
    I think in hindsight what we know, what Enron had done, and 
what seems to be bearing out by prosecutions, was, in fact, 
illegal and people will go to jail. Absolutely. I think as we 
are looking at this industry--and it is an industry--which, 
again, hopefully the graph will look like this in not too long 
a period of time in terms of fiber optics, that the 
transactions that occurred here I think are open to a much 
different analysis.
    And for all the work of our committee at this point, as 
opposed to the Enron investigation, where we found smoking guns 
and we found illegal activity, at this point we have found 
practices that I think need further, in a sense, explanation, 
both to us, to the market, so we can be helpful, because not 
only do we investigate in this committee but we also have the 
regulatory side of the telecommunications industry. And maybe 
we were missing something in terms of our regulatory side as 
well.
    So I look forward to the witnesses' testimony. I am very 
pleased to learn that Mr. Winnick will be testifying today on 
his own really offer, which is really the first CEO that I am 
aware of in this committee that has taken that option. 
Hopefully we will learn a great deal from him and the other 
witnesses today regarding that issue.
    Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman, and reminds 
him that Jeffrey Skilling also testified before us, the CEO of 
Enron.
    The lady from Colorado for 5 minutes, Ms. DeGette.
    Mr. Deutsch. He was no longer the present CEO, Mr. 
Chairman, at the time. Mr. Chairman, I really would stand 
corrected on that. Mr. Skilling, when he testified, was not the 
CEO of the company.
    Mr. Greenwood. The record will reflect the gentleman's 
comments.
    Go ahead, Ms. DeGette.
    Ms. DeGette. Thank you, Mr. Chairman.
    Mr. Deutsch. And he is not the CEO; he is Chairman of the 
Board. Thank you.
    Ms. DeGette. Thank you, Mr. Chairman. As I said last week 
in my opening statement, accounting decisions that were made 
not just in the telecommunications industry but in the energy 
industry and in pharmaceutical companies, and really throughout 
American business, really went to the edge in the 1990's. And 
today in a softening economy we are now seeing the result of 
that.
    We have two examples of that result sitting right here in 
front of us--Ms. Crumpler and Ms. Smith. And before I go on, I 
would like to introduce my colleague, Louise Slaughter, who is 
a Congresswoman from New York. She has a particular interest in 
this issue, because Global Crossing is located in her district, 
and Ms. Crumpler is one of her constituents. And so on Ms. 
Slaughter's behalf, I would like to welcome you, Ms. Krumpler.
    And since Ms. Slaughter is not a member of this committee, 
she is not allowed to speak. It is probably the first time 
Louise has ever been silent.
    So just watch out, Mr. Chairman.
    But she will submit a statement for the record. Like Ms. 
Slaughter, I have lost--my constituents have lost jobs, 
thousands of them. And Paula Smith, who is my constituent and 
will testify in a moment, is here today. And as we heard, Ms. 
Smith lost $400,000 in her 401 stock plan, because under the 
plan employees were not permitted to sell stock until they 
reach 55 years old. And so she could not pull her money out of 
the fund.
    That echoes some other testimony we heard just a few months 
ago. I am looking forward to hearing from Ms. Smith on behalf 
of all the thousands of my constituents who are now out of 
work.
    I am also pleased, Mr. Chairman, that you have brought in 
the major players in both of these companies who will let us 
know from their perspectives exactly why these swamps were made 
and what the accounting practices were. In particular, I am 
glad that after my questioning last week we are bringing in Mr. 
Peter Hellman, who is the chairman of the Qwest Audit 
Committee, because one of my big concerns throughout this 
entire process with Enron, with Imclone, and now with the Qwest 
and Global Crossing hearing, is, what role does the board 
play--and, in particular, the Audit Committee--in these 
corporate decisions?
    And I think that the testimony we will hear from Mr. 
Hellman today will give us some insight into what the board's 
role was and what, if anything, hopefully something, Qwest is 
doing to tighten the reigns and to make sure that there are 
stricter controls.
    I am looking forward to the testimony today, Mr. Chairman. 
I want to thank you for continuing these hearings throughout 
the past year. They have been very helpful in formulating 
public policy around corporate responsibility and corporate 
actions. And with that, I will yield back the balance of my 
time.
    Mr. Greenwood. The Chair thanks the gentlelady, and also 
thanks the gentlelady from New York, Ms. Slaughter, for her 
presence. Ms. Slaughter has shared with me her concerns about 
her constituents for the past many months. I know that she has 
held her own hearing on this subject, to inform herself and all 
of us on the matter. And it was she who helped us find Lenette 
Crumpler as someone who experienced the losses.
    So we thank you for your presence. We regret that the rules 
of the committee do not allow you to participate in the 
questioning, and so forth. But we are delighted that you are 
with us.
    Ms. Slaughter. The notes from the forum that we held, may I 
ask that they be included in the record?
    [The information referred to follows:]




    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]



    Mr. Greenwood. Yes. The gentlelady's statement and the 
document that she has presented to me, the transcript of the 
hearing that she held, will become a part of the record.
    [Additional statements submitted for the record follows:]
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Thank you Mr. Chairman. I've said on a number of occasions that 
this Subcommittee over the past year truly has done a tremendous public 
service with its dogged investigative work into corporate misconduct--
beginning with Enron and Andersen and extending through to the actions 
of Global Crossing and Qwest, which we will continue to explore this 
morning. I believe members on both sides here appreciate what they've 
learned from this good work.
    One important lesson that these investigations have revealed for us 
is how a handful of key leaders of a big corporation--the CEOs, CFOs, 
Presidents and Board Members--really set the tone for those below them.
    Last week we heard from a number of executives, at both Global 
Crossing and Qwest, who were charged with making deals happen. And they 
did make them happen--sometimes, as we learned, with an implicit, if 
not explicit, effort to deceive.
    Look at what we've been unraveling in this investigation. It's a 
story of deception and betrayal of public trust. How else can we 
explain Global Crossing pursuing optical capacity sales and swaps that 
its own employees couldn't justify? They did so out of desperation to 
make the numbers, as we have learned, when the market for expanding 
optical capacity was drying up.
    Deception and betrayal of the public trust--how else can we explain 
some of Qwest's dealmaking? Here's a company that entered into long-
term capital leases with illegitimate side agreements--winks and nods--
that these deals really weren't what Qwest would report to the 
accountants for the purpose of booking income. These were sham deals 
that both sides knew were being done for one purpose only--to make 
quarterly numbers.
    The people who put these deals together were not rogue employees. 
We learned they were responding to, and working within, an atmosphere 
created from those at the top. This morning we have those who set the 
tone before us. And I look forward to learning from them directly about 
the atmosphere they set at these two companies.
    Congress, the SEC and the Department of Justice, as you also note 
Mr. Chairman, all have a duty to help restore trust in the marketplace 
when it has been violated. So far, I believe the facts we've uncovered 
in our investigation show the SEC has been on the right track in its 
recent investigations. Yet some fail to understand this duty. Joseph 
Nacchio, the former Chairman and CEO of Qwest, who is before us today, 
reportedly told the press that the SEC's investigation of Qwest was 
driven by ``global corporate McCarthyism'' and ``Enronitis.'' I wonder 
what Mr. Nacchio will say today, now knowing what we've uncovered and 
Qwest's own admission that it must restate its prior financial 
statements by over one billion dollars.
    Mr. Chairman, we should remember that those who believe most 
strongly in free markets should be most outraged by deceptive and 
fraudulent behavior that undercuts trust in free markets. These 
poisonous acts--whether in the corporate boardroom or the boiler room--
violate the trust that is necessary for a marketplace to flourish in a 
free society. We should encourage rules and actions that help to 
maintain this trust.
    Thank you again Mr. Chairman, and I look forward to the testimony.
                                 ______
                                 
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Mr. Chairman, thank you for continuing these important hearings on 
corporate accounting fraud and misdeeds. The shenanigans by some of the 
country's largest corporations and their accounting firms, and the 
resulting bankruptcies, have hurt many innocent workers and investors. 
The American people have lost confidence in the stock market and in 
corporate America, and they have lost billions of dollars in savings 
and pension plans. We will hear from just two of those Americans today, 
but their experience can be multiplied by a million or more.
    We are also going to hear today from the executives who ran two of 
these corporations: Qwest and Global Crossing. They are the people at 
whose feet the proverbial buck must stop. They are the ones that set 
unrealistic revenue and growth goals for their employees in 2001 and 
berated or fired them if they didn't make those goals. ``I do not want 
to hear about how your part of the business is just going to continue 
to erode when we meet next week,'' Global's head of sales ordered his 
subordinate. ``I want to know what you guys are going to do to turn it 
around--starting immediately.'' Documents from last week's and today's 
hearing show they are the ones who knew their revenues could not keep 
up with projections without these swaps, but didn't bother to inform 
their investors. These documents also show the executives are the ones 
who made illegal side deals--hidden from the accountants because they 
could not book all the revenue up front if these deals were known.
    We have read the e-mails in which these employees acknowledge that 
the swaps of optical capacity are being done just to meet the numbers. 
``This swap crap is going to kill us in the long run,'' a Global 
Crossing employee wrote. ``The sales folks don't know what exactly 
they're getting and product guys haven't figured out what to do with 
those assets.'' Many of those before us today are the ones who 
benefitted the most from the high stock prices. They are the ones who 
set a corporate tone that put numerical growth over all else and 
rewarded those who achieved that growth, no matter what. And they 
continued their push in the face of a tumbling world economy and the 
implosion of the dot-com phenomenon.
    To rebuild confidence after this sort of debacle, the new 
management at these companies will need to clean house and instill a 
new culture. Congress and the public will support those efforts, so 
long as they are vigorous and effective. Investors and regulators 
cannot be expected to trust companies that do any less.

    Mr. Greenwood. The Chair then calls forward our first 
panel, Ms. Lenette Crumpler, from Frontier, a citizens company. 
She is from Rochester, New York. Welcome. Good morning. I 
believe your seat is the one to the right there. Thank you.
    And also, we have Ms. Paula M. Smith, a consultant and 
former Qwest employee. She is from Denver, Colorado. Is Ms. 
Smith with us? Good morning, and welcome. Thank you for joining 
us this morning.
    And if the staff would assist the ladies with their 
microphones, so that they are positioned where they should be, 
and they are familiar with how to operate them.
    And while that is happening, let me share with our first 
panel of witnesses that I think you are aware that this is--the 
committee is holding an investigative hearing, and when we do 
that it has been our practice to take testimony under oath, and 
ask if either of you have any objections to giving your 
testimony under oath. I see that neither of you do.
    I would also advise you that pursuant to the rules of this 
committee and the rules of the House that you are allowed to be 
represented by counsel, if you choose. Do either one of you 
wish to be represented by counsel this morning? Okay. You 
haven't brought attorneys with you?
    Ms. Smith. I have some attorneys, but I am fine.
    Mr. Greenwood. Okay. You don't need--if you need them at 
any point, and I can't imagine that you would, you just come--
just let us know that.
    All right. If you would rise, then, and raise your right 
hand, I will swear you in.
    [Witnesses sworn.]
    Let me just assure you that, ladies, you should be relaxed. 
You are among friends. You are not in the hot seat this 
morning.
    Okay. And I think we are going to start with Lenette 
Crumpler from Rochester, New York.
    Ms. Crumpler. Yes.
    Mr. Greenwood. Good morning. Welcome. We are delighted that 
you are with us. Do you have an opening statement that you 
would like to make?

 TESTIMONY OF LENETTE CRUMPLER, FRONTIER, A CITIZENS COMPANY; 
    AND PAULA M. SMITH, CONSULTANT AND FORMER QWEST EMPLOYEE

    Ms. Crumpler. I want to thank you, Mr. Chairman, and 
members of the subcommittee, for holding the hearings and 
letting me tell you what happened to some of the Global 
Crossing employees because of the mismanagement and corporate 
greed of people running the company.
    I grew up in a small rural town called Williamson, New 
York. While riding on the school bus 1 day I overheard the 
conversation of a foreign exchange student from Thailand. He 
said, ``In America, I cannot tell who is rich or poor.'' Now I 
was only in the third grade, and I asked myself two questions. 
What does he mean? And why does he say that?
    I simply couldn't figure it out. For some strange reason, 
his comments always stayed buried in my mind. It was not until 
my fifth grade study in American history and our presidents 
that I learned about the presidency of Theodore Roosevelt and 
finally found the answer to my two questions.
    Despite his wealth, Theodore Roosevelt became a President 
who saw himself as a steward of the people. He didn't like what 
he saw going on in corporate America where the rich robber 
baron owners of companies were becoming billionaires off the 
back of the working poor. This President envisioned a greater 
America--an America where all people could prosper.
    He battled with the barons of corporate America in the 
early years of the 20th century. He used his executive powers 
and championed the passage of new laws such as antitrust, 
monopoly, child labor laws, etcetera. Because of the vision of 
this President, the working poor class Americans became the 
working middle class of America.
    This is what makes America different from other countries. 
From that moment on, I realized although I am a descendent of 
slaves, I am so blessed to have been born in the greatest 
country on the earth--the United States of America, a place 
where impossible dreams can become reality.
    This is my story. I have worked 31 years at the phone 
company. I lost my entire 401(k) money--$86,000--when Global 
Crossing went bankrupt. I raised two children all by myself, 
and I never asked the system for one penny because I didn't 
have to. I worked for Frontier, formerly Rochester Telephone, 
which was a family oriented company. All you had to do was come 
to work on time and give the company an honest, full day's 
work, and you would always have a job. The odds of a single 
mother accomplishing such a feat are astronomical.
    I accomplished the near impossible. To me, $86,000 to 
supplement my pension was like having a million dollars. I was 
so proud of myself. I thought for sure with Global Crossing 
buying Frontier I would reach my goal of $100,000, so that my 
retirement years would be comfortable years, and I even could 
leave something for my children.
    That is why I held on, believing the statements that Global 
Crossing executives made when the stock was failing. Tom Casey 
sent an e-mail telling us the company was funny funded for 2 
years and could weather the storm. Joe Clayton sent an e-mail 
saying that The Wall Street Journal was wrong about Global 
Crossing's debt.
    With information like that, I knew I had another three to 5 
years to work, so why not hold on to the stock? It will 
eventually go back up. Our phone company stock had always been 
rock solid. How was I, or any of us, to know that no longer 
were there men of integrity at the helm of our 100-year old 
phone company?
    Instead, our leaders were men of gluttonous greed who told 
shareholders to hold on while they were unloading their stock 
options and bailing out fast, because they knew something we 
didn't know. The company filed for bankruptcy in January 2002, 
leaving us shareholders holding the empty bag.
    Now, sadly, because I believed all the lies of the 
executives of Global Crossing, I have now lost my entire 
retirement money. Shattered are my dreams of having a modest 
retirement in Florida in a lovely retirement community called 
The Villages, where I had visited and had looked at a model 
home. Thanks to Global Crossing, that will be a dream 
unfulfilled. I no longer dream of retirement. I now worry 
whether I will be able to keep my job, or will I be the next 
one laid off. For if I get laid off, I will surely lose the 
house that I now own in upstate New York.
    I am heartbroken, and I am hurt, because I did all the 
right things. I was truly an idealist, a dreamer, an achiever, 
even when great astronomical odds were against me as a single 
mother to amass that kind of money. Now this is what happened 
to me because I believed in the system, and the system let me 
down.
    So here we are again in the 21st century, 101 years after 
the start of the presidency of Theodore Roosevelt. Now new 
robber barons, such as Gary Winnick of Global Crossing, even 
more ruthless than their predecessors, have shown their ugly 
faces in corporate America. This time, however, their greed is 
even colder, crueler, and more calculated than ever before.
    They have literally stolen the wealth of the working middle 
class Americans--their own employees--right out from up 
underneath their noses before they even knew what hit them. 
Their greed is of an immoral, gluttonous nature. After cleverly 
succeeding in transferring the wealth out of the pockets of the 
working middle class directly into their own pockets, these 
21st century robber barons have the nerve to seek protection 
through bankruptcy laws and, at the same time, present the 
illusion that their companies just needed to reorganize to 
survive.
    These Global Crossing robber barons know full well that it 
was their gluttonous thievery that caused this company to go 
under. They are hiding behind bankruptcy laws while unloading 
their debt, so that they can start all over again with a clean 
balance sheet.
    Then, to add insult to injury to the working middle class, 
Global Crossing/Frontier employees, after stealing our 401(k) 
life savings, under the false pretense of bankruptcy 
reorganization, they now are laying us off in record numbers. 
Having cooked the accounting books, these robber barons 
successfully collapsed the company into bankruptcy. 
Simultaneously, they have collapsed and shattered the dreams of 
many working middle class people and their families.
    This is why I am here today speaking on Capitol Hill. I 
have shared with you my shattered dreams, but this isn't just 
about me. So many working, middle class American dreams have 
been shattered. I would like you to hear what they have told 
me.
    ``I have lost my job, and I can't find work here, so I will 
have to move to another state to look for work.'' ``I have no 
more money. I have lost it all. Now I must sell my beloved 
home.'' ``My child has cancer, and I have no health care. What 
shall I do?'' ``I am 72 years old. Who will hire me?'' ``I am 
47 years old, and I shall have to work now until I am 75 or 80 
years old.'' ``I am 53 years old. I am too old to start over 
and recoup my losses.''
    ``It didn't have to be this way. I believed in the system, 
and the system let me down. I have lost everything. Now my 
children won't be able to go to college.'' ``Thanks to Global 
Crossing, I will have to work another 10 years to try to save 
money, and I am not a healthy person. I take eight pills a day, 
and I am tired.''
    ``I have lost $500,000. I worked so hard to save that money 
in my 401(k), and I should be retired now. But I can't afford 
to.'' Even a dentist said to me, ``What is happening here with 
corporate greed is the domino effect. When people get laid off 
in great numbers and can't find work, they have to move away to 
find work. So even we local doctors and other businesses pay in 
lost customers.''
    Yes, people's lives have been devastated. They have lost 
their new homes. They have lost their ability to send children 
to college. They have lost their medical insurance. They have 
lost their retirement savings. They have lost their pride, 
their security, their self-confidence.
    They have lost their faith in the American dream--all 
because of the greed and mismanagement of individuals who 
should have been looking out for the well being of the 
shareholders and the investors of the company instead of lining 
their own pockets. The officers of Global Crossing have left 
thousands of employees, stockholders, and investors holding an 
empty bag.
    Now is the time for this government to clamp down hard on 
corporations, especially those in charge at Global Crossing who 
led the company to ruin, taking many hopes and dreams with it. 
It is the responsibility of this government to restore the 
confidence of the working, middle class Americans who only 
desire to continue working so that all can prosper--both 
management and the workers.
    There has been a lot of talk about heroes over the last 
year. Our firefighters are recognized as heroes. Our police 
officers are recognized as heroes. But those of us who get up 
each and every morning, whether we are tired or energized, 
whether we are sick or well, whether we love our job or dislike 
it, those of us who go to the office, or the factory, or the 
warehouses, we are heroes, too.
    We will never be given a parade or a medal, but we are 
heroes to the families who depend on our income for food and 
shelter. We are heroes to those who rely on our employment to 
obtain health care. We are heroes to those who depend on our 
tax contributions to obtain needed services.
    Please don't forget these heroes. Please don't allow these 
robber barons to victimize our everyday and unsung heroes by 
destroying their dreams.
    Please have the vision and the courage shown by the 
visionary, President Theodore Roosevelt, ``Speak softly, but 
carry a big stick.'' Please, on behalf of all of the Frontier 
and Global Crossing victims, look hard at the management of 
Global Crossing.
    Please use your powers to effectively punish those who have 
committed these crimes. Please seize the assets and return 
those assets to the rightful owners. And, please, legislate 
whatever new laws are necessary, so that such abuses never, 
ever occur again in America.
    Thank you.
    [The prepared statement of Lenette Crumpler follows:]
                 Prepared Statement of Lenette Crumpler
    Thank you, Mrs. Slaughter, for your kind introduction. And thank 
you, Mr. Chairman and members of the Subcommittee for holding this 
hearing and letting me tell you what happened to some of Global 
Crossing's employees because of the mismanagement and corporate greed 
of the people running the company.
    I grew up in a small rural town, Williamson, New York. While riding 
on the school bus one day; I overheard the conversation of a foreign 
exchange student from Thailand. He said--``In America . . . I cannot 
tell who is rich or poor.'' Now, I was only in the third grade, and I 
asked myself two questions: What does he mean? And why does he say 
that? I simply couldn't figure it out. For some strange reason, his 
comment always stayed buried in my mind. It was not until my fifth 
grade study in American History and our presidents that I learned about 
the presidency of Theodore Roosevelt and finally found the answer to my 
two questions.
    Despite his wealth, Theodore Roosevelt became a President who saw 
himself as a . . . ``steward of the people.'' He didn't like what he 
saw going on in corporate America where the rich Robber Baron owners of 
companies were becoming billionaires off the backs of the working poor. 
This President envisioned a greater America . . . an America where all 
people could prosper. He battled with the Barons of corporate America 
in the early years of the 20th century. He used his executive powers 
and championed the passage of new laws such as anti-trust,--monopoly,--
child labor laws, etc. Because of the vision of this President, the 
working poor class of America became the working middle class of 
America.
    This is what makes America different from other countries. From 
that moment on, I realized that, although I am a descendent of slaves, 
I'm also blessed to have been born in the greatest country on the earth 
. . . the United States of America: a place where impossible dreams can 
become reality.
    This is my story. I have worked for 31 years at the phone company. 
I lost my entire 401(k) money--$86,000--when Global Crossing went 
bankrupt. I raised two children all by myself, and I never asked the 
system for one penny because I worked for Frontier (formerly Rochester 
Telephone Co) which was a family-oriented company. I didn't have to ask 
for help. All you had to do was come to work on time and give the 
company an honest, full day's work, and you would always have a job. 
The odds of a single mother accomplishing such a feat are astronomical!
    I accomplished the near impossible. To me, $86,000 to supplement my 
pension was like having a million dollars. I was so proud of myself. I 
thought for sure with Global Crossing buying Frontier, I would reach my 
goal of $100,000 so that my retirement years would be comfortable 
years, and I even could leave something for my children. That's why I 
held on, believing the statements the Global Crossing executives made 
when the stock was failing. Tom Casey sent an e-mail telling us the 
company was fully funded for two years and could weather the storm. Joe 
Clayton sent us an e-mail saying that Wall Street Journal was wrong 
about Global Crossing's debt. With information like that, I knew I had 
another three to five years to work . . . so why not hold onto the 
stock? It'll eventually go back up eventually. Our phone company stock 
always had been rock solid. How was I or any of us to know that no 
longer were there men of integrity at the helm of our 100-year-old 
phone company? Instead, our leaders were men of gluttonous greed who 
told shareholders to hold on while they were unloading their stock 
options and bailing out fast, because they knew something we didn't 
know. The company filed for bankruptcy in January of 2002, leaving us 
shareholders holding the empty bag.
    Now sadly--because I believed all the lies of executives of Global 
Crossing, I have now lost all retirement money. Shattered are my dreams 
of having a modest retirement in Florida in a lovely retirement 
community called The Villages, where I had visited and had looked at a 
model home. Thanks to Global Crossing that will be a dream unfulfilled. 
I no longer dream of retirement. I now worry whether I will be able to 
keep my job or will I be the next one laid off. For if I get laid off, 
I will surely lose the house that I now own in upstate New York.
    I'am heartbroken. And I am hurt because I did all the right things. 
I was truly an idealist . . . a dreamer . . . an achiever . . . when 
great astronomical odds were against me as a single mother to amass 
that kind of money. Now this is what happened to me because I believed 
in the system, and the system let me down.
    So, here we are in the 21st century . . . 101 years after the start 
of the presidency of Theodore Roosevelt. Now new Robber Barons, such as 
Gary Winnick of Global Crossing, even more ruthless than their 
predecessors, have shown their ugly faces in corporate America. This 
time, however, their greed is even colder, crueler and more calculated 
than ever before. They have literally stolen the wealth of the working 
middle class Americans--their own employees--right out from underneath 
their noses before they even knew what hit them. Their greed is of an 
immoral, gluttonous nature. After cleverly succeeding in transferring 
the wealth out of the pockets of the working middle class directly into 
their own, these 21st Century Robber Barons have the nerve to seek 
protection through bankruptcy laws and, at the same time, present the 
illusion that their companies just need to reorganize to survive.
    These Global Crossing's Robber Barons know full well that it was 
their gluttonous thievery that caused the company to go under. They are 
hiding behind bankruptcy laws while unloading their debt so that they 
can start all over again with clean balance sheets. Then, to add insult 
to injury to the working middle class Global Crossing/Frontier 
employees, after stealing our 401(k) life savings, under the false 
pretense of this bankruptcy reorganization, they now are laying us off 
in record numbers. Having cooked the accounting books, these Robber 
Barons successfully collapsed the company into bankruptcy. 
Simultaneously, they have collapsed and shattered the dreams of many 
working middle class people and their families.
    This is why I am here today speaking on Capitol Hill. I've shared 
with you my shattered dreams but this isn't just about me. So many 
working, middle class Americans dreams have been shattered I would like 
you to hear what they have told me . . . 

 ``I have lost my job and I can't find work here, so I will 
        have to move to another state to look for work.''
 ``I have no more money--I have lost it all, now I must sell my 
        beloved home''
 ``My child has cancer, and I have no more health care--what 
        shall I do?''
 ``I am 72 years old--who will hire me?''
 ``I am 47 years old, and I shall have to work now until I am 
        75 or 80 years old''.
 ``I am 53 years old--I'm too old to start over and recoup my 
        losses.''
 ``It didn't have to be this way--I believe in the system and 
        the system let me down--I've lost everything . . . now my 
        children won't be able to go to college''.
 ``Thanks to Global Crossing I'll have to work another 10 years 
        to try to save money and I am not a healthy person . . . I take 
        8 pills a day and I'm tired.''
 11I lost $500,000 dollars I worked so hard to save that money 
        in my 401(k) and I should be retired now . . . but I can't 
        afford to.''
 A dentist said, ``What is happening here with corporate greed 
        is the domino affect. When people get laid off in great numbers 
        and can't find work, they have to move away to find work. So 
        even we local doctors and other businesses pay in lost 
        customers.''
    People's lives have been devastated. They've lost their new home. 
They've lost their ability to send their children to college. They've 
lost their medical insurance. They've lost their retirement savings. 
They've lost their pride, their security, their self-confidence. 
They've lost their faith in the American Dream. All because of the 
greed and mismanagement of individuals who should have been looking 
after the well being of the shareholders and investors of the company 
instead of lining their own pockets. The officers of Global Crossing 
have left thousands of employees, stockholders and investors holding an 
empty bag.
    Now is the time for this government to clamp down hard on 
corporations . . . specifically those in charge at Global Crossing who 
led their company to ruin, taking many hopes and dreams with it. It is 
the responsibility of this government to restore the confidence of 
working class Americans who only desire to continue working so that all 
can prosper--both management and the workers.
    There has been a lot of talk about heroes over the last year. Our 
firefighters are recognized as heroes. Our police officers are 
recognized as heroes But those of us who get up each and every morning, 
whether we are tired or energized, whether we are sick or well, whether 
we love our job or dislike it, those of us who go to the office, or the 
factory, or the warehouse, we are heroes too. We'll never be given a 
parade or a medal. But we are heroes to the families who depend on our 
income for food and shelter. We are heroes to those who rely on our 
employment to obtain health care. We are heroes to those who depend on 
our tax contributions to obtain needed services. Please don't forget 
these heroes. Please don't allow these robber barons to victimize our 
everyday and unsung heroes by destroying their dreams.
    Please have the same vision and courage shown by the visionary, 
President Theodore Roosevelt . . . ``Speak softly but carry a big 
stick'''. Please, on behalf of all of the Frontier and Global Crossing 
victims, look hard at the management of Global Crossing. Please use 
your powers to effectively punish those who have committed these 
crimes. Please, seize their assets and return those assets to the 
rightful owners. And, please, legislate whatever new laws are necessary 
so that such abuses never, ever occur again.
    Thank you.

    Mr. Greenwood. We thank you, Ms. Crumpler, for your most 
eloquent statement. Thank you for being with us.
    Ms. Smith, your turn.

                   TESTIMONY OF PAULA M. SMITH

    Ms. Smith. Thank you. My name is Paula Smith.
    Mr. Greenwood. If you would like, you can push that 
microphone up a little bit.
    Ms. Smith. Okay. Can you hear me now?
    Mr. Greenwood. Yes, it is flexible. Go ahead. Wherever you 
are comfortable with. That is good.
    Ms. Smith. Okay. I would like to tell a story, and it is a 
story that is not unlike many thousands of other stories of 
people and families who have spent some of the best years of 
their lives at Qwest, formerly US WEST, and before that the 
original Bell operating company we all knew as Mountain Bell, 
or we all in our community called it Ma Bell.
    I started working for Mountain Bell in November 1980 and 
stayed there as a full-time employee through its divestiture 
when it became US WEST, and then through its merger, in June 
2000, when it was taken over by Qwest. And then, in June 2001, 
I was laid off, along with thousands of other employees, many 
who had spent decades as employees of this company. I had 20 
years. Some of them had 30, 40 years with the company.
    I had spent those 20 years as a full-time employee. These 
were perhaps some of the prime productive working years of my 
life. During those years, I also got married, and I had my two 
children--two girls, Kelsey, 14, and now Ali, who is 12.
    As far as my investments in the company's 401(k) plans were 
concerned, of course, I was anxious to start putting money into 
the plan as early as I could, voluntarily deferring income from 
every paycheck to save toward retirement and the children's 
college funds. For me, it was a slow and deliberate building 
approach.
    And although it meant making some sacrifices and giving up 
on some of the material things we would have loved to have had, 
at least I knew, and we knew, we were building toward our 
futures, and at least I knew we would be in a position to open 
doors for our children, so they could pursue any of the 
educational dreams or opportunities they are so entitled to 
have in their futures.
    It was really fun getting my statements from my 401(k) plan 
every quarter. I really looked forward to it. I could see the 
growth. It was so rewarding. I was so committed to this.
    But, of course, the picture now is very bleak for me and 
many thousands of others who invested in the 401(k) plan at 
Qwest. And based on my last retirement statement from the Qwest 
401(k) plan--and I would like to just make a small correction. 
I have lost a little over $230-, maybe close to $240,000 in my 
retirement money I once had in my Qwest stock, and that is all 
gone.
    People often ask me why I kept putting my money into the 
Qwest stock plan and didn't take out whatever of it I could, 
even after the stock began to fall. And that is a really hard 
question to answer for so many of us, as we look back. Of 
course, a lot of my Qwest investment couldn't be sold. Under 
the rules of the plan I could only sell stock that I had bought 
with the money I myself put aside from my salary.
    And then, until they changed the rules in April of this 
year, I was too young to be allowed to sell any of the stock 
which the company had bought with its matching contributions. 
But the fact is: I didn't sell, even the part I could have, and 
that was because I believed in the company, and I believed what 
the company's management said about the future health and 
potential and well being of Qwest. They said it was strong, and 
they had a tremendous potential.
    Mountain Bell, and then US WEST in former years, had been a 
wonderful company, a great employer in the community, a great 
community citizen throughout Colorado and the Rocky Mountain 
region for up close to 100 years. And then, after it became 
Qwest, management was so positive.
    When we had a kickoff meeting on June 30, 2000, at the 
Pepsi Center in Denver to celebrate the merger, Joe Nacchio 
said that the Qwest stock, by the end of the year, would be 
selling at $75 a share by the end of the year. And, of course, 
we, the employees, believed him.
    And then, long after the stock began to fall, many of us 
still couldn't believe that the new leadership could come in 
and destroy, in such a short period of time, really less than 2 
years, all that we have built as a body of employees over that 
100 years. We were no dot com. We were no startup company 
coming and going in the blink of an eye.
    We had a tremendous infrastructure. We had a tremendous 
history. We provided a universal telephone system to everyone. 
We were regulated by the Public Utilities Commission, the PUC. 
How could anyone ever have imagined that a company with over 
60,000 employees and a 100-year old history could be taken down 
in such a short period of time? What a shock. Everybody's head 
spun. It was--we all sat there in disbelief, and, consequently, 
many of us still held on to our Qwest stock investments.
    So as far as my Qwest stock investments were concerned, 
this was, and always I had felt it was, my conservative stock. 
It was my safe utility stock. This was my secure investment.
    I kept putting money into the company, because I believed 
in the company. And, of course, while I worked there I kept 
thinking that things would turn around. And even after I left, 
I kept thinking things would turn around until I started 
reading in the Denver newspapers what was really going on with 
some of the accounting practices. But by that time, the stark 
reality had hit me, as well as so many other people. And by 
then most of the value, a big chunk, and most all of my Qwest 
stock savings were gone.
    I just wanted to bring up one experience I think is 
important to state--that as employees of Qwest, US WEST, and 
even as Mountain Bell, we were all required to uphold our 
corporate responsibility in the form of a type of training and 
certification that was called the Code of Conduct, Code of 
Business Conduct. We had to be trained on that, and we had to 
be certified through testing on our Code of Business Conduct.
    And, basically, that involved the illustration that we knew 
what our corporate behavior was supposed to be, and that we 
knew that our responsibilities were to be honest and above 
board in our dealings with customers, the public, and our co-
workers.
    In that training, we were warned about the dangers of 
insider trading. And as a regulated utility, we understood that 
we were accountable for our actions in every way. A specific 
goal of this Code of Business Conduct certification was to 
ensure that we would protect our company from unscrupulous 
behavior, both inside and out of the company.
    This was our corporate culture. We were trained in this 
every year, and we had to be certified in a Code of Business 
Conduct. But it seems that this Code of Business Conduct only 
applied to the employees and not necessarily to the executives 
who ran our company.
    Even when we began to hear rumors that the new Qwest was 
flying a little higher and playing a little closer to the edge, 
we couldn't believe it could be true, what we were hearing 
could be true. We heard questions that were raised about 
Qwest's accounting practices, and we heard Joe Nacchio say that 
the people raising these questions just didn't understand 
contemporary accounting standards or practices.
    And he kept referring to them as contemporary, or in some 
cases I remember contemporaneous. Though many of us didn't 
quite understand what that meant, we assumed he and the 
accounting people who ran our company did understand what 
contemporaneous accounting practices were. We wanted to believe 
in the honesty of our CEO and of the company to which we had 
given so many years.
    I also had a pension plan at Qwest, but because I was let 
go so many years away from my retirement the value in that 
pension plan wasn't nearly enough to make up for what I have 
lost in my 401(k) plan. And as I had mentioned earlier, my two 
daughters, Kelsey and Ali--we are trying to assemble a new plan 
through which we will be able to put them through college in 
the next few years, and then after that possibly our own 
retirement.
    But we really no longer know exactly how we are going to do 
that. The money I have lost in my 401(k) plan is exactly the 
money we had put aside through a slow, deliberate, and 
disciplined savings, and through really many sacrifices over 
the years.
    I understand that Joe Nacchio will be testifying later 
today. And, really, I would like to congratulate him on 
taking--having taken such good care of his children. I have 
read about his children in the newspaper, and I know they go to 
private schools, and I am sure that they will have a tremendous 
opportunity to go to college, whatever future they wish to 
pursue. I really wonder if he would be willing to help me 
educate my children.
    I believe Mr. Nacchio when he defied his critics and 
assured me that Qwest was strong and sound and positioned for 
the future. I wish I could still believe in the company I 
worked for for such a long time.
    I know that I must do now whatever it is going to take to 
fight for my future and for the future and educational goals of 
my children. But the prime years of my working life were taken 
from me. I can never recover those years, those 20 years I had 
spent at Qwest. I am now 52 years old, and it is really the 
time and that precious life energy during the prime years of my 
life--I can't recover that time. I can't get those years back.
    I understand that Congress is now beginning to look into 
new laws and provisions that will protect the assets for 
holders of 401(k) plans, and that is very good, especially if 
you are young and just beginning a 401(k) savings plan with a 
company. But for those of us in our forties or fifties or 
sixties, or even those of us in retirement or who are 
approaching retirement, those new laws would really be too late 
for us.
    We need help now. We need at least some of our money back 
from those who deceived us and robbed us and robbed our 
children of their futures. Without a real remedy for 
restitution in the form of monetary returns, returns that we 
put in over so many years, my only hope now is to work full-
time until I die. Right now I see no other alternative, unless 
there is some remedy for those of us who have suffered and 
those of us who have lost so much. We can't get those years 
back.
    This is my statement and my testimony. And I really believe 
that my story illustrates and represents--is the story of so 
many thousands of other people and employees who have worked at 
Qwest, formerly US WEST, and even those who started with 
Mountain Bell.
    I really thank you very, very much for this opportunity to 
tell this story. And I would be happy to answer any of your 
questions. Thank you.
    [The prepared statement of Paula Smith follows:]
        Prepared Statement of Paula Smith, Former Qwest Employee
    My name is Paula Smith. I started working for Mountain Bell in 
November, 1980, and stayed on when Mountain Bell became US WEST and 
then when US WEST merged and became Qwest in 2000. I was one of 
thousands of employees who was laid off by Qwest in 2001, working my 
last day there on June 29, 2001. I started putting money into the 
company's savings plan as early as I was able to--I think, probably, 
all the way back to 1980, voluntarily deferring income from every 
paycheck to save toward my retirement. Based on my last retirement 
statement from the Qwest Plan, about $230,000 of the retirement money I 
once had in Qwest stock is gone.
    People ask me why I kept putting my money into Qwest stock, and 
didn't take out whatever of it I could, even after the stock began to 
fall. It's a hard question to answer. Of course, a lot of my Qwest 
investment couldn't be sold: under the rules of the Plan, I could only 
sell stock that I had bought with the money I myself put aside from my 
salary. Until they changed the rules in April of this year, I was too 
young to be allowed to sell any of the stock which the company had 
bought with its matching contributions. But the fact is, I didn't sell 
even the part I could have. That was because I believed in the company, 
and I believed what the company's management said about the future 
health and potential of Qwest.
    Mountain Bell and then, US WEST, had been a good company, a good 
employer and a good and important part of the Colorado community for 
100 years, and after it became Qwest, management was more positive than 
ever. When we had a kickoff meeting on June 30, 2000 at the Pepsi 
Center in Denver to celebrate the merger, Joe Nacchio said that Qwest 
stock would be selling for $75/share by the end of 2000, and we--the 
employees--believed him. Long after the stock began to fall, I still 
couldn't believe that new leadership could come in and destroy in only 
a few years all that we had built as a body of employees over that 
hundred years. We were no dot.com . We were no start-up company, coming 
and going in the blink of an eye. We had an infrastructure and a 
history, and we didn't believe that could be destroyed in such a short 
period of time. In fact, I always thought of my company stock 
investment as my conservative, safe stock--while I diversified the rest 
of my savings fund investment, I kept putting money into company stock 
because I believed that that was the secure choice. So while I worked 
there, I kept putting my money into company stock; after I left, I 
waited so long to think about selling it that, by then, most of the 
value, and a big chunk of my savings, were gone.
    I was a salaried employee at Qwest, a technical writer. One of our 
duties every year was to take a course in corporate responsibility and 
integrity, and to certify to the Human Resources department that we had 
studied the materials and taken a test to show that we knew what our 
behavior was supposed to be, and understood our responsibilities to be 
honest and above-board in our dealings with customers, the public, and 
our co-workers. We were warned about the dangers of insider trading, 
and as a regulated utility, understood that we were accountable for our 
actions in every way. A specific goal of our Code of Business conduct 
was to insure that we would protect our company from unscrupulous 
behavior, both inside and out of the company. Our corporate culture was 
one of absolute concern for honor and good faith. Even when we began to 
hear rumors that the new Qwest was flying a little higher and playing a 
little closer to the edge, we didn't believe that could be true of our 
company. We heard that questions were raised about Qwest's accounting, 
and we heard Joe Nacchio say that the people raising questions just 
didn't understand contemporary accounting standards, and we believed 
Mr. Nacchio, because we wanted to believe in the honesty of our CEO and 
of the company to which we'd given so many years.
    I also had a pension plan at Qwest, but because I was let go so 
many years away from my retirement, the value in that plan wasn't 
nearly enough to make up for what I've lost in my Savings Plan. My 
husband and I have two children, my daughters Kelsey and Ali who are 14 
and 12 years old. We are looking forward to putting them both through 
college in a few years, and then, after that, to our own retirement. 
But we no longer know exactly how we are going to do that: the money 
I've lost from my 401(k) Plan is exactly the money that we had put 
aside, through slow, deliberate, and disciplined savings--what I liked 
to call the Turtle approach to savings--and some sacrifices, to pay for 
that. So right now, we are looking for Plan B.
    I understand that Joe Nacchio will be testifying later today, and 
I'd like to congratulate him on having taken such good care of his 
children: I wonder if he is going to help me educate mine. I believed 
Mr. Nacchio when he defied his critics, and assured me that Qwest was 
strong, and sound, and positioned for the future. I wish I could still 
believe in the company I worked for for so long.
    I know that I will do whatever it takes to fight for my future and 
for the best future I can make for my children, but the best years of 
my working life were taken away from me, and I can never recover those 
years. Qwest took 20 years of my productive working life away from me. 
I am 52 years old, and I can't get those years back. I can try to start 
building again, but I know that I simply cannot recover what I, and my 
family, lost.
    I understand that Congress is talking now about enacting new laws 
and new protections for savings and retirement plans, but for those of 
us who are in our 50s, it is just too late--we need help now; we need 
at least some of our money back now; we need to rebuild our futures 
now. Without some help, my only plan now is that I will have to work 
until I die.
    This is my statement and my testimony, but I believe that my story 
represents the experiences of thousands more.
    Thank you for your attention, and I will be happy to answer any of 
your questions.

    Mr. Greenwood. Thank you, Ms. Smith. We thank you both for 
your poignant and personal testimony, and for your courage in 
coming here. We know that this isn't the easiest thing to do, 
but we thank you for being with us.
    The Chair notes the presence of the chairman of the full 
committee, Mr. Tauzin, and welcomes him, and recognizes him for 
an opening statement.
    Chairman Tauzin. Mr. Chairman, thank you. And I thank you 
for allowing me to pause between this panel and the panel we 
are about to receive. Obviously, this panel represents one of 
the three classes of victims in the corporate misconduct 
hearings you have conducted.
    One of the most severely impacted class of victims, those 
who gave their lives and their energies to the corporations 
that have failed, not only failed them but failed the general 
investors and the general public.
    But this class of investors I think makes us realize again 
perhaps the other side of the insider trading problem that we 
have uncovered. The other side of it is where the major key 
players of a corporation know or should know that their 
corporation is conducting itself in an improper manner, and 
perhaps reporting improperly to the investors of its company, 
perhaps suffering, as we learned at WorldCom, significant 
losses of income and perhaps busy covering up those losses and 
putting on a much rosier face than the corporation actually 
enjoys. And at the same time advising its own employees that 
everything is okay.
    They themselves are aware that things are wrong, perhaps 
busy cashing in on the high value of their stock before the 
public catches on, and at the same time advising their 
employees that everything is okay. We all understand 
corporations are proud of their success, and they want the 
employees to be proud of their success, and they constantly 
encourage their employees to work harder and longer and to 
believe in their own company. And that's one thing.
    But when the key managers of a corporation know, or should 
have known, that the corporation is failing, and that those 
failures are being covered up, bad accounting, contemporary 
accounting perhaps, and yet at the same time advise their 
employees that everything is okay, keep investing, don't sell 
your stock, that is perhaps the greatest tragedy of all.
    I commend you to the Pension Reform Bill this House has 
already passed. It is on its way to--it is in the Senate now 
awaiting action--that would forbid corporate executives from 
selling their stock during periods of time their employees 
can't sell and would protect against some of these activities, 
not all of them but some of these activities, perhaps too late 
for some of you, unfortunately; and commend to you the new 
powers we have extended to the SEC to try to go back and 
recover ill-gotten gains.
    There are lawsuits mentioned today in the paper where there 
are attempts being made, at least in New York, to try to do 
that.
    It is also important, Mr. Chairman, I think to reflect--
and, first of all, to commend your subcommittee, all of its 
members, Democrats and Republicans, for the extraordinary job 
you have done over the last several months doggedly 
investigating the corporate misconduct we have uncovered in 
these corporations, beginning with Enron and through this 
recent one with Qwest and Global Crossing.
    I think what we learned out of all of this is going to not 
only help make these new laws work, and hopefully complete the 
package of new laws into signature, but it has certainly sent 
some strong messages out to corporations across America that 
this is not behavior that is going to be tolerated by the 
investing public.
    And it is certainly not behavior that ought to be tolerated 
by the good workers who come to a corporation and love it and 
dedicate their lives to it as you two have. So I want to 
commend you, again, as the chairman said, for your courage to 
come and tell your stories. They are repeated so many times in 
all the corporations we have investigated in the last year.
    What we learned in last week's hearing was that, you know, 
significant executives working at these two companies were 
charged with making some deals happen that they themselves knew 
were not good for the company, couldn't explain the reason they 
were doing them themselves, questioned them in many cases, and, 
nevertheless, felt compelled to do them because, as we learned, 
there were instructions from someone, sometimes implicit, 
sometimes explicit, to make these deals happen because they 
helped make the numbers for Wall Street, even though they were 
bad for the corporation, even though they drained the 
corporation of its cash, stacked up debt for no apparent 
business purpose other than to pretend they were making money.
    And you cannot characterize what we learned last week 
except as a story of betrayal and betrayal of the public trust 
and the employees' trust in their own corporations. And what we 
do today is to examine whether or not the key players in those 
corporations knew or should have known that that was going on 
in their corporations and what we might do to make sure this 
doesn't happen again.
    Now, what we also learned last week, Mr. Chairman, was that 
these employees who put these deals together were not rogue 
employees. They were responding to changes in the corporate 
culture. They called it that--changes in the culture. Something 
changed at the corporation. It was a time when they were making 
money, and everybody was working together and the corporation 
was flourishing, and then things got a little tough.
    It was harder to make those Wall Street numbers, and 
corporate culture changed. Cultures don't change unless 
somebody wants them to change. So today we are going to explore 
why those cultures changed. Why all of a sudden it became more 
important to make those numbers, even if you had to make them 
up, to the detriment of all the workers and the investors in 
the company. Why it became so doggone important to make those 
numbers up and see a corporation, a great corporation, go down 
the way some of these have gone down.
    Somebody had to make those cultures change. We are going to 
explore that today, and why that happens and when it happens 
and who made it happen in these two corporations. And it is not 
going to do anybody any good to call this a new McCarthy-ism or 
Enron-itis. It is not going to do anybody any good to say that 
in the face of corporate income restatements as much as over a 
billion dollars we have recently heard from Qwest. Those 
excuses are not going to fly here, and they shouldn't fly with 
you, and I know they don't.
    So, Mr. Chairman, thank you for continuing this very 
difficult and painful experience of looking into the lives of 
the citizens of our country who have been severely damaged 
because of this corporate irresponsibility that we have 
uncovered.
    And thank you for helping a market that is trying to shake 
this off, learn what went wrong, and then begin to make wise 
decisions about where to put its money.
    This series of hearings has not been--has not fallen well 
on the ears of American investors. Until we get all of this 
behind us and American investors can again return with some 
confidence to the market, and employees can start believing in 
their companies again, we are going to continue this rocky 
road.
    So this is critical. This is important. I commend you for 
it. Others I know wish that you would stop and encourage you to 
stop. But you have been faithful to the challenge that all of 
the members of this subcommittee have invested in you in 
staying with the course and sticking to the extraordinary job 
of putting the light of sunlight on some of these hidden deals, 
so in the future that we won't have to hear from employees 
whose families have been ripped like this.
    Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman.
    The Chair recognizes himself for questions for 5 minutes.
    Let me start with you, Ms. Crumpler. In your opening 
statement, you mentioned that Tom Casey sent an e-mail to 
employees saying that the company was fully funded for 2 years 
and could weather the storm. Do you remember when that e-mail 
was sent?
    Ms. Crumpler. I believe it was in the month of May.
    Mr. Greenwood. In the month of May. Was there----
    Ms. Crumpler. Of last year, 2001.
    Mr. Greenwood. 2001. All right. Was there much discussion 
among the employees about this e-mail and whether they should 
take their money out of Global Crossing?
    Ms. Crumpler. We all were under the illusion that this 
company was going to take us into the future. Perhaps our 100-
year old company may be a 200-year old company. Joe Clayton had 
a plate on his--license plate on his car saying that, $100, 
that is where it was going to go. So we believed them totally 
to the bitter end.
    Mr. Greenwood. Okay. Let me ask you, Ms. Smith, if I could, 
in your opening statement you discussed the fact that at a 
kickoff meeting in June 2000, to celebrate the merger between 
Qwest and US WEST, Joe Nacchio said that Qwest stock would be 
selling for $75 a share. I don't know whether he had a $75 
license plate by the end of 2000.
    What was the stock price of Qwest and US WEST stock at the 
same time of the merger--at the time of the merger?
    Ms. Smith. I don't know the exact figure, but it was 
trading at around I would say $50, $55 a share.
    Mr. Greenwood. And did the stock price reach $75 by the end 
of 2000?
    Ms. Smith. No. I believe the highest price it ever reached 
was around $62 a share, though I am not exactly sure that that 
is correct. But it was a little over $60 a share.
    Mr. Greenwood. Okay. Back to you, Ms. Crumpler. How did 
Global Crossing provide you, as an employee with significant 
investment in the company, with information about what was 
happening with your investment?
    Ms. Crumpler. We were constantly getting e-mails from Mr. 
Joe Clayton. He was the one that really sold us when they first 
made the bid in March 1998, I believe, to purchase us, and he 
kept flying out to California, Beverly Hills.
    And he would always send us these long, long e-mails 
telling us that it was definitely the way to go, that it would 
be like a trillion dollar marriage between Frontier and Global 
Crossing. So he always sent very, very long letters, and they 
were always encouraging letters that we were doing the right 
thing.
    Mr. Greenwood. So let me ask each of you, at what point in 
the process did you begin to have doubts? At what point did you 
start to think, ``oh, my gosh, this is not going to--stock is 
not going to not only go to $100, or not go to $75, but it is 
going to go down?'' And at what point did you begin to feel the 
floor fall from beneath your feet?
    Ms. Smith. I know from my recollection it was not through 
direct company information, but through basically the daily 
reports in the paper where we started learning about the fiber 
optic swaps and the way that they were accounting for that 
revenue, and the fact that that revenue was not fairly 
accounted for.
    And then, so basically we started learning that the numbers 
were incorrect, that they were deceptive, and they were 
basically created to impress Wall Street. And then, when Wall 
Street--I believe it was Morgan Stanley--started questioning 
those figures, kind of the light bulb went off, uh-oh, we could 
really be in trouble because we haven't been getting the facts. 
These are not the real numbers. This has all been a falsehood.
    And so then I started--and many other people started 
reckoning or reconciling themselves with the fact that there 
may not be a recovery.
    Mr. Greenwood. And that your options to get--to bail out 
were not----
    Ms. Smith. By then, stock was so low it was--I just kind of 
gave up on it. I thought, well, maybe something will turn 
around. You know, I still kept hoping something would turn 
around. I thought they would recover somehow.
    Mr. Greenwood. And were either of you aware that executives 
had been selling their stock at the same time that they were 
encouraging the employees that everything would be fine and to 
stay the course?
    Ms. Smith. Yes. Again, most of my information came through 
the Denver newspapers, Rocky Mountain News or Denver Post. And 
basically we read about Joe Nacchio cashing in on stock 
options, something like 28--over a period of 28 months, he 
would be cashing in daily to the amount of about $200,000 or 
$300,000 a day in his stock options. It was just an 
unbelievable number, but he was cashing in his stocks, and he 
was spreading them over a long period of time.
    Mr. Greenwood. How about you, Ms. Crumpler? Were you aware 
that executives of the company were selling while you were 
losing money?
    Ms. Crumpler. Yes. In the last quarter of 2001, the 
department that I worked in is Engineering and they--some of 
the Engineering fellows, they were talking, and they showed me 
how to go on the internet and to actually look at the trader 
information. And that is where I saw Mr. Winnick selling all 
the stocks, as well as the other ones.
    Mr. Greenwood. That is trader with a D, right?
    Ms. Crumpler. Millions. Yes. Actually, it went all the way 
back to 2000, so I could see it all. But as Ms. Smith has said, 
the same thing. It was so low then, and I said, well, you know, 
maybe it will go back up. It will go back up. I just kept 
believing them.
    Mr. Greenwood. Okay. Thank you.
    Ms. Crumpler. That it couldn't happen to us.
    Mr. Greenwood. Thank you. My time has expired.
    The gentleman from Florida is recognized for 5 minutes.
    Mr. Deutsch. Thank you, Mr. Chairman.
    Thank both of you, and I would add, Ms. Crumpler, that both 
of you are heroes. There might not be parades, but I think all 
of us who have heard and listened to what you said completely 
understand that. I think some of us have an appreciation--you 
know, not just raising a family as a single mom, but just 
raising a family. And, I mean, clearly caring about their 
futures and believing in their futures, giving back to them. I 
am sure your kids appreciate it and understand it.
    You have suffered a great deal. I mean, and are suffering 
now. And I think it is amplified literally by not just 
thousands and tens of thousands and hundreds of thousands, but 
literally by millions and even tens of millions of Americans at 
this point in time, maybe not to the focus, maybe not to the 
degree.
    I referred to an optimistic Wall Street Journal article 
from last week. Yesterday there was another front page story in 
The Wall Street Journal not so optimistic. I don't know how 
many other people have submitted it for the record as well, but 
talking about in the article specifically a couple dozen of 
WorldCom employees and other employees of bankrupt companies 
and personal experiences that they are having, living in 
garages, selling homes, just as you, Ms. Crumpler, described, 
friends or people who you have talked about.
    Let me mention that some of the anger, which is I think an 
absolutely legitimate--and betrayal, not just of the system but 
of individuals, really ought to be directed at us up on this 
dais and at the U.S. Congress, because the reality is the 
401(k) laws that you took advantage of, and were not protected 
by, U.S. Congress passed.
    And, in fact, some of the, you know, situations that you 
have described, in terms of not being able to sell some of the 
stocks statutorily, or the 55-year old restrictions, right 
now--and, Ms. Smith, I mean, you so eloquently talked about the 
future.
    Well, incredible as it sounds, with all we know, with the 
testimony that you gave today, the testimony that we have 
heard, or examples that we have seen, at this point in time we 
are literally days away from a journey--this Congress--and we 
have not changed the 401(k) laws of the United States of 
America. Incredible as that sounds. I mean, it is almost 
incredulous, unbelievable.
    I mean, I have introduced legislation, others have 
introduced legislation, that literally would have protected 
you. And it won't protect you now. It won't get you your money 
back. Hopefully, some of it can be. But for those other 
stories, in 5 years, and 10 years, and next year, and next 
month, that could occur--the blockout periods, things like 
that.
    We have not, at this point in time--and by all of the 
projections, you know, that we are talking about, this is not 
the highest priority of the leadership of this House at this 
point in time. It is not like we will not go home unless we 
pass legislation protecting workers in America. And I will tell 
you my perspective, and I think at least many of my colleagues, 
not enough and not the leadership at this point, is that we 
shouldn't go home. That the suffering and, you know, the 
testimony that you gave today should--we can statutorily 
prevent it.
    I mean, as you are well aware, I am sure at this point in 
time, there is no--if your 401(k)s were managed by a 
professional pension manager, you are both aware that the 
investments would not have been the way you had them. Are you 
both aware of that? Ms. Crumpler? I mean, had your 401(k) been 
managed by a fiduciary--you know, had you given your 401(k) to 
a fiduciary and said, ``Invest my funds,'' are you aware that 
they would not have been invested the way you invested them?
    Ms. Crumpler. Yes, I now know what a fiduciary----
    Mr. Deutsch. And, Ms. Smith, you are aware of that as well?
    Ms. Smith. Well, my understanding is the board of directors 
and the CEOs were the fiduciaries.
    Mr. Deutsch. No. But your personal--in other words, the 
overinvestment in one particular equity--if you had said to a 
fiduciary, I mean, anyone at any brokerage house in America, 
and they took your savings for the purposes that you described, 
and they put 100 percent--in your case I guess 100 percent of 
the stock in one company, and let us say what happened did 
happen, and 90 percent or 100 percent of that equity 
evaporated, and you had given it to a fiduciary, what would 
have, in fact, happened is they would have broken their 
fiduciary duty. You could have sued them for malpractice.
    Ms. Smith. Right.
    Mr. Deutsch. And, in fact, could have recovered from them 
or from their insurance or from their company or something like 
that. So, in a sense, I mean, what we have done in Congress is 
allowed a system--and by not changing it, I mean, the tragedy 
here is not just the tragedy that you have experienced, which 
is untold.
    I mean, I don't think any of us could experience what you 
are going through, and I--in any way we can, you know, on a 
personal level, I think all of us really wish we could do more 
and hope we can do something. But I think we also legislate, 
and we are--our failure at this point in time, with literally 
days to go before the end of this Congress, we have not 
legislated to prevent this from happening.
    I yield back the balance of my time. Thank you, Mr. 
Chairman.
    Mr. Greenwood. The Chair thanks the gentleman, and agrees 
with him that we do need to pass the 401(k) reform legislation, 
and would note that I am a member not only of this committee 
but the Education and Labor Workforce Committee. We passed that 
legislation from that committee months ago. We passed it in the 
House months ago, and we await action by the Senate.
    The gentlelady from Colorado, Ms. DeGette, is recognized 
for 5 minutes.
    Ms. DeGette. Thank you, Mr. Chairman. And I think what my 
ranking member, and also the chairman, have said about passing 
legislation is right. However, what really hits me is what Ms. 
Smith said about even if we pass all these laws it might help 
future people. It might help some of those people in their 
twenties. But people who are in their forties and fifties, like 
all of us, it is not going to help. It is not going to get you 
your money back.
    And in 1995, before I got here, Congress passed a law which 
made it harder for employees like you to sue accountants and 
corporate boards. And it made all these requirements that made 
it much more difficult to bring these lawsuits and to get 
compensation. And the purpose of that law was to stop frivolous 
lawsuits, but what it really did--it did stop some frivolous 
lawsuits, but it also stopped folks like you from getting back 
your money.
    And so I think--and then, in 1997, not content to just make 
that apply to Federal court, Congress passed a law that it made 
all these cases be brought in Federal court, so people couldn't 
bring them in state court. And so what I think we should do, 
for Ms. Smith and Ms. Crumpler, for both of you, I think we 
should reform some of those laws, so that you could use the 
civil justice system to recover some of the money. You know, 
these executives, they are sending their kids to private 
schools, and you can't even send your kids to college.
    And, I mean, I was sitting up here, because my kids are 8 
and 12, and I was thinking about if I lost everything I had. 
And I know exactly how you feel, and it is little comfort for 
all those thousands of employees of both these companies, and 
some of the other ones, to say not to worry, Congress might 
pass some laws sometime that might help some people in the 
future. You guys need help today, and so I hope that we work on 
that.
    And I also really hope that both of these companies and 
other companies will try to find a way to compensate some of 
their employees who have really lost everything, and who can't 
send their kids to college or retire.
    I mean, what you say really strikes all of us, and I just 
want to thank you for coming here and let you know Members of 
Congress recognize that whatever we may do legislatively won't 
make you whole. The civil justice system is going to have to 
also participate. And, hopefully, these companies, which are 
really--you know, I know Qwest has new leadership. They are 
trying to bring it back more like the old phone company was. 
And what they need to do while they are doing that is think 
about the thousands of former employees who lost their jobs who 
now are just stuck.
    So, anyway, that is my message, and I actually have some 
questions. Ms. Smith, I wanted you to talk--you talked briefly 
in your opening about the atmosphere at US WEST and how it was 
the phone company, it was a solid community leader. I want you 
to talk for a minute about the corporate culture and the 
feeling at the company after the company was acquired by Qwest.
    Ms. Smith. Well, it quickly became apparent that we were in 
a new corporate culture, and what had been a long-standing, 
stable telephone infrastructure, community service company was 
now kind of the ride-the-light, fast-moving, fast-paced, moving 
in the fast lane, high energy, aggressive kind of company.
    And people--really, one of the first things that happened 
is that Qwest started pulling out of some of their community 
service involvements. We were involved with Habitat for 
Humanity, Race for the Cure. They would match contributions 
through their US West foundation, and they stopped the 
foundation. And so a lot of the philanthropic involvement kind 
of ceased to exist.
    Some of the other things that happened were, you know, a 
quick startup of projects, and then they would cancel projects. 
They would bring in--for example, I had a new CEO or, actually, 
the president of my organization, ITE--he came and he 
implemented a new process, and within 8 months he was gone. 
Everything was canceled.
    So things were just turning so quickly, and new leadership 
was funneling through like a revolving door. And so it was hard 
to--our work felt like it was kind of like throwaway work. It 
wasn't enduring. People started getting very discouraged, 
demoralized about the value of their work, and we started 
feeling very insecure about the future of our company, 
especially when we saw we would put a lot of energy and work 
and time into projects that were canceled, and all that energy 
was gone.
    So it was a completely different corporate culture. They 
changed the retirement laws. That also impacted me 
dramatically. I had just short of 20 years. There was a 20-year 
rule, which I was just short of because I had been on maternity 
leave. And, consequently, some of the retirement benefits I 
would have been entitled to were cutoff, just because the new 
management said, ``We can't cover you in your retirement.''
    Ms. DeGette. And how long did it take for the corporate 
culture to change like that?
    Ms. Smith. Oh, I would say within a couple months. I mean, 
it happened very rapidly. The old management left, most of 
them, when the new management came in.
    Ms. DeGette. Ms. Crumpler, did you see some of the same 
things happen at Global Crossing?
    Ms. Crumpler. They left the majority of the things in 
place.
    Ms. DeGette. So you didn't see a change in corporate 
culture at all?
    Ms. Crumpler. Things were changing, the fact that a faster 
pace, that we would move on, you know, quickly into the 21st 
century--you know, become a leader in the fiber optic network 
and the broadband. So that was what they kept, you know, 
feeding us, that we would be the leader, and there were very 
few competitors out there that could compete with us.
    Ms. DeGette. Thank you.
    Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentlelady.
    And the Chair very sincerely thanks both of our witnesses, 
Ms. Smith and Ms. Crumpler, for traveling from your homes in 
Colorado and New York to come here to this fairly intimidating 
setting to tell us your story. You did a great job, both of 
you, and we thank you.
    And you are excused now. You are certainly welcome to stay 
with us and listen to the rest of the hearing.
    Ms. Crumpler. Thank you.
    Ms. Smith. Thanks.
    Mr. Greenwood. The Chair would then call the second panel 
consisting of Mr. Gary Winnick, Chairman of the Board of 
Directors of Global Crossing Limited; Mr. Jim Gorton, former 
General Counsel of Global Crossing Limited; Mr. Dan Cohrs, 
Chief Financial Officer; Global Crossing; Mr. Joe Perrone, 
Executive Vice President of Finance of Global Crossing; and Mr. 
David Walsh, former President and Chief Operating Officer of 
Global Crossing.
    You can do anything you would like. Do you want to change 
the--Mr. Cohrs, would you move your name plate over in front of 
you when you have an opportunity? And is Mr. Perrone with us?
    Okay. We welcome each of you for--we welcome you, and we 
thank you all for being with us this morning.
    As you heard me advise the first panel, this committee is 
holding an investigative hearing, and it is our practice when 
holding investigative hearings to take testimony under oath. Do 
any of you object to giving your testimony under oath this 
morning?
    Seeing no such objection, I advise you that pursuant to the 
rules of this committee, and pursuant to the rules of the House 
of Representatives, you are entitled to be represented by 
counsel. Are any of you represented by counsel? Mr. Winnick?
    Mr. Winnick. Yes.
    Mr. Greenwood. If you would identify your counsel by name, 
please.
    Mr. Winnick. Gary Naftalis.
    Mr. Greenwood. Okay.
    Mr. Winnick. And David Frankel.
    Mr. Greenwood. All right.
    Mr. Winnick. Both of the same firm.
    Mr. Greenwood. Very well.
    Mr. Cohrs, are you represented by counsel this morning?
    Mr. Cohrs. Yes, Mr. Chairman, I have counsel. It is Ralph 
Ferrara and Jeffrey Kinnard from the firm of Debevoise & 
Plimpton.
    Mr. Greenwood. Very well.
    Mr. Perrone?
    Mr. Perrone. Yes, I am. Also Mr. Kinnard and Mr. Ferrara 
from Debevoise & Plimpton.
    Mr. Greenwood. The same as Mr. Cohrs.
    Mr. Perrone. That is correct.
    Mr. Greenwood. And Mr. Walsh?
    Mr. Walsh. Yes, I am. It is Ralph Ferrara and Martin 
Auerbach.
    Mr. Greenwood. Very well.
    And Mr. Gorton?
    Mr. Gorton. Yes, I am. It is Mr. Larry Iaxson and Mr. Rob 
Raddick.
    Mr. Greenwood. Very well. All right. Well, if you gentlemen 
would rise and raise your right hand, I will swear you in.
    [Witnesses sworn.]
    Okay. You are under oath, and I will ask if any of you have 
opening statements that you would like to make. Mr. Winnick, do 
you?
    Mr. Winnick. Yes, I do, Mr. Chairman.
    Mr. Greenwood. We will begin with you. Mr. Winnick, 
whatever else happens this morning, I appreciate the fact that 
you have agreed to take testimony rather than to exercise your 
Fifth Amendment rights.
    Mr. Winnick. Thank you for that.

TESTIMONY OF GARY WINNICK, CHAIRMAN OF THE BOARD OF DIRECTORS, 
   GLOBAL CROSSING LTD.; JIM GORTON, FORMER GENERAL COUNSEL, 
   GLOBAL CROSSING LTD.; DAN COHRS, CHIEF FINANCIAL OFFICER, 
    GLOBAL CROSSING LTD., MADISON, NEW JERSEY; JOE PERRONE, 
  EXECUTIVE VICE PRESIDENT OF FINANCE, GLOBAL CROSSING LTD., 
  MADISON, NEW JERSEY; AND DAVID WALSH, FORMER PRESIDENT AND 
         CHIEF OPERATING OFFICER, GLOBAL CROSSING LTD.

    Mr. Winnick. Good morning, Chairman Greenwood and members 
of the subcommittee. This is my first appearance before a 
congressional committee. In a more perfect world, I could be 
here to applaud our company's success in building the world's 
greatest telecommunications network. But, of course, I am not 
here to applaud success.
    Rather, the devastation that has beset the 
telecommunications industry during the past 12 months and my 
own company's bankruptcy, have raised some very important 
questions for this subcommittee. And I am pleased to respond to 
any of the questions you put forward to me today.
    As you said, Chairman Greenwood, I chose to testify today 
for two very important reasons. First, I believe it is 
important for the subcommittee, as well as the Congress and the 
American public, to hear directly from Global Crossing's 
executives, including its chairman, about the hard work of the 
men and women who built this great company.
    They include some of the very best executives, both past 
and present, who join me on this panel today. All are people of 
keen intellect and healthy ambition, and all have the drive to 
make Global Crossing a success. I was proud to serve with them.
    Most important, however, are the thousands of people across 
the globe who helped build this company. These Global Crossing 
executives and employees brought out dream to bright reality. 
They shared our collective vision of revolutionizing global 
telecommunications.
    It was each one of them who put their careers and 
opportunities aside to become part of the Global Crossing 
family. And make no mistake--we were a family--in the face of 
enormous financial risks in joining a startup.
    Mr. Chairman and members of the subcommittee, I want to 
express to them and to you as the elected representatives, my 
profound sorrow at the impact of Global Crossing's distress on 
their professional lives and their financial well-being, and my 
sadness over the setback to our shared vision.
    Second, I chose to testify today because I want to help you 
distinguish the facts as I understand them, from fiction or 
speculation, both with respect to Global Crossing and to me 
personally.
    When we began to construct our 100,000 mile fiber optic 
network, it seemed as though there was simply not enough fiber 
optic capacity to satiate the appetite of a world that would 
become committed to transmission of ever-increasing and 
enormous amounts of voice, data, and video traffic. As we all 
know, the principal driver was the demand forecasts for the 
explosive growth of the internet worldwide.
    Our vision was one of innovation and competition--to be the 
first company out of the gate in building a global network to 
meet demand and to provide the best possible service to our 
customers. We set out to change the face of telecommunications 
by competing directly with the traditional telecommunications 
giants and by dramatically cutting the cost of 
telecommunications to our customers and their customers around 
the globe. And, for the first several years, we were very 
successful.
    Neither our bankruptcy nor the global telecom meltdown that 
precipitated it is unique to our company. Others in the 
industry either have filed for bankruptcy or are concerned that 
they may have to at some point in the future. A $300 billion 
industry that is the backbone of our nation's capacity to 
communicate with each other is in jeopardy. Indeed, our very 
freedom to speak our minds will be of little value if we no 
longer have the facilities and the access to be heard.
    Before responding to your questions, may I first observe 
that all too often Global Crossing has been mentioned along 
with a number of companies as among the great corporate 
scandals. I do not have the knowledge of the facts and 
circumstances relating to other companies, other than what I 
read, and I cannot comment on them.
    But Global Crossing's bankruptcy, based on the facts known 
to me, is not a result of fraud, but of a catastrophe that 
befell an entire industry sector. I don't offer this as an 
excuse, because it is certainly not an acceptable excuse. It is 
an explanation that I hope will take on greater meaning as our 
discussion proceeds here today.
    You have interviewed many past and present Global Crossing 
employees, and you have reviewed tens of thousands of e-mails 
and other documents from our company. I have only my 
recollection with me here today, and I request the opportunity 
both to review the transcript of these proceedings and to 
provide clarifying comments so that your record may be 
complete.
    Thank you, Mr. Chairman.
    Mr. Greenwood. You will have both of those opportunities.
    Mr. Winnick. Thank you, Mr. Chairman.
    Mr. Greenwood. Thank you.
    Mr. Cohrs, do you have an opening statement?
    Mr. Cohrs. No, Mr. Chairman. I will answer questions.
    Mr. Greenwood. Very well.
    Mr. Perrone, do you have an opening statement?
    Mr. Perrone. No, I do not.
    Mr. Greenwood. Mr. Walsh, do you have an opening statement?
    Mr. Walsh. No, I do not.
    Mr. Greenwood. Mr. Gorton?
    Mr. Gorton. No, I do not.
    Mr. Greenwood. All right. The Chair then recognizes himself 
for 10 minutes for purposes of inquiry and notifies the members 
that this will be a 10-minute round.
    And, Mr. Winnick, as you might suspect, I am going to start 
with you. We have just heard from Lenette Crumpler, a Frontier 
employee who lost her entire retirement savings. She has 
testified that she believed in Global Crossing. She believed in 
the executives who told her and other investors that the 
company would ``weather the storm.''
    And yet while she did not sell her stock because she had 
faith in the company and its leadership, you sold almost 10 
million shares and reaped $123,512,549 in proceeds from that 
sale in May 2001.
    When you sold those shares in May, you knew that the 
financial projections for the company showed that Global 
Crossing may not meet its numbers for the quarter, isn't that 
correct, Mr. Winnick?
    Mr. Winnick. When I sold the stock in May--May 23, 2001, to 
be exact--the company had just completed, as I recall, an 
analyst call reporting its quarterly numbers, on May 10, I 
believe, or May 11. The company--in fact, I was I believe in 
Asia at the time, but I read the report and our CEO had 
reconfirmed along--he was on the call with Dan Cohrs, our Chief 
Financial Officer, reconfirmed guidance, both for the quarter 
and for the year.
    So the suggestion that I sold stock, based on information 
that was not readily available, is not correct, sir.
    Mr. Greenwood. All right. Well, I am going to ask you to 
turn in your notebook there to Tab 10. And Tab 10 consists of 
the notes from a management meeting held on the 16th of April 
of last year. I am sorry. Let me correct that. Let me correct 
that. I am sorry.
    Tab 15. These are the notes of the Office of the Chair 
Minutes from May 16, which was exactly 1 week prior to your 
sale of the $123 million worth of stock. And if you would turn 
to page 2, at the top of that page, you will see a handwritten 
word that says, ``Highlights.'' And then it says, ``The 
forecast for second quarter is $285 million, which is about 
$360 million light.''
    So, clearly, 1 week before you sold your stock you knew 
that you were--the company was in fairly horrendous shape, that 
you were going to be $360 million short of your revenue 
projections for the quarter. Isn't that not correct?
    Mr. Winnick. Well, I don't have the specific recollection 
of this forecast, and I am reading this now. But I can tell you 
my reaction to this particular meeting on May 16, as well as 
other Office of the Chairman meetings, which we conducted at 
least once a month and many times twice a month.
    The business cases, the numbers that were being created for 
the presentation in the--these are notes of the meeting, 
Chairman Greenwood. There was a--as I recall, from most of the 
Office of the Chairman meetings, there would be a book prepared 
for that, which I don't have the benefit of having here in 
front of me, so I am just looking at the notes.
    Whatever you see here are just highlights, and they are, in 
my estimation, very preliminary. As you probably know, the 
company did make its numbers for the second quarter of 2001, 
notwithstanding----
    Mr. Greenwood. The quarter was half over at this point, so 
I am not sure how preliminary they are. But you had revenues of 
$285 million. I think the note was you are $360 million short. 
Is that--that sounds to me like an earthquake, not a 
preliminary glitch.
    Mr. Winnick. I think if you look back, Mr. Chairman, in the 
history of this company, which I had been involved in from the 
very inception, there was always a great deal of uncertainty 
during the quarters. And, in fact, it is an anomaly, but we 
really never knew what the final result of the quarter would 
look like until the end of the quarter. It was the nature of 
the business.
    So to the extent that there is a highlight here that the 
numbers are light halfway through the quarter doesn't really 
give me any indications of what they were going to do about it.
    Tom Casey, who was the CEO at this time, had a variety of 
initiatives in place in the company, both cap ex reduction, 
capital expenditure reduction, cost reduction, head count 
reduction, and the company was very much focusing and shifting 
from a pure wholesale IRU model to an outsourcing model.
    For example, during this timeframe in May, as I recall, 
Deutsche Telecom was doing a significant amount of due 
diligence on the company, not for purposes of acquiring the 
company, which obviously we would not have objected to at the 
time, but looking at the company in terms of its network 
capabilities.
    One of the things that has been lost in this myriad of 
press is what this company was about. We built----
    Mr. Greenwood. Well, let me--I am going to have to--I have 
limited time, so I am going to have to stick with the line of 
questioning.
    Mr. Winnick. Oh, I am sorry.
    Mr. Greenwood. I would like you to turn to Tab 10, if you 
will, which are the management meeting minutes for April 16, 
2001. And if you look on the second page, about halfway down, 
it says--and this is Tom Casey speaking. ``We do not have room 
for more reciprocal deals.'' Would you interpret that for us? 
And in the context of that, would you tell us how frequently 
you communicated with Tom Casey?
    Mr. Winnick. Sure. Well, it is certainly easier for me to 
tell you how much I communicated with Tom than what Tom's 
intent was in some statement here. I spoke to Tom frequently. I 
spoke to him--he spent a fair amount of the week back in New 
Jersey. I was in Los Angeles. I probably talked to Tom at least 
once a day.
    Mr. Greenwood. Okay. So you talked to Tom once a day. So 
he--here he is, on April 16, saying, ``We do not have room for 
more reciprocal deals.'' He is talking about missing revenue. 
He says, ``The company is missing revenue, running at an 
expense rate that is ridiculous.''
    Mr. Winnick. Well, he----
    Mr. Greenwood. Did he share that with you?
    Mr. Winnick. Well, he did----
    Mr. Greenwood. Those concerns with you?
    Mr. Winnick. Well, he certainly shared with me that he had 
a variety of cost reduction initiatives in place. Absolutely.
    Mr. Greenwood. That is not what I am asking you. I am 
asking you, did he say to you that the company is, ``missing 
revenue, running at an expense rate that is ridiculous''? Not 
in so many words, but did he indicate to you that that was the 
dire situation that he was seeing?
    Mr. Winnick. I don't believe----
    Mr. Greenwood. Back in April 2001.
    Mr. Winnick. I don't come out with the same interpretation 
as you do, Mr. Chairman.
    Mr. Greenwood. Well, what is your interpretation?
    Mr. Winnick. That anything is dire. I look at this Tab 10, 
and I see a note here that says, ``David,'' and I can't make 
out the word next to it. It looks like ``carrier,'' but I am 
not sure. I assume that is David Walsh.
    And at the same time in this memo that--there is some 
notation of perhaps--well, let me find that first. I do see 
here that there is a notation on this management committee 
meeting, which, as you could see by the heading, I am not part 
of, and I was not----
    Mr. Greenwood. All right. That is why I asked you if you 
talked to Tom Casey regularly, and you explained you talked to 
him daily. So I am assuming that he was not hiding this kind of 
information from you. But you assume otherwise?
    Mr. Winnick. Well, that would be unfair, because when I 
said I spoke to Tom, he didn't have a lot of time. He had a lot 
of pressure. He had a lot of responsibilities.
    Mr. Greenwood. So would you characterize your 
communications with Tom Casey as one in which he was not 
forthcoming with the important matters that affected Global 
Crossing?
    Mr. Winnick. No, I wouldn't say that at all.
    Mr. Greenwood. Okay.
    Mr. Winnick. But I think it is important to recognize that 
Tom was the CEO of the company during this period of time and 
had a lot of responsibilities and took those responsibilities. 
He is a very competent person.
    Mr. Greenwood. Okay. Well, I think that is probably true. 
If you look at the last page of that memo there, again, this is 
quoting Tom Casey who is very competent. He says, ``Theme for 
today: must fix this! Missing revenue. Running at expense rate 
that is ridiculous.''
    Now, there is someone you have just described as very 
competent describing the situation at Global Crossing in April 
of last year. And you began by telling me that you thought in 
May, when you sold your stock, that the company was in great 
shape. And here he is a month ahead of time communicating with 
you daily and indicating that the company is missing revenue, 
running at an expense rate that is ridiculous.
    Mr. Winnick. Well, first of all, the--it would be the wrong 
assumption, Mr. Chairman, to suggest that by having some 
conversation with Mr. Casey, which I think for the most part I 
spoke to him daily, but they were sound bytes. They were brief. 
There might be something he wanted to mention to me or 
something I wanted to mention to him, not necessarily always 
related to Global Crossing, I might add.
    His notation--this notation here about missing revenue, I 
would expect Tom to put as much fire under his leadership team 
as he needed to to run the business the way he felt was 
appropriate.
    Mr. Greenwood. Let me, finally, ask you to turn to Tab 8.
    Mr. Winnick. May I make one other comment, though, sir?
    Mr. Greenwood. Certainly.
    Mr. Winnick. Going back to this tab, one of the things that 
is not being raised is that David--and I assume it is David 
Walsh--indicates here that he has $1.7 billion in 
opportunities. And I assume those are transmission 
opportunities in some form.
    Mr. Greenwood. Or swap opportunities. It is not made clear.
    Mr. Winnick. Well, and he also notes here $678 million 
focused primarily in Global accounts. So I can't tell you what 
is meant by this memo, which I didn't receive. But I can tell 
you as it relates to my May 23 sale.
    Mr. Greenwood. Well, let me--since my time is expiring, let 
me ask you to turn to Tab 8.
    Mr. Cohrs. Mr. Chairman, would it be permissible for me to 
add a bit of context to these notes? May I make that request?
    Mr. Greenwood. You may. We will get to all of you, and you 
can insert that into your responses.
    But are you at Tab 8, sir?
    Mr. Winnick. Yes.
    Mr. Greenwood. This is, again, Tom Casey, you have 
characterized as speaking to you daily, as very competent. He 
says, ``We need to treat this as a crisis.'' Oh, I am sorry. 
This is on page--this is the third page of that document.
    He says, ``This revenue shortfall is a crisis. The company 
is a billion dollars off on revenue and a billion dollars off 
in expenses.'' Is it your opinion that the crisis was, in 
fact--the company was, in fact, in crisis at that time?
    Mr. Winnick. Absolutely not. No, it is not.
    Mr. Greenwood. So even though Mr. Casey, whom you have 
described as someone who spoke to you daily, was very 
competent, he says, ``We need to treat this as a crisis. We are 
a billion dollars off on revenue, a billion dollars off on 
expenses,'' you--is it your testimony here this morning that he 
did not convey that to you? Or is it your testimony that you 
think that he was in error with regard to this assessment that 
the company was in crisis?
    Mr. Winnick. Well, this April 9 meeting was a management 
committee meeting, and I don't know the origin. But there is--
again, the heading here has at least 10, maybe more, 
executives, many of which are sitting here on this panel with 
me today.
    Mr. Greenwood. I understand that. But I am addressing your 
attention to where Mr. Casey says, ``We need to treat this as a 
crisis. We are a billion dollars off on revenue and a billion 
dollars off on expenses.'' And my question to you is: is it 
your testimony this morning that a) Mr. Casey was wrong, and, 
in fact, it wasn't a crisis, and you weren't a billion dollars 
off on revenue and weren't a billion dollars off on expenses? 
Or is it your testimony that he was correct and he just didn't 
share that information with you?
    Mr. Winnick. I don't have any recollection of Tom conveying 
that to me. And, in fact, there is a great inconsistency to 
this, because, as I said before, in May both Tom and Dan 
reconfirmed the guidance. So I don't know what the origin of 
this was, but certainly had Tom been concerned, or the rest of 
the management team been concerned about a revenue shortfall--
--
    Mr. Greenwood. But that is exactly the point here. You went 
out publicly and assured everyone in the public--your 
investors, your employees--that things were in good shape, 
while at the management meeting the company is described as in 
crisis with these billion dollar shortfalls. And you are 
sitting here this morning telling us that you were not aware of 
this, even though this guy reported to you and talked to you 
daily. That is hard for us to follow.
    Mr. Winnick. Well, when I said--when you asked me the 
question regarding Tom talking to me, we did speak regularly, 
and almost daily, but it may be just a very small sound byte. 
Tom reported to me as the chairman. He ran the business. He was 
the CEO.
    In fact, when Tom was asked whether he wanted to be the CEO 
of this company, Tom had a condition attached to it, which was 
a very reasonable condition. He wanted the autonomy to run the 
business. He wanted the autonomy to have all of the people in 
the company report to him.
    Mr. Greenwood. Well, did Lod Cook report to you from these 
meetings?
    Mr. Winnick. Lod didn't report to me. We worked together as 
chairman and co-chairman.
    Mr. Greenwood. All right. My time is way over, and I am 
going to give the same amount of leeway to the ranking member 
as I have given to myself to get through this line of 
questioning.
    But here is what concerns me. If you look at Tab 6, this 
was April--these were the management minutes of April 2, 2001. 
You had just gotten the first quarter results back.
    Mr. Winnick. I am sorry. Chairman Greenwood, which one, 
please?
    Mr. Greenwood. Tab 6, first page of that. There is an 
indication there that says, ``Cannot continue running the 
business with IRU sales to counter losses on current service.'' 
And then it says, ``Reminder: No one to talk about performance 
until we get our numbers published. Be careful. Do not comment 
on the market either. Formal earnings release will be in middle 
of May. We remain comfortable with our guidance,'' which is 
what you have assured us here this morning, that you were 
relying on guidance.
    And what it sounds--what it looks very much like to us is 
that while it was clear to the management in the company at 
this time that you were in a hell of a situation, that you were 
billions of dollars short in revenues, that you were 
experiencing ridiculous losses, that your message to the public 
was, ``Pay no attention to the man behind the screen. All is 
well.'' And advice to the rest of the management team to be 
quiet, be careful, and don't let this--don't let the public in 
on the truth. How would you--would you interpret this 
otherwise?
    Mr. Winnick. I would interpret it quite--very different 
than that.
    Mr. Greenwood. Well, we are all ears, Mr. Winnick.
    Mr. Winnick. Okay. First of all, as I indicated before, 
Chairman Greenwood, I did not participate in these management 
meetings, and I am not even noted here as being in the 
meetings, which was part of my understanding from----
    Mr. Greenwood. But you didn't--and no one reported to you 
about these meetings?
    Mr. Winnick. Whatever discussions Tom Casey had with his 
senior leadership team, which--all of which are sitting here at 
this table, so perhaps they could answer this question better 
than I.
    On May 9, I believe it was, Joe Perrone, notwithstanding 
this as being April, and which is, in fact, after the quarter, 
the first quarter, Joe Perrone had prepared a schedule for Tom, 
which I had the benefit of seeing in preparation of coming here 
today, sir, that Tom used, and Dan used I believe, as the basis 
of their analyst call on May 10 or 11. I am not sure on the 
date, and where they, again, reconfirmed their guidance.
    The business--we were a young company. We didn't have the 
benefits, as many major companies have, in terms of having 
reserves that they could bring back into the quarter when they 
have shortfalls. We had to, in our company, go out and get the 
business. Our network was coming online. We were adding more 
facilities.
    The demand and traffic studies, whether they were right or 
wrong, which turned out to be wrong in many cases, were almost 
unanimously very, very bullish and positive on the accelerating 
demand for transmission services because of new types of 
applications that were coming on stream.
    Mr. Greenwood. We know that was the general mood in the 
telecom industry. But the chronology that we have just outlined 
here--and I have to stop, because my time has expired, and I 
apologize for that. But the chronology here is that there is 
crisis at the management level. There is direction to keep mum. 
There is bullish guidance given to the public, and soon 
thereafter there is recognition that things are pretty bad. And 
that is what this hearing is all about.
    The Chair recognizes the gentleman from Florida for 20 
minutes to compensate for the extra time that I took.
    Mr. Deutsch. Thank you, Mr. Chairman. I appreciate it.
    Mr. Winnick, you know, I would like to follow up on a 
number of things that Mr. Greenwood mentioned. And, obviously, 
you know, the inference is that the sale that you made on May 
23 that yielded $123 million was a sale based upon insider 
knowledge. I mean, that is clearly the inference that he 
questioned you about.
    I would be curious about a couple of things. One is, at 
that point in time, May 23, could you give us an approximation 
of how much stock in Global Crossing you owned?
    Mr. Winnick. Yes. If I may, Congressman Deutsch, I can come 
at it a little bit differently. Over my tenure with the 
company, which is about five and a half years at this point, I 
have sold a total of about 30 percent of my holdings in the 
company. I still maintain 70 percent of my holdings, even 
though it doesn't have a lot of value today.
    So the suggestions that anyone might have, particularly in 
some of the articles I have read, that I have bailed out and 
cashed out, is just absolutely false. In the--which, by the 
way, the 70 percent relates to I still own about 80 million 
shares in equivalent. I have sold about 30 million shares from 
the inception of the company. Does that answer your question?
    Mr. Deutsch. Yes. I mean, just--it would be easier also if 
you could mention--you have mentioned the share value. But as 
of May 23, in Global Crossing stock--I mean, obviously, you 
didn't sell the majority of your shares, you sold a fraction. 
Just to give us a perspective of how much you sold, you know, 
you sold what percent of your holdings at that point in time, 
in that sale?
    Mr. Winnick. In May?
    Mr. Deutsch. Or, I mean, you sold $123 million worth of 
Global Crossing. How much did you own----
    Mr. Winnick. I sold 10 million shares. I still----
    Mr. Deutsch. And you owned 90 million at the time?
    Mr. Winnick. Yes.
    Mr. Deutsch. So you had about a billion dollars, 
approximately a billion dollars, in Global Crossing stock at 
that point?
    Mr. Winnick. More than that.
    Mr. Deutsch. So literally, at that point in time, you sold 
approximately 10 percent of your shares?
    Mr. Winnick. Ten, 11 percent. That is correct, sir.
    Mr. Deutsch. Okay. And the reason I pursue this--not--I 
really don't like to get into personal anecdotal stories. But I 
think it actually relates to the last panel where people who 
had 100 percent of their holdings--and, obviously, the scale of 
the holdings was much smaller--but 100 percent of their 
holdings in a particular stock.
    You know, at that point in time, of your--you know, I mean, 
again, if you don't feel comfortable, I wouldn't answer it. But 
how much of your net worth at that point would be in Global 
Crossing stock? 80 percent of it? 90 percent of it?
    Mr. Winnick. Most of my net worth has come from a result of 
Global Crossing.
    Mr. Deutsch. And so what you were doing at that point in 
time would be really doing what any prudent investor would be 
doing and diversifying a little bit?
    Mr. Winnick. Well, actually, more significant than that, I 
was not a big seller of stock in the company. In fact, at the 
time we had a deal with US WEST to merge. Part of the 
transaction which I negotiated was to have US WEST buy 10 
percent of Global Crossing. This is pre-Frontier.
    At the time, I owned 20 percent of Global Crossing, because 
this was pre-dilution to Frontier. Effectively, we created a 
$3.5 billion cash tender for the stock of Global Crossing, 
which I don't believe any telecom company, or at least emerging 
telecom provider, ever had for the benefit of their 
shareholders. And this gets lost.
    In fact, this is never written about. I was entitled at 
that time of that tender to take out 20 percent of the proceeds 
of $3.5 billion, which effectively was $700 million, for me and 
my family. And I only elected to take half and left the balance 
for the benefit of the other shareholders. So, effectively, the 
shareholders were able to prorate a much bigger percentage.
    Mr. Deutsch. Let me, you know, go back to that specific 
sale, because that really seems to be a lot of the focus of the 
previous testimony. Is there--I mean, at that point, is that 
something, I mean, you were planning on selling? I mean, was 
that something that your personal, you know, financial advises 
you personally--I mean, what made you sell at that particular 
point in time?
    Because clearly the inference is that you knew something 
about the company that others didn't know, and that is why you 
sold, while others were holding on and while there were public 
statements about how good the company was doing.
    Mr. Winnick. Well, I thank you for the question. Obviously, 
some could look at it as if I decided on a given morning to 
sell. That is not the case.
    And factually, and the documentation will support, what I 
am about to say to you. At the time that Global Crossing was 
created, I had my own personal investment group called Pacific 
Capital Group, which I still have. Pacific Capital Group had a 
line of credit that had been drawn down almost equal to the 
exact dollar amount of the sale proceeds.
    It was Pacific Capital Group that sold the stock or entered 
into this financial transaction referred to as a collar on May 
23. And it was something that had been worked on for a few 
months in terms of all the legal documentation and dealing with 
the investment dealers to see who could do a better job on it. 
We decided to pull the trigger, however, in May, but this had 
been contemplated for quite some time.
    Mr. Deutsch. I mean, any particular reason why that 
particular day in May, or why in May?
    Mr. Winnick. It was just, you know, I was getting good 
advice from my financial team at Pacific Capital that it was 
prudent to reduce or eliminate the line of credit. The window 
was open. Shortly after the earnings release on May 10 or 11, 
the window was open by the company. And I was very cautious and 
very careful about the execution of selling stock.
    First of all, I was the largest shareholder of the company, 
and obviously that sends a message, and I didn't lose sight of 
that. I rejected the notion about selling stock into the market 
every day as most people do when they are insiders in the 
company, and then their filing requirements are 10 days or 2 
weeks later. I wouldn't do that, so I wanted it all done at one 
time.
    And, in fact, I insisted with the investment dealer who 
handled that transaction that it be disclosed within 2 days, 
because I didn't want rumors and information being in the 
marketplace. But I sold the stock solely for the purposes of 
eliminating an indebtedness, and the window was open, and we 
documented everything relating to what was appropriate and 
legal during that period and sought all of the necessary 
approvals.
    Mr. Deutsch. Let me go back to, again, some of the 
questions that you have already heard. Obviously, you know, 
again, we have really a truly I think incredibly competent 
staff in terms of going through records and trying to really 
put together and piece together incredibly complicated puzzles 
in terms of historical things that have happened at different 
companies.
    And, you know, I mean, they have done a great job again in 
this hearing. And they have gotten--you know, put together in 
really useful order minutes of meetings that you can question 
about. I mean, first of all, let me just be clear, and so I 
understand.
    You did not attend any of these meetings that--the 
documents that you--that we have talked about--the Tab 8, the 
Tab 15, these are executive committee meetings that you would 
not have been----
    Mr. Winnick. If they were management meetings, I did not 
attend. If they were Office of the Chairman----
    Mr. Deutsch. Okay. So these are management--MMM would be 
management meetings?
    Mr. Winnick. Management meetings I did not attend.
    Mr. Deutsch. Okay. So you did not attend any of the 
meetings of these notes?
    Mr. Winnick. No.
    Mr. Deutsch. Okay. And so your information about what 
occurred at those management meetings would occur how?
    Mr. Winnick. Generally, it wasn't reported to me.
    Mr. Deutsch. I mean, you obviously wanted to know what was 
going on in the company. How were you keeping track of what was 
going on in the company?
    Mr. Winnick. You know, I talked to Tom enough that I was 
generally informed on the company at a very high level. I 
mean----
    Mr. Deutsch. Like how often a week, I mean, would you be 
talking to him?
    Mr. Winnick. Well, I said to Chairman Greenwood that I 
think I spoke to Tom very frequently. If it wasn't every day, I 
spoke to him at least 3 or 4 days during the week, and, in 
fact, he was in L.A. a couple of days during the week, so I 
would have a chance to see him for, you know, a small amount of 
time.
    Most of our conversations was more in corporate development 
and strategy as opposed to sales and things of that nature, 
although I did certainly help and involve myself in some sales 
activities.
    Mr. Deutsch. So, I mean, is it your testimony that the 
specific things discussed--the billion dollars in shortfall in 
sales, or the billion dollars over in expenses--you would have 
no personal knowledge of that?
    Mr. Winnick. Tom was always very confident that he would 
make his numbers and did not involve me in the minutia of--and, 
frankly, billion dollar shortfalls, I think, is certainly 
something that would be very relevant, and you would assume he 
would come to me. So I don't believe he believed it. I don't 
believe his management team believed it. And I don't know the 
basis of why these are in the management meeting notes, but I 
didn't get copies of the management meeting notes.
    Mr. Deutsch. So what you are telling us, then, is that even 
though it says it is a billion dollar shortfall it might have 
just been a way to motivate people? You have used that term 
previously, that things are worse than they look. I mean, 
trying to give us a feel of what was actually going on.
    Mr. Winnick. Well, you know, the notation of a shortfall is 
a notation in the absence of the future business opportunities. 
You know, as I said before, in one of the notations that 
Chairman Greenwood referred me to, it showed a shortfall, or a 
notation of a shortfall I believe, and then it showed $1.5 
billion, $1.7 billion, of business opportunities.
    Mr. Deutsch. So it is kind of how we use numbers on 
deficits. I mean, a shortfall really isn't a shortfall. A 
shortfall is a shortfall based upon what the projection was, 
hopefully in an optimistic way, going to be.
    Mr. Winnick. To me, all of these numbers that I would get 
to see at the Office of the Chairman, notwithstanding the 
management, because the origin of that--there are people here 
who can certainly address that much better than I--were 
preliminary. The Office of the Chairman information was high 
end, and then bottom line, so that there wasn't a lot of meat 
to the middle of it.
    Mr. Deutsch. What about the comment, you know, in the 
minutes ``treat it like a crisis''? I mean, is that--again, I 
mean, is it a crisis? Treat it like a crisis? I mean, what is 
going on in this company? Is there a crisis in the company that 
you are aware of? Or are we treating it like a crisis to 
motivate people to try to make the sales at the end of the 
quarter?
    Mr. Winnick. Well, at the risk of troubling anybody, I 
believe that from the very inception of this company, even 
before it was a public company, every quarter was a crisis. We 
didn't have a foundation to draw from.
    Whatever business we did, and whatever business got booked 
in that quarter, is business that we went out and sought, and 
in many cases it was business that was taken away from the 
incumbent phone companies that totally dominated the landscape 
of telecom, and, unfortunately for all of us, will dominate the 
landscape of telecom in the future because of the demise of 
companies like ours.
    Mr. Deutsch. I mean, you talked about making his numbers at 
the end of the quarter. I mean, you know, the major focus of 
what we have looked at is this, you know, so-called sham 
transaction, the swaps that really had no business purpose. I 
mean, what was your knowledge, or what is your level of 
knowledge, in terms of the details of a specific transaction?
    Mr. Winnick. Okay. I take issue with the comments that are 
used of swaps and hollow transactions and terms of that nature. 
Our company--actually, from the very beginning of the company, 
did reciprocal transactions. So it wasn't a new revelation. But 
there were very specific procedures in place.
    First and foremost, there needed to be a business case that 
had a justifiable business purpose--not a manufactured business 
purpose, but a justifiable business purpose. And that was just 
one level of check and balance.
    The second level of check and balance would be the sign-
offs of the various department heads throughout the company--
network services, network engineering, sales, financial. Joe 
Perrone is a very experienced chief accounting officer and was 
a senior partner at Arthur Andersen, which obviously is not a 
name today that people want to be proud of, but was the gold 
standard in this industry.
    Dan Cohrs is a Ph.D. and very capable, and he is very smart 
and very capable, and he is the CEO--the CFO of this company 
and remains in that position, as well as Joe, notwithstanding 
the crisis that we have been living through here for the last 9 
months.
    They, too, needed to approve and sign off on the deals, the 
reciprocal transactions. The CEO was required to sign off on 
the business transactions. And then before--it was my 
understanding before anything was booked in the company it 
required Arthur Andersen's sign-off. And in some cases, these 
transactions went to the audit committee, and in some cases 
those transactions came to my door because of the threshold of 
dollars that were involved in it. So----
    Mr. Deutsch. You know, what I actually just asked our staff 
was just examples of some of the transactions that have 
obviously raised questions to us, but also to our staff. You 
know, what was your level of knowledge on the 360 transaction, 
in terms of swaps or reciprocal?
    Mr. Winnick. I had a fairly good knowledge of the 
transaction at the time it was brought to me.
    Mr. Deutsch. And in terms of trying to defend it as a 
business purpose, could you get--I mean, could you--still in a 
position to defend that it is a business purpose?
    Mr. Winnick. Could I defend it today?
    Mr. Deutsch. Today.
    Mr. Winnick. Knowing what I know today?
    Mr. Deutsch. Well, obviously, not hindsight.
    Mr. Winnick. Right.
    Mr. Deutsch. But at the time.
    Mr. Winnick. It is a little difficult, because the company 
did file for bankruptcy. My job was not to defend or reject the 
business purpose, business cases, which I had no involvement 
with in terms of the operations of the company.
    I remember the 360 transaction. And, in fact, it was a 
business case that was presented, and the reason it was brought 
to me, and then the executive committee of the board, was 
because of the dollars involved. And, frankly, I was surprised 
when Tom Casey told me about the transaction before our 
executive committee meeting, that part of the transaction 
involved us acquiring capacity in the Atlantic, because it was 
my assumption that we had ample capacity in the Atlantic, but I 
wasn't involved in the details of that.
    And the business case was very much supported by all of the 
operating people that were on the call. The only issue of 
question with 360 was the financial instability that I think 
all of us perceived as the primary risk factor in doing 
business with them at that time.
    Mr. Deutsch. Mr. Perrone, would you want to comment on the 
business purpose of the 360 network transaction? And could you 
defend it, you know, in a more specific way? Again, at the time 
when it was made.
    Mr. Perrone. Well, I mean, I can comment generally. I was 
responsible for putting the process in place by which the 
various functions in the company approved the business cases. 
But from my general knowledge, as an example, I was in the 
budget meetings many months before that.
    Mr. Deutsch. In that case, before you answer, is anyone 
else here in a position to, you know, basically give us the 
background of why, you know, from your perspective that that 
was--Mr. Cohrs?
    Mr. Cohrs. If I may, Mr. Deutsch, the 360 transaction 
originated from a need for Atlantic capacity at Global 
Crossing. We had, as Mr. Perrone was just about to mention, in 
the budget meetings in the fall, we had extensive presentations 
from our product management and network engineering people who 
ran those departments, that we had needs based on our forecasts 
at the time.
    Now, this was based on the forecast at the time--that we 
had needs in the very near future for additional capacity in 
the Atlantic. Partly it was because the demand forecasts were 
very robust at that time. Partly it was because of the network 
configuration we had in the Atlantic. We had built our own 
cable.
    We had purchased or co-built with Level 3 half of another 
cable, and we were projecting that we would have a level of 
demand sufficient to fill up our own cable, which meant we 
would have no redundancy and no backup available in the 
Atlantic. And it was critical for us to obtain redundant 
capacity in the Atlantic to provide for that demand that we had 
projected.
    We were at a point at this time in the spring when it was 
actually too late, based on those forecasts, to construct the 
capacity, and it was both more timely and more economically 
efficient to purchase the capacity.
    Mr. Deutsch. If I could follow up something specifically, I 
think, and this is--this is from our previous hearing, which 
hopefully I am sure you have been briefed on, if not watched. 
But Mr. Joggerts told the hearing, and the staff as well, that 
that deal would not have been entered into if it wasn't for 
falling short of first quarter revenue. Is that correct?
    Mr. Cohrs. I don't believe that is correct, sir. I think 
that the reasons I just described were the primary reasons for 
doing that transaction. It is true that that deal contributed 
significantly to our financial results, but it is certainly not 
the only reason that transaction was done.
    Mr. Deutsch. If I could just one--just follow up to that 
question. Mr. Gorton, apparently I guess you shot down the 
deal. I mean, would that be your assessment as well?
    Mr. Gorton. Obviously, it still flew. I was opposed to the 
transaction.
    Mr. Deutsch. And could you describe the business purpose?
    Mr. Gorton. I think----
    Mr. Deutsch. Because really, again, the premise is--and our 
premise really is that--well, not our premise, but what we are 
really investigating, is the issue of sham transaction. There 
was not--because that is the key thing. If there was not a 
business purpose, a legitimate business purpose that is 
defensible, then I think we get into literally criminal 
activity at that point, because then the markets can't--there 
is not transparency.
    So, I mean, was your--what were your objections to it? I 
mean, at that time.
    Mr. Gorton. Well, I had heard many of the executives tell 
me what the business purposes of the transaction were, and I 
believed that those were good business purposes. The problem is 
the transaction as structured, to me, presented too much risk 
to the company. And the legal risk associated with a 360 
bankruptcy, to me, outweighed any business purpose that you had 
for the transaction. So I believe that the company should not 
have entered into that transaction.
    Mr. Greenwood. The time of the gentleman has expired. We 
will be doing another round, and we certainly want to explore 
that line of questioning.
    The Chair recognizes the gentleman of the full committee, 
Mr. Tauzin, for 10 minutes.
    Chairman Tauzin. Thank you, Mr. Chairman.
    Mr. Gorton?
    Mr. Gorton. Yes, sir.
    Chairman Tauzin. When last Enron was here, Mr. Skilling 
gave us a similar line, that he hadn't sold all of his stock 
after all, so he couldn't be held responsible for knowing 
anything or dumping stock at the detriment of the Enron 
employees or the general investing public. In fact, he said he 
had more stock left after he made his sale. He sold, we were 
told, $190 million worth of stock, netted $112 million, but sat 
near where you are sitting saying, in effect, ``But I didn't 
sell it all, so that was okay.'' Now you are the general 
counsel of the corporation. And Mr. Winnick comes to you and 
says, in effect, in this open window on May 23 when he decides, 
according to his words, to pull the trigger on a $123 million 
sale of Global Crossing stock, you had some responsibility in 
advising him on whether that sale was appropriate, I suspect. 
Is that correct?
    Mr. Gorton. Well, I had the responsibility to maintain the 
window inside the company and determine whether the window was 
open or was not open. Mr. Winnick----
    Chairman Tauzin. Is that all? Suppose Mr. Winnick had come 
to you and said, ``I want to sell 70 percent of my stock,'' 
instead of 30, on that date, or ``100 percent of my stock''? 
Would you have had any responsibility to the company and the 
corporation to advise him, ``Mr. Winnick, that would kill the 
corporation? If the head of the company sells 70 percent or 100 
percent, this company is gone tomorrow on the stock market.'' 
Would not that have been your advise?
    Mr. Gorton. I don't believe that would have been my 
responsibility. But if I--first of all, I don't know that I 
knew the size of Mr. Winnick's transaction.
    Chairman Tauzin. Right.
    Mr. Gorton. But if I had been told he were going to sell 
100 percent of the stock, obviously, that would have a real 
impact on----
    Chairman Tauzin. In fact, selling as much as he did had a 
negative impact, did it not?
    Mr. Gorton. It struck me that the market did not react 
favorably to----
    Chairman Tauzin. It reacted negatively, did it not?
    Mr. Gorton. Right.
    Chairman Tauzin. And had he sold 40 percent or 50 percent, 
or 70 or 100 percent of his stock in the company, on May 23, 
right after on May 10 his executives have told the investment 
community everything is okay, ``We are within our plans. And by 
the way, we are not making any--we didn't make any swaps in the 
first quarter.'' Tom Casey actually said that on May 10; I will 
quote it for you in a second.
    On May 23, he sells 30 percent of his stock. Had he chosen 
to sell 70, 90 percent, or 100 percent right after on May 10 
the heads--the offices in this company--Mr. Cohrs, you were on 
that conference call, and I want to talk to you about it--
actually told the investing public, ``Everything is okay. We 
are within our plans.'' You know, keep investing in Global 
Crossing, in effect. Had he come to you and offered--with a 
plan to sell more than 30 percent, significantly more, wouldn't 
that have had disastrous effects upon the stock of that 
company?
    Mr. Gorton. If he had decided to sell 100 percent of his 
stock, I believe my judgment would be that the market would not 
have reacted favorably to that.
    Chairman Tauzin. It would have caved. You know it. So this 
excuse that ``I am keeping 70 percent. I only sold 30 percent. 
Therefore, everything was all right'' is a little weak.
    I want to go to you, Mr. Winnick, on this, because it is 
important for us to know what you did know on May 23 when you 
pulled the trigger on this $123 million share. Did you know, 
for example, that on April 5--on April 5, Mr. Perrone--let me 
go back further than that--April 2. Mr. Perrone had reported 
first quarter results at the manager's meeting that day, that 
there would likely be a half billion dollar shortfall in 
revenues.
    Did you know that that information had come out at the 
manager's meeting on April 2, and that Joe Perrone was going to 
investigate the causes of this half billion dollar shortfall? 
Did you know that?
    Mr. Winnick. I have no recollection of that.
    Chairman Tauzin. You didn't know that. Did you know that on 
April 5 Mr. Perrone made his report? This is it here on Tab 5--
Tab 7, rather--indicating that it was going to be a billion 
dollar shortfall. Did you know that?
    Mr. Winnick. Did that document come to me, sir?
    Chairman Tauzin. I am asking you. Did you ever see it? Did 
you know that Mr. Perrone made such a report?
    Mr. Winnick. I don't believe that document ever came to me. 
Therefore, I don't----
    Chairman Tauzin. I understand the document may not have 
come to you. Did you know that Mr. Perrone issued a report 
following the April 2 manager's meeting indicating that the 
shortfall would be a little over a billion dollars?
    Mr. Winnick. No, I am not familiar with that.
    Chairman Tauzin. You didn't know that? You already talked 
about this with the chairman. But on April 9, at a manager's 
meeting, Tom Casey now reports to the managers, at which the 
Office of the Executive was there--Lod Cook was there, Tom 
Casey is reporting that the Office of the Chairman was there--
that we need to treat this as a crisis, that it is a billion 
dollars off on revenue. Did you know that was reported at the 
manager's meeting?
    Mr. Winnick. Just to comment, if I may----
    Chairman Tauzin. Yes.
    Mr. Winnick. --Chairman Tauzin, you indicated before that 
I--on May 23, I sold 30 percent of my stock. I sold 10 percent 
of my stock.
    Chairman Tauzin. On that date.
    Mr. Winnick. Yes. I had sold----
    Chairman Tauzin. You had sold some before that?
    Mr. Winnick. [continuing] 20 percent of my stock going back 
to I think it was March 2000, and then----
    Chairman Tauzin. And that is fair.
    Mr. Winnick. [continuing] periods before that period.
    Chairman Tauzin. So it is not quite as big a chunk. It is 
10 percent. Did it have a negative impact on the market?
    Mr. Winnick. I think the stock went down a little bit, yes.
    Chairman Tauzin. Suppose you had sold 30 percent, 50 
percent, would it have gone down even more?
    Mr. Winnick. Well, I will tell you----
    Chairman Tauzin. The likelihood?
    Mr. Winnick. [continuing] I was very sensitive to how this 
would be done. I mean, I think one of the issues here which is 
at some point--should be--actually, I think it has been dealt 
with here, the disclosure requirements of when you need to--as 
a major executive in a company, when you need to disclose your 
sales.
    As I told you, when I entered into the collar transaction, 
it was really a financial transaction. I didn't actually sell 
physical stock in----
    Chairman Tauzin. Well, yes, but you sold $123 million worth 
of stock.
    Mr. Winnick. No, I sold 10 million shares in the company.
    Chairman Tauzin. Ten percent of your holdings.
    Mr. Winnick. Right.
    Chairman Tauzin. And the point I am making--and disagree 
with me freely, if you want to--executives like you don't have 
the freedom to sell all your stock any time you want. You don't 
have the freedom to sell the great majority of the stock any 
time you want. You know doggone well how Wall Street would 
treat that, wouldn't it?
    Mr. Winnick. Well, nor did I try.
    Chairman Tauzin. And you didn't try.
    Mr. Winnick. That is correct.
    Chairman Tauzin. So you sold what you could sell.
    Mr. Winnick. No. I sold what I--what was appropriate to 
sell to reduce a line of credit that had been drawn down.
    Chairman Tauzin. Okay. And what I am doing now is I am 
exploring what you might have known, or did know, on that date 
when you sold that substantial block of shares. And $123 
million is not chump change. It is a pretty big----
    Mr. Winnick. It is a significant amount, sir.
    Chairman Tauzin. Let me add, on that date, May 23, did you 
notify all of the employees that they ought to sell 10 percent 
of their shares that day?
    Mr. Winnick. Well----
    Chairman Tauzin. Did you notify anybody that they ought to 
sell? ``I am selling; you better sell, too''?
    Mr. Winnick. Well, my job is not to tell people to----
    Chairman Tauzin. No, but you didn't do that.
    Mr. Winnick. [continuing] sell or buy.
    Chairman Tauzin. Right. You didn't do that.
    Mr. Winnick. But----
    Chairman Tauzin. So did you know----
    Mr. Winnick. [continuing] that is not my----
    Chairman Tauzin. [continuing] on April 9----
    Mr. Winnick. Excuse me, Chairman Tauzin.
    Chairman Tauzin. Yes, sir, please finish.
    Mr. Winnick. Let me answer that, please.
    Chairman Tauzin. Yes, sir.
    Mr. Winnick. When I sold--when they entered into this 
collar transaction, which effectively sold stock, it was during 
a window period. I had a conversation with Tom Casey relating 
to did he still feel comfortable with his guidance for the 
quarter, and was he still comfortable with his year. And he 
said to me, yes, he was. I relayed that conversation----
    Chairman Tauzin. Tom Casey did not tell you at that point, 
``We are going to be a billion short''?
    Mr. Winnick. I asked him if he was comfortable--first of 
all, the billion short is--I don't know where this comes from, 
because as we said before in May, May 9 I think it was, Joe 
Perrone had given updated information to both Tom Casey and Dan 
Cohrs, so that they could have--be fully informed when they 
were having their analyst call the next day or two, where they 
reiterated their guidance for the quarter and for the year.
    Had there been, in their view, a significant shortfall, 
notwithstanding this billion dollar number, sir, that you use, 
but certainly even less than that would be more than 
sufficient, then it would have been inappropriate to confirm 
the guidance on the May call.
    Chairman Tauzin. I should think so. And we are going to 
talk about that in a second, because I want to know what you 
knew about that May call, and what Mr. Cohrs knew, and what 
actually happened that day. But I want to specifically ask you: 
did you know or not know that on April 9, at the manager's 
meeting, that Tom Casey reported there would likely be a 
billion dollar shortfall in revenue?
    Mr. Winnick. No, I can't say to you that I had----
    Chairman Tauzin. You did not know that on May 23 when you 
sold your stock?
    Mr. Winnick. I don't have--and I would have, I believe, a 
clear recollection of that. I have none.
    Chairman Tauzin. All right. Let us go to the--to Tab 10, 
where on April 16 Tom Casey states, in effect, that we do not 
have more room for these reciprocal deals.
    Mr. Winnick. Where are we looking now?
    Chairman Tauzin. He is sending a clear warning on Tab 10.
    Mr. Winnick. What page?
    Chairman Tauzin. Tab 10. I am not sure of the page. But it 
is, again, another manager's meeting on April 16, where Tom 
Casey states that these--that the commitments made in the first 
quarter had ``a material impact on cash plan and k-pac, and we 
do not have more room for these reciprocal deals.'' Were you 
aware of that? That is on page HEC40147 of the manager's 
meeting that day.
    Mr. Winnick. Chairman Tauzin, what page are you looking at 
on that?
    Chairman Tauzin. It doesn't have a page number. It had----
    Mr. Winnick. I mean, just--I mean, it is----
    Chairman Tauzin. It is the manager's meeting April 16, Tab 
10, and it is marked ``Confidential, GX HEC40147,'' Tab 10.
    Mr. Winnick. 4047?
    Chairman Tauzin. 40147. It has a list of those present, and 
then discussion items, and then you have a report from Tom 
Casey indicating that these first quarter reciprocal deals had 
``a material impact on cash plan and k-pac budget. We do not 
have room for more reciprocal deals.'' Were you aware that Tom 
Casey made that report to the manager's meeting of April 16?
    Mr. Winnick. I don't have a recollection of that. But I 
don't think Tom was----
    Chairman Tauzin. Again, you speak to him daily, and you did 
not know he was making that report to the manager's meeting?
    Mr. Winnick. No.
    Chairman Tauzin. Had you known that, had Casey told you 
that. ``We don't have room for any more of these deals,'' would 
you have participated in trying to get any more of these deals?
    Mr. Winnick. Well, again, I can't tell you in the context. 
I think, Chairman Tauzin, it is a little unfair to--for me to 
paraphrase a conversation----
    Chairman Tauzin. I am just asking you if you knew about it.
    Mr. Winnick. Well, there were people on this panel that 
were on this call.
    Chairman Tauzin. I realize that. I am asking what you knew. 
I want to know what you knew from Tom Casey. Tom Casey is 
talking to you every day, but he is making these rather 
incredible statements at manager's meetings that the company--
you have to treat this as a crisis. It is going to be a billion 
dollars down.
    Joe Perrone is issuing the report saying it is going to be 
a billion--it went from a half billion to a billion in just a 
matter of days. And you are telling me you were totally unaware 
of this, that Casey never told you this, and that you were 
never made aware that you couldn't do any more of these deals 
because it was so negatively impacting the ability of the 
company in terms of its cash and its capacity? You were not 
aware of that?
    Mr. Winnick. I was there to help and assist any of the 
executives in any way they could, or I could. Tom did not tell 
me he didn't have more capacity to do reciprocals. I do not 
have any recollection of anyone giving me information relating 
to shortfalls of a billion dollars or cost excesses of a 
billion dollars.
    Chairman Tauzin. So you didn't know that. Tab 14 now. Go to 
Tab 14. Tab 14 is a confidential memo from Kurt Rossi to Joe 
Perrone.
    Joe, are you following along with us? Tab 14. This is a 
memo to you.
    It is from Hank Milner, and it is addressed to Gorton, Jim, 
etcetera, Mr. Perrone, and Mr. Cohrs. Mr. Cohrs and Mr. 
Perrone, do you remember receiving this memo from Frank Milner 
as an e-mail?
    Mr. Perrone. Yes.
    Chairman Tauzin. Mr. Cohrs?
    Mr. Cohrs. I have reviewed this in preparation for the 
hearing.
    Chairman Tauzin. Do you remember it?
    Mr. Cohrs. No. At the time--I actually didn't see at the 
time, but I remember--I have reviewed it in preparation for the 
hearing.
    Chairman Tauzin. The subject is--Mr. Cohrs is on it. So you 
got it. You are on the list of receiving the e-mail, so you did 
get it.
    Mr. Cohrs. I understand. I was not in the office at----
    Chairman Tauzin. The subject is Debt Covenants and Capacity 
Sales. It is, again, a dire warning. This is May 17. It says 
that additional debt from these categories could be significant 
and result in covenant violation. What is a covenant violation, 
guys? What does that mean?
    Mr. Perrone? You were with Arthur Andersen. What is a 
covenant violation?
    Mr. Perrone. That just relates to the requirement of 
financial performance under our various loan agreements that we 
were required to maintain.
    Chairman Tauzin. Yes. In fact, it goes on--the memo goes on 
to say, ``The consequences of violating this financial covenant 
are severe.'' That is highlighted--severe--big words. ``And the 
time period to which--in which to fix it is short,'' again 
emphasized. So time to fix it is short. ``First quarter 
financial statements are due to the banks on May 30, 2 weeks. A 
violation would be immediate, in the event of default, with no 
cure period.'' It goes on to say, ``Global Crossing would 
immediately lose the ability to borrow.''
    It says, ``The lenders would either terminate their 
commitments under the facility and make the loans immediately 
due and payable, or both.'' It goes on to say that lenders 
would accelerate their loans, which would be a cross 
acceleration of Global Crossing's $3 billion of senior notes. 
This is a pretty dire set of warnings, is it not?
    Mr. Cohrs. Chairman Tauzin, if I may, this memo did not 
forecast a violation of loan covenants. It was based--it was 
also based on imprecise estimates as it says in this memo.
    Chairman Tauzin. That may have been wrong.
    Mr. Cohrs. When the actual certificate----
    Chairman Tauzin. That may have been wrong, but it was a 
pretty dire----
    Mr. Cohrs. If I may finish.
    Chairman Tauzin. Finish.
    Mr. Cohrs. The actual certificate of compliance that was 
filed, the ratio that was estimated here as 4.71, which was 
close to the requirement, was, in fact, reported to the banks 
as 3.54, which was not close to the requirement.
    Chairman Tauzin. Would you go to the next page?
    Mr. Cohrs. This memo was based on incorrect and imprecise 
and preliminary estimates that, in fact, did not forecast a 
violation of loan covenants.
    Chairman Tauzin. Would you go to the last page, Mr. Cohrs?
    Mr. Cohrs. Yes.
    Chairman Tauzin. Did you write this e-mail back? This is--
--
    Mr. Cohrs. No, actually, I wrote that e-mail before----
    Chairman Tauzin. Sent May 12. Did you send this e-mail?
    Mr. Cohrs. [continuing] before the prior e-mail.
    Chairman Tauzin. Right.
    Mr. Cohrs. Yes, I did send that e-mail.
    Chairman Tauzin. And doesn't this e-mail basically say 
that, ``We will be tight on our bank covenant as we go through 
this year''?
    Mr. Cohrs. This e-mail says, ``We will be tight on our bank 
covenant as we go through the year.'' This was based on the 
same information that Mr. Milner wrote his subsequent e-mail 
on, which, as I just said, was preliminary and imprecise and 
turned out to be significantly too pessimistic compared to the 
actual results that were filed when we completed it and closed 
the books.
    Chairman Tauzin. All right. But this was what you knew at 
the time, is that right? On May 12----
    Mr. Cohrs. That is correct. That is what I----
    Chairman Tauzin. [continuing] you said it was going to be 
tight.
    Mr. Cohrs. This----
    Chairman Tauzin. On May 16----
    Mr. Cohrs. [continuing] is what I knew at the time.
    Chairman Tauzin. --Mr. Milner says, ``This could be 
significant.'' We don't know.
    Mr. Cohrs. Milner, unfortunately, as we know, had very 
preliminary, imprecise information, which it says in his e-mail 
is based on imprecise estimates.
    Chairman Tauzin. Given all that----
    Mr. Cohrs. You can look at it in his e-mail.
    Chairman Tauzin. Given all that, Mr. Winnick, are you aware 
of these e-mails, these concerns about covenant violations in 
the numbers, and the debt growing too fast?
    Mr. Winnick. No.
    Chairman Tauzin. You were not aware of that either?
    Mr. Winnick. I have no recollection of a problem with 
covenants.
    Chairman Tauzin. Let us go to----
    Mr. Winnick. By the way----
    Chairman Tauzin. Go ahead.
    Mr. Greenwood. Please pull the microphone forward. Thank 
you.
    Mr. Winnick. --Chairman Tauzin, one of my obligations as 
the Chairman of the Board of this company is if there was 
something remotely resembling a violation of a covenant, would 
be to bring it to the board's attention immediately, 
notwithstanding management's position. It is not something that 
we would ever take very lightly. It is the heart and soul of 
the business.
    Chairman Tauzin. So do you know whether these concerns were 
brought to the attention of the board?
    Mr. Winnick. I know, in fact, they weren't.
    Chairman Tauzin. So you----
    Mr. Winnick. By me, because they weren't brought to my 
attention.
    Chairman Tauzin. All right. Let us go to the 360 deal, Mr. 
Gorton. You called Dan Cohrs and Joe Perrone to go over the 
financial perspective on this call, and you opposed it. Why did 
you oppose it?
    Mr. Gorton. I believed that the transaction, as it was 
structured, posed too much legal risk on Global Crossing and 
economic risk on Global Crossing, if 360 were to file for 
bankruptcy.
    Chairman Tauzin. Did you think 360 was a candidate for 
bankruptcy?
    Mr. Gorton. Oh, I did. I think everybody thought 360 was a 
possible candidate for bankruptcy. I do want to say that that 
risk was something that wasn't settled law. The structure of 
these transactions were IRU transactions, and you couldn't 
really get any lawyer to give you an opinion as to whether that 
is a service contract on the one hand or an asset purchase on 
the other.
    Chairman Tauzin. Right. But the bottom line was this was 
the last day to do this deal----
    Mr. Gorton. I think that was maybe----
    Chairman Tauzin. [continuing] when it was done, right?
    Mr. Gorton. [continuing] the day before the last day, I 
think.
    Chairman Tauzin. That was right down to the wire if you are 
going to get it in the first quarter, right?
    Mr. Gorton. That is correct.
    Chairman Tauzin. Did either Mr. Cohrs or Mr. Perrone tell 
you that if the company was going to make their first quarter 
numbers this deal had to go through?
    Mr. Gorton. Yes, that was mentioned to me on the call.
    Chairman Tauzin. Do either one of you guys want to 
challenge that statement? Mr. Cohrs?
    Mr. Cohrs. Chairman Tauzin, as I said earlier, the numbers 
that we generated with that transaction, which was for good 
business reasons, were important to us making our numbers.
    We also knew at the time--we suspected at the time that if 
we didn't make that transaction in the first quarter that it 
might not be available to us in future periods, and that 360 
may not do the transaction on the same terms, which we thought 
were quite favorable to us and we needed the capacity on very--
with very short lead times, as I testified earlier.
    Chairman Tauzin. Now, Mr. Perrone, did you also recall 
basically saying that, if you are going to make numbers, you 
have got to do this deal?
    Mr. Perrone. I don't recall that specific comment, but I 
think----
    Chairman Tauzin. Do you deny it?
    Mr. Perrone. No. I think it was generally known that we 
would--that size of a deal would be needed to make the numbers 
for the quarter.
    Chairman Tauzin. And, Mr. Gorton, do you remember Mr. 
Winnick telling Bill Conway in the conversation in the meeting 
that in order to make the numbers they have to approve the 360 
transaction?
    Mr. Gorton. That was at the executive committee conference 
call, which was the following day, I believe.
    Chairman Tauzin. The following day.
    Mr. Gorton. Yes, sir.
    Chairman Tauzin. And you recall that.
    Mr. Gorton. Yes, sir.
    Chairman Tauzin. Mr. Winnick, do you recall that?
    Mr. Winnick. Well, I recall for--not as you stated, 
Chairman Tauzin.
    Chairman Tauzin. How do you recall it?
    Mr. Winnick. As a matter of disclosure to Mr. Conway that 
this was a transaction that was included in the quarter, and 
that was disclosure, not for, as has been suggested, any other 
reason.
    Chairman Tauzin. I want to go--and, actually, this deal is 
done. Now, Mr. Winnick, people were invited to leave the 
conference call at some point before the deal was approved. 
Were you the one that asked people to get off the phone? Who 
did that?
    Mr. Winnick. I don't remember, but I will take the credit 
for that.
    Chairman Tauzin. Okay. Who was invited to get off the 
phone?
    Mr. Winnick. Well, first, it is important to--sir, to set 
up how this one was done. I was asked by Tom Casey to convene 
an executive committee of the board, which was made up of four 
people--myself, Lod Cook, Tom Casey, and Bill Conway. Lod, I 
believe, as I found out subsequent in terms of preparation for 
today, was not there that day, which, in fact, would have 
required that any vote would have been unanimous. We would have 
needed a unanimous vote on this transaction.
    Tom briefed me on the transaction. I, too, shared Jim's 
concern that 360 was a little dicey as a credit risk. There was 
not a lot of concern in terms of the business case. But more 
specifically to your question, management, which is--there 
were, I don't know, half a dozen, a dozen people on the call, 
with Tom Casey and Bill Conway and myself--made a presentation 
on the deal. And they never would have convened an executive 
committee of the board to approve a deal that, in fact, they 
weren't interested in approving.
    As Jim Gorton has pointed out, and I think Jim is a--served 
Global Crossing extremely well and is extremely competent and 
thorough--had indicated that there was some financial risk. And 
I said the same thing, and Bill Conway said the same thing.
    So it was after the management team made their presentation 
that I thought it appropriate--and it was--by the way, there 
were suggestions on how we could mitigate some of this risk. It 
was appropriate that the executive committee would go into 
closed session, which I don't want to be as formal about it as 
it sounds, so Bill Conway could talk to Tom and myself openly 
about his concerns.
    Bill, as I recall, approved the transaction. And for those 
who know Bill Conway, he is a very serious businessman, and he 
does not--he does not succumb to pressure. He is principled and 
moral, and he will do what he thinks.
    Chairman Tauzin. Mr. Winnick?
    Mr. Winnick. He approved this transaction.
    Chairman Tauzin. I am going to have to--the chairman is 
signaling me. I am going to have to wrap up, and I want to do 
one more thing.
    Mr. Winnick. Okay. I am sorry.
    Chairman Tauzin. I just want to make the case--make a 
couple of questions, if you will just answer them quickly for 
me. Did you characterize Mr. Gorton's position on this deal 
during this call as being signed off on it?
    Mr. Winnick. It didn't require Jim's approval.
    Chairman Tauzin. I don't know whether it did or not. But 
did you characterize him as signing off on the deal?
    Mr. Winnick. We didn't take a vote of the management team.
    Chairman Tauzin. Mr. Gorton, did Mr. Winnick characterize 
you as signing off on the deal?
    Mr. Gorton. My recollection is that in response--after the 
management presentation of the transaction, Mr. Conway asked a 
question relating to the legal issues surrounding the deal.
    Chairman Tauzin. Yes.
    Mr. Gorton. And Mr. Winnick had indicated that Jim Gorton--
me--who was on the line had worked on the transaction and had 
signed off on the deal. I don't know if he got to finish that 
statement, because I actually stepped in and cut him off and--
--
    Chairman Tauzin. You stepped in and made it clear that you 
didn't think the deal should go through.
    Mr. Gorton. Well, I stepped in and really set forth the 
legal concerns that I had about the transaction.
    Chairman Tauzin. But before I yield, I just want to do one 
quick thing now, because I want to take you to that May 10 
conference call. And, Mr. Cohrs, you are on it. This is the 
call with the investors, right? May 10, Mr. David Tecata asked 
the question--you didn't talk on this conference call about I 
guess--I forgot your term--the kind of--the regional swaps of 
capacity by some of your carrier customers.
    Specifically, Mr. Casey responds--this is, by the way, Tab 
13, if you want to follow. Mr. Casey responds, ``Okay, Dave. 
First, with respect to regional swaps, we did no swaps of 
capacity back and forth between carriers.'' Was that a correct 
statement?
    Mr. Cohrs. Chairman Tauzin, the question specifically asked 
about regional swaps. Earlier in that conference call, there 
had been a question about what we call global network offers, 
which gives our customers the right to purchase capacity and 
then exchange that capacity from one part of our network to 
another.
    The fact that he asked about regional swaps, in particular, 
indicated to us that he was asking about that type of 
transaction. Now, the statement about swaps in general I think 
I should address, however, because the word ``swap''----
    Chairman Tauzin. But you had done regional transactions in 
the first quarter, had you not? You had done regional swaps.
    Mr. Cohrs. No, not to my knowledge.
    Chairman Tauzin. Reciprocal--you had done reciprocal 
transactions in the first quarter, right?
    Mr. Cohrs. We had not done what would be referred to as 
regional swaps, which is my understanding of what the question 
addressed. With respect to the term ``swaps''----
    Chairman Tauzin. Yes.
    Mr. Cohrs. [continuing] in the context it was normally 
used, referring to these concurrent transactions, swaps is an 
accounting term. And we were advised specifically by our 
independent auditors that the transactions that we were doing 
were not swaps, that they were accounted for at fair value----
    Chairman Tauzin. You were on the phone call. Did you see 
any need to clarify that point to the people on the phone?
    Mr. Cohrs. Not in response to a question about regional 
swaps. No, sir.
    Chairman Tauzin. Now, later on--I will wrap it--Mr. Cohrs, 
you said, at some point, with reference to the capital spending 
commitments and their effect on revenue, ``It actually fits 
into our business plan.'' That is your quote on the third page 
of this, in the middle of this conversation.
    Mr. Cohrs. I don't see the transcript in front of me, but--
--
    Chairman Tauzin. Tab 13. This is your quote when talking 
about the spending commitments during the quarter and how it 
affected revenue. You said, ``It is really--actually fits into 
our business plan.'' When you made that statement, were you 
aware of all of the warnings about threats to the company 
because of the''----
    Mr. Cohrs. Could you help me find the--I am just trying to 
find the reference.
    Chairman Tauzin. Page 3.
    Mr. Cohrs. Page 3?
    Chairman Tauzin. It is the--wait, I will find it for you. I 
think it is the last page, the last page of Tab 13. You were 
being asked about capital spending commitments in the quarter 
and how they would affect revenue, and you said, ``It actually 
fits into our business plan,'' which was a--which sounds like 
an assurance to consumers or to investors that these challenges 
presented by these swaps and these agreements were actually 
part of your business plan and everything was okay. Were you 
aware that Tom Casey and Mr. Perrone were predicting a billion 
dollar shortfall when you made this statement?
    Mr. Cohrs. Chairman Tauzin, if I may, I would like to 
address the billion dollar shortfall, which I think is getting 
a lot of attention.
    Chairman Tauzin. That will be the last, Mr. Chairman.
    We want you to do that, Mr. Cohrs. But also, if you 
address----
    Mr. Cohrs. If I could answer your question----
    Chairman Tauzin. I want you to address the billion dollar 
shortfall, but then I also want you to answer the question as 
to whether or not you were aware of those warnings when you 
made the statement that everything was okay, that----
    Mr. Cohrs. Well, sir----
    Chairman Tauzin. Because you were in those meetings. Would 
you go forward, please.
    Mr. Cohrs. Sir, the question from Luanne Surlow, as I am 
looking at it here, asked--I believe her question essentially 
was asking, as we acquired these assets in the reciprocal 
transactions, were we increasing our revenue forecast? My 
response was, ``No. These fit within our business plan.'' That 
is, we are not increasing our revenue forecast as a result of 
these transactions. That is what that exchange meant.
    Now, as to the billion dollar shortfall, the billion dollar 
shortfall, which is in these notes from April 9, April 16, 
etcetera----
    Chairman Tauzin. Yes.
    Mr. Cohrs. [continuing] is a reference to shortfalls from 
our budget, not from our public guidance. At this time, our 
budget was significantly higher. Our revenue budget was 
approximately $700 million higher than our external guidance. 
In other words, our external guidance was much more 
conservative than our budget.
    In these meetings, it is very clear to me that Tom Casey 
was referring to shortfalls from the budget, not from external 
guidance.
    Chairman Tauzin. But if I can----
    Mr. Cohrs. It is also clear to me----
    Chairman Tauzin. If I can wrap, Mr. Chairman----
    Mr. Cohrs. [continuing] that in the May 9 meeting, the 
David Walsh forecast that suggests a billion dollar shortfall 
had not been reviewed by anyone, because I asked him a 
question, which is in these notes. And I asked him, ``How much 
of that forecast is service revenue, and how much is IRU?'' It 
is very clear to me that that forecast was coming from David 
Walsh alone. It had not been reviewed by the finance 
organization or anyone else. It was a very preliminary 
forecast, and it was a reference to shortfalls from budget, not 
external guidance.
    Chairman Tauzin. Mr. Chairman, if I can wrap, what concerns 
all of us--and, Mr. Winnick, that is why I asked you what you 
knew of all of this, is that you had all of these warnings, and 
whether they are preliminary or whether they are accurate or 
not, you had all of these warnings, and they reach people at 
least as close as Lod Cook and Tom Casey. They get all that far 
up the line, and they come in the form of reports.
    They come in the form of notes at management meetings. They 
come in the form of e-mails and warnings. And yet the head of 
the company is here today saying he didn't have any 
recollection of any of that, didn't know any of that. He just 
decided to pull the trigger on May 23 and sell 10 percent of 
his holdings in the company stock.
    I have got a graph of the stock, Mr. Winnick, if you will 
look at it with me.
    Mr. Chairman, this is it.
    Mr. Winnick. I can't see that from here.
    Chairman Tauzin. You have got a hard time seeing it. I will 
try to depict it for you. But this is the graph of Global 
Crossing's stock, and it was going up at this point, and that 
is the date you sold. And it started a down slide, and it has 
never recovered. It just went down and stayed down, continued 
going down from the date you sold this amount--when you pulled 
that trigger on May 23 and sold your stock.
    And the burning question out there that I still have not 
gotten a good answer to. I wish Mr. Casey were available. I 
wish he could be here to help us understand it.
    Mr. Winnick. Well, we wish----
    Chairman Tauzin. Of course. But how Mr. Casey was aware of 
all of these dire warnings, and how so many other people in the 
corporation were sending e-mails and concerned about the 
covenants being violated, even though those were preliminary 
numbers, and the head of the corporation, who is about to make 
a sale that theoretically at least had a pretty nasty effect on 
the company's stock for all of those who invested in it, 
including those employees we heard from--the head of the 
company never hears any of those warnings, doesn't know, 
doesn't recall, can't remember, wasn't at those meetings. Tom 
Casey never told me that, and nobody ever told me that. It is a 
little hard for us to understand how a corporation can function 
like that, and how you, Mr. Winnick, could be at the head of 
this corporation and be so out of the loop.
    I have run out of time. But when we come back, I am going 
to take you through some documents which indicate that you 
really were in the loop, that you were actively participating 
in these deals, in these swaps, and actually encouraging 
everyone else to make calls and try to make these swaps occur. 
And I will get you to comment on that.
    Thank you, Mr. Chairman.
    Mr. Winnick. I look forward to that.
    Mr. Greenwood. The time of the gentleman has expired.
    The Chair is going to recess the committee for 5 minutes. 
Members have been here for a long time, and we will give you a 
5-minute rest break, and then we will convene with--we will 
return with Ms. DeGette's questions.
    [Recess.]
    Mr. Greenwood. The committee will come to order. Guests 
will please be seated. And the Chair recognizes the gentlelady 
from Colorado for 10 minutes to inquire.
    Ms. DeGette. Thank you, Mr. Chairman.
    Mr. Winnick, you started Global Crossing in 1997, if I am 
not mistaken, correct?
    Mr. Winnick. Yes.
    Ms. DeGette. And before that, you were running an 
investment firm called the Pacific Capital Group, which I guess 
still exists, from what I have been told.
    Mr. Winnick. That is correct.
    Ms. DeGette. Now, when you started Global Crossing, your 
vision, as I understand it, was to create a global 
telecommunications company, correct? Would that be a fair 
characterization?
    Mr. Winnick. Not initially.
    Ms. DeGette. Okay. Why don't you tell me what your initial 
vision was.
    Mr. Winnick. Initially, we--my partners and myself financed 
an undersea cable across the Atlantic Ocean.
    Ms. DeGette. Right.
    Mr. Winnick. And it was from that, and the early success of 
that, which had not been done privately in some 125 years, that 
brought us into an opportunity to build a global platform.
    Ms. DeGette. And, really, your vision, though, was to have 
a global telecommunications company at that point, correct?
    Mr. Winnick. That is what we built.
    Ms. DeGette. Right.
    Mr. Winnick. Yes.
    Ms. DeGette. I mean, that was your vision, and then that is 
what you built.
    Mr. Winnick. Right.
    Ms. DeGette. And you acquired some other telecommunications 
companies, and then, in 1999, you acquired Frontier, correct?
    Mr. Winnick. I believe Frontier may have been our first 
transaction. Is that correct, Dan?
    Ms. DeGette. Okay. Oh, all right. But you also acquired 
some other companies.
    Mr. Winnick. Yes.
    Ms. DeGette. And all of that was part of your vision to 
create kind of a global telecommunications company, right?
    Mr. Winnick. It was to be part of that, yes.
    Ms. DeGette. Okay. I am not trying to give you trick 
questions.
    Mr. Winnick. No, no, no. I understand that.
    Ms. DeGette. Okay.
    Mr. Winnick. I understand that.
    Ms. DeGette. And Frontier, as I understand it, was a local 
telephone company that served the Rochester area, and also had 
some contracts for wire around the United States in some other 
markets. Is that accurate?
    Mr. Winnick. Well, Frontier was really a few businesses, if 
I may.
    Ms. DeGette. Right.
    Mr. Winnick. It had started as Rochester Telephone over 
some hundred years ago.
    Ms. DeGette. Right.
    Mr. Winnick. And it had what they referred to as a local 
exchange business.
    Ms. DeGette. Right.
    Mr. Winnick. Telephones in the local markets.
    Ms. DeGette. Right. They were the local telephone company.
    Mr. Winnick. They were like--as Qwest is in Denver.
    Ms. DeGette. Right. Exactly. Qwest took over US WEST, which 
took over Ma Bell is what we called it, which was the local 
telephone company.
    Mr. Winnick. But Frontier, unlike other ILECs, also made an 
investment in building a U.S. terrestrial fiber optic network.
    Ms. DeGette. Right. That is what I was just saying in my--
--
    Mr. Winnick. Yes.
    Ms. DeGette. [continuing] lay person's terms.
    Mr. Winnick. Yes.
    Ms. DeGette. And so, really, this was part of your vision 
not just to have the undersea cable, but really to have a 
presence within the United States with local phone service and 
long distance phone service, right?
    Mr. Winnick. That is correct.
    Ms. DeGette. Similar to Qwest, right?
    Mr. Winnick. That is correct.
    Ms. DeGette. And let me ask you, when--I guess during the 
timeframe we are really dealing with, the 1999 to 2001 type of 
timeframe, how big was your board of directors?
    Mr. Winnick. Twelve, 15 people.
    Ms. DeGette. And as I understand it, every person at this 
table was on that board of directors at some point. No?
    Mr. Winnick. There is no one----
    Ms. DeGette. Mr. Cohrs is shaking his head.
    Mr. Winnick. Well, many of the people at this table were 
invited to board meetings. Certainly, Jim Gorton, our general 
counsel, would be there, and Dan Cohrs would be there.
    Ms. DeGette. Okay. Who was on the board? Who sitting here?
    Mr. Winnick. None of the members of this table, outside of 
myself, were board members.
    Ms. DeGette. I see. So your board of directors, they were 
all outside directors?
    Mr. Winnick. No, there were some--there were some inside 
people.
    Ms. DeGette. Okay. Who were the inside people?
    Mr. Winnick. The CEO.
    Ms. DeGette. Okay.
    Mr. Winnick. And they changed, as you know, but----
    Ms. DeGette. Right. Like four of them in 5 years, as I 
understand.
    Mr. Winnick. Maybe five, because I was the CEO for this 
company before it was a public company.
    Ms. DeGette. Okay. Five in 5 years. Okay.
    Mr. Winnick. But the CEO; my co-chairman, Lod Cook; Joe 
Clayton, who had been the CEO of Frontier Corporation----
    Ms. DeGette. And what was his----
    Mr. Winnick. [continuing] was a board member.
    Ms. DeGette. He was a board member. And what was his title 
within the company?
    Mr. Winnick. He was the President of--I believe of North 
America. Maybe David could help me on that, but I believe he 
was the President of North America. And then at some point he 
also became Vice Chairman of the Board.
    Ms. DeGette. Okay. So how many outside directors did you 
have? People who were not also employed by the company?
    Mr. Winnick. The majority of the people were certainly not 
employees.
    Ms. DeGette. Mr. Chairman, I would ask unanimous consent if 
I could ask Mr. Winnick to supplement the record with the lists 
of everyone who served on the board from 1999 until the present 
and what--and if they worked inside the company, what their 
title was.
    Mr. Greenwood. Mr. Winnick, can you do that for us?
    Mr. Winnick. Do you mean from memory?
    Ms. DeGette. No, no.
    Mr. Greenwood. No, no, no.
    Ms. DeGette. If you could supplement the record and provide 
us with that information.
    Mr. Greenwood. We are asking that subsequent to today's 
hearing----
    Mr. Winnick. Just send it to you? Oh, absolutely. 
Absolutely.
    Mr. Greenwood. The staff will formulate that question----
    Ms. DeGette. Thank you very much.
    Mr. Greenwood. [continuing] and document and----
    Ms. DeGette. Thank you, Mr. Chairman.
    Mr. Winnick. If you get that to Mr. Ferrara at Debevoise, 
we will certainly make that available.
    Ms. DeGette. Great. Thank you.
    Now, I would like to talk particularly about the audit 
company--I am sorry, the audit committee of your board. Who was 
the chairman of the audit committee of your board in 1999?
    Mr. Winnick. I believe it was Bill Conway. Oh, no, no, I am 
sorry. There were two principal audit committee chairmen. One 
was a gentleman from Loew's Corporation, who was one of the 
original investors in the company.
    Ms. DeGette. Okay. And who was that?
    Mr. Winnick. His name was Hillel Weinberger.
    Ms. DeGette. And what was his term as chairman of the audit 
committee?
    Mr. Winnick. From the inception of the company, as a 
private company----
    Ms. DeGette. Right.
    Mr. Winnick. [continuing] up until I think maybe February/
March, sometime in that timeframe, 2000. Is that right?
    Ms. DeGette. And then who was the chairman of the audit 
committee?
    Mr. Winnick. He was the chairman of the audit committee. 
And then, when he left the board----
    Ms. DeGette. Right.
    Mr. Winnick. [continuing] and the reason he left the 
board----
    Ms. DeGette. Okay. I don't need to know that.
    Mr. Winnick. Okay.
    Ms. DeGette. I only get 10 minutes.
    Mr. Winnick. Okay. I am sorry.
    Ms. DeGette. Who succeeded him?
    Mr. Winnick. And then I believe Bill Conway----
    Ms. DeGette. Bill Conway?
    Mr. Winnick. [continuing] a senior partner of the Carlisle 
Group.
    Ms. DeGette. And how many members of the audit committee 
are there?
    Mr. Winnick. At least three.
    Ms. DeGette. Okay. Now, I was thinking about something as I 
was listening to Ms. Crumpler and Ms. Smith's testimony about 
working for the phone company for 20 years or longer, and 
working there for a long time, and it is the phone company. And 
then, all of a sudden, new people come in and it changes.
    And what I was thinking about is, what was similar with 
Qwest and Global Crossing, and maybe some other companies, is 
you all were coming in, you were trying to kind of bring the 
local phone company into the new era of communications. Would 
you think that would be fair to say?
    Mr. Winnick. No.
    Ms. DeGette. No? Okay. I mean, because Frontier or Mountain 
Bell, they didn't have international wire. They didn't provide 
long distance phone service around the world, did they?
    Mr. Winnick. No, and they weren't permitted to.
    Ms. DeGette. Exactly. And so after the Telecom Act, what 
happened was new companies came in, and they wanted to really 
update and expand the services of the old companies, and that 
is what you were trying to do, isn't it?
    Mr. Winnick. Yes, and certainly, as you point out, lower 
the cost to the consumer.
    Ms. DeGette. Right.
    Mr. Winnick. Which was an end product.
    Ms. DeGette. So when for whatever reason--and you and us, 
we might have disagreements why--when the telecommunications 
industry started to go south and lose money, thousands of 
people at your company lost their jobs, people like Ms. 
Crumpler, isn't that so?
    Mr. Winnick. Well, as--and let me say to Ms. Crumpler that 
I sat here and I heard her very loudly, and I am very saddened 
by this tragedy that has fallen upon her and other hardworking 
people of the company. And it has not gone unnoticed by me.
    Ms. DeGette. Well, hang on a minute. I know you feel bad, 
and I can sense that you really do. But--and Ms. Crumpler 
didn't lose her job, but others did lose their jobs. Ms. 
Crumpler only lost her retirement, and I guess my question to 
you is: what does the company now intend to do for all of these 
thousands of employees who thought they were working for the 
phone company? But, as Ms. Smith said, they thought it was a 
solid local citizen, and it turned out to be a really edgy 
place to work.
    Just as an aside, we have had--as you know, we have had a 
lot of startup telecom around my district, most of which is 
either bankrupt or out of business now. And I knew a lot of 
people that went to work for those companies. And what they 
said is, ``Look, you know, to a person''--the people I knew, 
they said, ``Look, I know this is a risk. You know, either I am 
protected through some other way; I have had another job.'' Or 
they said, ``I know that I could lose everything, and I 
prepared to take that risk.'' And now they have taken the risk.
    But these folks--Ms. Crumpler and Ms. Smith and these other 
people--they weren't that way. You know, they thought they were 
working for the phone company. Aside from feeling sorry, what 
is it that you intend to do to make them whole?
    Mr. Winnick. Well, Ms. DeGette, I wasn't intending on doing 
this at this particular hearing, but I need to speak from the 
heart on this, if I may----
    Ms. DeGette. Thank you.
    Mr. Winnick. [continuing] and make a comment here that is--
gives me a chance to make a point.
    Ms. DeGette. Thank you.
    Mr. Winnick. And a statement. This is not about money. This 
is about people. It is always about people. My whole life, it 
is always about empowerment of people. Yes, I made a lot of 
money. But when I went into this venture, building a cable 
across the Atlantic, I had no contemplation that this thing 
would turn out to be what it was. I am both proud and I am 
saddened by it.
    You can't take the money with you. As you know, I am living 
in an environment that is very litigious, to say the least. 
There are over 70 lawsuits filed against me and my colleagues 
and associates. There is a number of government investigations, 
in addition to our own internal investigations conducted by our 
special committee.
    And they will all come to a determination of what the facts 
were and what the facts are. And that is here, and that is 
important, and the findings of this committee are important.
    But the only legacy that I am going to leave this planet 
with is my name and the name I have given to my family, my wife 
of 30 years, who is with me in Washington today, and I asked 
her not to come to this hearing because I didn't want her to 
see me beaten up and grilled and embarrassed and things said 
about me that are not true. And I appreciate this committee's 
conduct with me today, which has been very professional and 
very above board.
    But at the end of the day, I came here to testify in front 
of this committee because you need to hear from me. Whether you 
like the answer or you don't, that is your determination. I 
need to tell you what I feel and think.
    Ms. Crumpler, as well as these other people that worked in 
our company, whether they worked there for 2 days, 10 years, or 
30 years, they were part of our family. And as the head of this 
company, I let them down. Not because we engaged in fraud, not 
because we engaged in insider trading, not because we engaged 
in chicanery. We ran our business, and we ran into a very 
difficult economic period.
    In fact, Mike Armstrong, on The Charlie Rose Show over the 
summer, talked about how the world came to an end for him and 
his company in the summer of 2001. That was the period that our 
company got hung up, in the third quarter. And, in fact, there 
were three or four transactions that would have put us well 
over the quarter--reciprocal, call them what you may--and they 
were all rejected, and they did not meet business purposes.
    But I want to go back to Ms. Crumpler. And I think my 
numbers are accurate. And this is just the beginning. Since the 
time of the acquisition of Global Crossing of the Frontier 
Corporation, 14,000 men and women around the world contributed 
$25 million to the 401(k) plan of the company. I discussed this 
with my wife. She is in complete support. I am personally, 
along with my family, going to guarantee $25 million to the 
people who have lost their money in their 401(k) plan. They had 
nothing to do with the loss.
    I call on chairmen and CEOs of every other company--Qwest, 
XO Communication, McLeod--every one of these companies has 
strong and viable partners, whether they are chairmen, CEOs, or 
just significant shareholders, and I call on every other 
chairmen and CEO and significant investor in any company in 
this country where employees lose money, step up and write a 
check, because the only thing you are going to leave in this 
world is your legacy of who your name is.
    So today I make a commitment to every employee of Global 
Crossing who committed and contributed to the 401(k), which the 
number I am told is just a little bit shy of $25 million, I am 
personally, along with my family, going to write a check to the 
administrator of that plan, so that the Ms. Crumplers and 
others of the world who worked hard for this company do not go 
unnoticed.
    Ms. DeGette. Mr. Winnick, I don't think there is much more 
that needs to be said. And I can tell you are speaking from the 
heart. I can tell Ms. Crumpler and her colleagues will 
appreciate this. And I yield back my time.
    Mr. Greenwood. The Chair thanks the gentlelady, and the 
Chair recognizes the significance of that statement, Mr. 
Winnick. It is magnanimous. It is one of leadership. And I 
think you have just shocked a lot of people, and you ought to 
be proud of that.
    However, the hearing goes on, because there are other 
issues at stake. The fact of the matter is that it wasn't just 
the employees who lost $25 million. It was investors who lost I 
think $54 billion as a result of the collapse of Global 
Crossing.
    And it is the function of this committee, the purpose of 
this committee, to try to understand how that happened, so that 
it doesn't happen in the future, and so that we don't have Ms. 
Crumplers and others in the future in this kind of a situation.
    So I do have some additional questions to ask, and I want 
to address them, first off, to Mr. Perrone. And I would like 
you to turn, Mr. Perrone, to Tab 87, if you would. And Tab 87, 
as I understand it, on the front page is a profit and loss 
statement that you produced, and that was dated May 9, 2001. Do 
you see that, Mr. Perrone?
    Mr. Perrone. Yes.
    Mr. Greenwood. Thank you. If you look down at recurring 
service EBITDA, which I believe stands for earnings before 
income taxes--interest, taxes, depreciation, and amortization. 
We are going to refer to that as earnings for short, but we 
know what it means.
    And as you look across those columns for the quarters, it 
shows a negative number in each one of those columns, is that 
correct?
    Mr. Perrone. That is correct.
    Mr. Greenwood. Okay. So the EBITDA, which we will call 
earnings, was going to--was negative in quarter after quarter. 
Then, if you look down at the IRUs, which is what we are 
referring to as swaps or capacity exchanges, we see positive 
numbers in each one of those columns. And then, below that, we 
see the recurring adjusted earnings are positive.
    So what this seems to me to indicate is that this company 
was going to be losing--showing that its earnings were negative 
quarter after quarter after quarter, except for the IRUs. Is 
that a--it brought it out of the red and into the black. Is 
that a fair statement?
    Mr. Perrone. I don't think that totally encompasses what 
this schedule depicts. If I can explain----
    Mr. Greenwood. Please do.
    Mr. Perrone. Okay. And I think some of this will help to 
shed some light on the earlier conversation on the billion 
dollar shortfall, and I will try--I know you have limited time. 
I will try and go through this as quickly as I can.
    But fundamentally, when you refer to EBITDA, that is a 
term--it is a calculation in accordance with generally accepted 
accounting principles, and the term ``adjusted EBITDA,'' which 
included the IRUs, was a calculation related to the loan 
covenants and the way the analysts looked at the business that 
Mr. Cohrs referred to.
    In doing our forecast, which this was the--the first 
forecast we did for the year 2001 started with my April 5 
presentation that was referred to earlier, and culminated with 
this view of our business for the rest of the year, which 
reflected the forecast as best we knew it at that time.
    And there are really three components to the business the 
way we looked at it. First of all, there was our--what we 
called our recurring service business. Then, as today, we have 
a multi-billion dollar worldwide business of recurring service 
revenue. So one of the things that we attempted to do was to 
look at the run rate for that recurring service business, and 
then, of course, the next step in the process was our operating 
expenses.
    The net of those two would give you the EBITDA number that 
you referred to. And then, of course, we had our IRU business. 
So there was a lot more to this business than just the IRUs.
    Now, if you were to look at the back part of my April 5----
    Mr. Greenwood. But the rest of it, shy of the IRUs, was 
negative, correct?
    Mr. Perrone. It was on the April 5 forecast, and this is 
the important point I want to make. If you look at the back of 
that presentation, we had put together--when I say ``we,'' it 
was myself and my finance team, and I don't have that 
presentation in front of me, but I am sure it is in there. 
There was a set of action items, and those action items 
primarily focused on margin. In other words, the margin on the 
sales, the recurring revenue that we had, and operating 
expenses.
    And part of what I was doing with Mr. Casey when I made 
that presentation to him and several other members of the 
management team was to say we needed to focus on cost, because 
the EBITDA was negative and we needed to get it back to break 
even.
    And what this chart that you are looking at does, the 
middle column reflects primarily cost reduction measures that 
we put into place in order to begin to attack that issue. And 
that is what Mr. Casey was referring to in those management 
meetings when he said expenses are out of control, and we are 
going to--we are losing a billion dollars.
    Now, I do agree with Mr. Cohrs that he was comparing it to 
budget, and the shortfall from our guidance was significantly 
less.
    Mr. Greenwood. Let me cut right to the chase here, what I 
think this whole issue is about, what I think this hearing is 
all about. Okay? I have no question that Mr. Winnick was a 
visionary guy who wanted to--who could see where the 
telecommunications world was going, that laying cable under the 
oceans and around the world and around the globe was an 
exciting business opportunity for the employees of the company, 
for the investors of the company, and that is all good. And a 
lot of other people got into that business.
    And what seems to me pretty clearly to have happened--I 
think this is--everybody understands this--there was a glut. 
There was more fiber optic cable running around the planet than 
there were customers using. And the go-go projections that this 
was going to double and quadruple and go on and on just weren't 
coming true.
    So that is not your fault. It is not your fault that other 
companies got in this business and decided to make these 
investments as well. But here is where I think things started 
to go wrong for the employees and the investors of the company.
    When it became clear that because there was this glut, 
because prices were going down, that you weren't going to 
make--that it was going to be very difficult for you to make 
the numbers, and we have document after document after document 
that demonstrates how the internal management of this company 
was deeply concerned and worried about the fact that you 
weren't going to make your quarterly revenue expectations, that 
that was going to drive the price of the stock down.
    Okay. Still, nobody has done anything wrong. That happens 
in business. It can happen to any company. But what strikes us 
as problematic, and what we don't--we have to figure out how to 
legislate about--is that when you got to the point--and I think 
the evidence is absolutely clear that you got to this point--
where the only way to make those numbers was to engage in 
transactions in which you essentially acquired a surplus 
capacity from other companies, not because you needed it, not 
because it was consistent with any business plan, but because 
that was the only way they would buy surplus capacity from you.
    And that is what I call a sham transaction. That is like if 
they had a bad Christmas season, and Macy's and Woolworth's are 
showing negative--or looking at negative numbers, and before 
the quarter ends Woolworth sells its inventory to Macy's, and 
Macy sells its inventory to Woolworth's to make the numbers 
look sound, that is a--that creates a false image for the 
investor.
    So the investor, not aware of the complexity of these 
transactions, continues to invest. And employees continue to 
stay invested in their 401(k)s, in the company stock. And that 
is the fraud. That is what was dishonest about these practices. 
Now----
    Mr. Cohrs. Mr. Chairman, could I----
    Mr. Greenwood. Yes. I am going to ask you to comment on 
this.
    Mr. Cohrs. Okay.
    Mr. Greenwood. And we have document after document after 
document where the sales people were saying, ``This sale makes 
no good. Who on God's earth would be buying more capacity in 
Scandinavia when we have already invested $80 million and we 
have no customers?'' So that is, to cut to the chase, what 
concerns us, and what we don't want to see happen in the 
future, whether the commodity is fiber optic cable or whether 
the commodity is anything else.
    And, Mr. Cohrs, why don't you respond to that.
    Mr. Cohrs. Thank you very much, Mr. Chairman, because it is 
very important, just as it is in the context of talking about 
these management notes, to keep these--to have some perspective 
and some context on these things. And there are also some 
inaccuracies and misperceptions that continually get repeated 
about these numbers.
    In Tab 87, first of all, just to address the inaccuracies, 
the fact is that this line called IRUs is not all what you 
refer to as swaps, or we would call concurrent transactions. We 
had--in the history of Global Crossing, most of our IRU cash 
revenue came from cash deals, not from either concurrent 
transactions--or the term you use is swaps, which has a 
particular meaning that we don't----
    Mr. Greenwood. Mr. Cohrs, I learned the word ``swaps'' by 
reading Global Crossing's internal documents.
    Mr. Cohrs. I understand it was used in those documents 
inaccurately and imprecisely.
    Mr. Greenwood. So it is not just that I referred to them. 
It is that your company referred to them.
    Mr. Cohrs. Fair enough, sir. And I acknowledge that. But I 
would also say----
    Mr. Greenwood. But didn't--I didn't hear that 
acknowledgement a moment ago.
    Mr. Cohrs. I would also--well, I would also say that 
publicly the senior executives of this company consistently 
used the term ``swaps'' to refer to an accounting treatment for 
a transaction in which the transaction would have been booked 
on a historical basis as opposed to fair value, which would 
have meant no recognition of cash revenue--publicly, and the 
senior executives attempted to consistently do that. I 
understand that there were e-mails where the term was used 
somewhat sloppily.
    But if I could go back to the numbers here. You stated that 
we were generating losses had it not been for the IRUs. The 
fact is we generated losses, period. Our GAAP numbers generated 
losses throughout this period. We did not recognize this--these 
IRU transactions as GAAP revenue. We reported our GAAP numbers, 
as required, which meant that when we sold an IRU----
    Mr. Greenwood. How did you report your pro forma numbers?
    Mr. Cohrs. And we reported--I am about to get to that, if I 
may.
    Mr. Greenwood. Sure.
    Mr. Cohrs. We reported our GAAP numbers as required, 
amortizing the IRU cash receipts over the life of the contract, 
which meant if we sold $20 million of capacity we would 
recognize $1 million per year on a 20-year contract, which 
meant that our GAAP numbers consistently reported losses. IRUs 
did not transform losses into gains.
    We reported pro forma metrics that were supplemental to our 
GAAP numbers. Those pro forma metrics were originally developed 
in conjunction with our underwriters and our bankers as we 
negotiated our bank covenants. In other words, our underwriters 
and our bankers agreed that adjusted EBITDA was a more accurate 
measure of the cashflow coming into the company and a better 
basis on which to calculate loan covenants. This is not 
something that----
    Mr. Greenwood. Okay. But what would have happened to your 
relationships with the banks if your EBITDA numbers were 
negative without the IRUs? And if it weren't for the IRUs, you 
would have been in trouble with the banks, is that not correct?
    Mr. Cohrs. If it had--if you were to hypothesize that we 
had no IRUs, we would have had significantly less adjusted 
EBITDA. The banks lent to this company based on projections of 
our IRU business. And so they were fully aware, from the very 
beginning, from the beginning of this company, our original 
business was 100 percent IRUs. The banks lent to this company 
on the basis of----
    Mr. Greenwood. Well, let me interrupt----
    Mr. Cohrs. [continuing] forecasts and generating the IRU 
revenue in the future.
    Mr. Greenwood. [continuing] you for a second. And I am 
looking at Tab 6, which is the management meeting minutes for 
April 2. Okay? And if you look in the center of the page, I am 
not sure who was saying this. Was this Casey saying this?
    It is not clear who is saying this, but from the minutes it 
says, ``Cannot continue running this business with IRU sales to 
counter losses on current services. Where is the negative 
EBITDA coming from? Reminder: No one to talk about performance 
until we get our numbers published. Be careful. Do not comment 
on the market either. Formal earnings release will be in middle 
May. We remain comfortable with our guidance.''
    Now, I would like you to explain what that all means, and 
why we shouldn't conclude that this company was in trouble 
financially, that it was using the IRUs to mask its losses in 
earnings, and why this was not--this does not--shouldn't be 
interpreted as something other than trying to keep that 
information from the public.
    Mr. Cohrs. First of all, what this is referring to, as I 
said earlier, all of the comparisons are with respect to our 
budget, not to our public guidance, which had significant 
differences. I think we have to keep that in mind.
    At this time period, what Tom Casey and the senior 
management team were focused on was that we had expense budgets 
for operating expenses which then developed in the fall, and we 
were spending at levels consistent with our budget. In other 
words, spending at levels consistent with revenues that were 
higher than our public guidance.
    As we went through this time period, we were seeing that 
our revenues were below budget, but still consistent with our 
public guidance on the whole. And because we were spending at 
the budgeted levels and generating revenues at the levels of 
public guidance, it meant that our service EBITDA, the number 
you referred to in Tab 87, was projected to be more negative 
than we expected.
    At the same time, I believe it was in the July--the April 
16 notes, we had David Walsh talking about $1.76 billion of 
opportunities in the IRU business. So, in other words, we were 
still looking at very robust demand for IRUs, and so what this 
is talking about is service EBITDA, which was always expected 
to be negative.
    In this time period, it was more negative than we had 
budgeted for, because of what I just described. And, yes, at 
this time, we were looking at the IRU business as making up the 
difference.
    This culminated in this period in a forecast that was done 
on May 9, where we actually had time to have the finance 
organization and the sales organization do some work to 
construct a forecast that we could support, and that May 9 
forecast showed that we were--our forecast was consistent with 
the lower end of our range for public guidance, and that was 
the basis on which--on that conference call on May 10, I 
believe, we affirmed guidance for the year, based on that 
forecast.
    Mr. Greenwood. Is it your testimony that all of these 
capacity swaps, all of these capacity trends, all of these 
capacity swaps, these deals, were all done for business 
purposes and were not done simply to meet--there were no 
transactions that were done to try to book revenue to meet your 
street--the numbers that the street was expecting?
    Mr. Cohrs. Yes.
    Mr. Greenwood. They all had business purposes.
    Mr. Cohrs. These transactions were all----
    Mr. Greenwood. They all had business reasons.
    Mr. Cohrs. [continuing] bought and sold from our carrier 
customers----
    Mr. Greenwood. When I see this----
    Mr. Cohrs. [continuing] for business purposes that were 
documented, and we projected acceptable rates of return on the 
assets we were purchasing. There were separate contracts. That 
is, once we signed the contract to purchase and sent money to 
the carrier for the purchase, that was a separate contract. 
There were no cross defaults.
    Mr. Greenwood. Did you watch the hearing last week?
    Mr. Cohrs. Yes, I absolutely watched the hearing.
    Mr. Greenwood. Okay. Let me ask you this.
    Mr. Cohrs. And if I may just--there were no separate--there 
were no cross defaults in those contracts. Once we sent the 
cash to our customer, to the carrier we were purchasing from, 
had they defaulted, we were still on the hook for that cash. 
And these were non-refundable----
    Mr. Greenwood. But explain why Mr.----
    Mr. Cohrs. [continuing] separately documented transactions.
    Mr. Greenwood. All right. Well, explain why Mr. 
Fitzpatrick, in an e-mail dated September 27, 2001--this is to 
Joggerts, is that right?
    Mr. Cohrs. I am sorry.
    Mr. Greenwood. Or is it the other way around?
    Mr. Cohrs. This is the dated--an e-mail dated--I am sorry?
    Mr. Greenwood. It is Tab 52. Ryan Fitzpatrick says, ``I 
received a call this a.m. regarding the Qwest deal, 
specifically regarding our interest for swap capacity in 
Helsinki. I wanted to make sure we are all operating from the 
same place. We do not''--capital N-O-T--``need any capacity 
into Scandinavia. We currently have invested $80 million plus 
into this region and have no customers. To tell ourselves we 
will take this capacity into inventory will add value to our 
efforts of yielding return on the investments we have already 
made is not what we want to do.''
    Now, I need you to square that up with your previous 
statement which is that all of these transactions had a 
legitimate business purpose and were not just done in order to 
book revenues.
    Mr. Cohrs. Yes, sir. This is a transaction that we did not 
do. In fact, this e-mail is dated on September 27, 2001, 3 days 
before we closed the third quarter.
    Mr. Greenwood. But why would it have been contemplated?
    Mr. Cohrs. As we had previously testified----
    Mr. Greenwood. Why would----
    Mr. Cohrs. [continuing] in the first quarter, we refrained 
from doing transactions that would have allowed us to make our 
numbers with Wall Street, but we did not do transactions that 
were available to us precisely because they were bad business 
deals. So we didn't do this transaction.
    Mr. Greenwood. And 3 days before the--if it was so obvious 
to Mr. Fitzpatrick that it was a crazy deal, why was it 
contemplated 3 days before the end of the quarter?
    Mr. Cohrs. Well, there are lots of deals that are 
contemplated, but if they are bad deals we reject them. And at 
the end of the third quarter, we rejected many deals. Mr. 
Winnick testified earlier, which is absolutely correct, on 
September 30, we had before us transactions that, if approved, 
would have allowed us to meet our Wall Street numbers. We did 
not approve those deals, because we concluded that they were 
bad business deals.
    My testimony is that prior to that, or my testimony is that 
the deals that we approved in the first quarter, second 
quarter, and third quarter, when we approved them, they had 
valid business purpose. We had business cases that were 
developed by the organization in product management, sales, 
network engineering, finance, that they all had financial 
projections that made the acceptable rates of return and that 
the assets that we were selling were being sold at prices that 
were consistent with good business reasons. That is my 
testimony.
    Mr. Greenwood. And 4 days after the end of that quarter, 
when in a memo from Joe Becchi to--I am sorry, from Wesley 
Winkler to Joe Becchi, and he says, ``I have been charged with 
the daunting task of figuring out how to sell the junk we 
obtained over the past few quarters of reciprocal deals,'' 
again, you think that was----
    Mr. Cohrs. I am sorry. Did I----
    Mr. Greenwood. [continuing] those would have been pursuant 
to business plans?
    Mr. Cohrs. Could I be referred to that, so I can look at it 
and know the date?
    Mr. Greenwood. I am sorry. I will share the document with 
you. It is not in your binder. It is from last week's hearing.
    The question is: why would sales people be referring to 
capacity that was obtained in a reciprocal transaction as junk 
if, in fact, it was acquired pursuant to a sound business plan?
    Mr. Cohrs. This e-mail from Wes Winkler was written on 
September 4, 2001.
    Mr. Greenwood. Right.
    Mr. Cohrs. Late in the third quarter. By that time, we had 
started to understand that demand was falling off in the 
industry. And by this time, we had gone through a process of 
revising some of our projections, understanding that some of 
the capacity that we bought, as well as much of the capacity 
that we had built, was not going to be fully utilized as we had 
earlier projected.
    Now, I don't necessarily endorse the use of the word 
``junk,'' but it was certainly the case that by this time in 
the year we were looking at disposal of excess assets that were 
no longer projected to be needed in the network.
    And this is hindsight, looking at this now. But we now know 
that we were at the beginning of one of the most spectacular 
collapses in any industry in American history in terms of fall 
off in demand, something to be----
    Mr. Greenwood. Well, this will be my last document I am 
going to ask you to look at, because my time has long since 
expired. But if you would look at Tab 44, this is from--I am 
sorry. This is from last week's binder, but--oh, it is Tab 44 
in your current binder, if you would look at that.
    This is considerably earlier. This was written in August 
2000, August 29, 2000, and it is from Robin Wright to Gary 
Brauninger. And it says----
    Mr. Cohrs. Who was that?
    Mr. Greenwood. Pardon me?
    Mr. Cohrs. I am sorry. Who was that to?
    Mr. Greenwood. The question is for Mr. Cohrs, but it is 
written from Robin Wright to I believe it is Gary Brauninger. 
It is in Tab 44. And she writes, ``As you know, prices are 
dropping fast, and to some extent we are our own worst enemy. 
When saddled with an unreasonable revenue expectation, we do 
the crazy deals at the end of the quarter. This, in turn, 
causes prices to drop, which makes it more likely that we will 
need to do another deal at the end of the next quarter.'' And 
then she cites a case in point.
    Again, people in the company referring to these deals as 
crazy deals, as ridiculous deals, as unnecessary deals, and 
clearly saying it is for the purpose of meeting quarterly 
numbers.
    Mr. Cohrs. Well, first of all, Mr. Chairman, I will never 
apologize for attempting to achieve targets. That is the way 
American business runs. In the particular case of this e-mail, 
this was written in August 2000. At that time, and from the 
beginning of the company, from the first business case ever 
prepared at Global Crossing, we always projected prices to be 
declining. That was the nature of our business.
    Mr. Greenwood. Always projected what?
    Mr. Cohrs. We always projected prices to be declining. The 
nature of our business was that every business case ever 
prepared in the history of Global Crossing showed declining 
prices for capacity because of technological advances. And so 
the typical business case would have annual price declines of 
from 15 to 30 percent per year. That was expected in this 
business.
    The fact that prices were dropping was no surprise to 
anyone. At this time----
    Mr. Greenwood. But that is not the critical issue here. The 
critical issue is, why would Robin Wright talk--say, ``When 
saddled with an unreasonable revenue expectation, we do the 
crazy deals at the end of the quarter''?
    Mr. Cohrs. It was not uncommon for people in the sales 
organization to resist some of the targets. We always had 
challenging targets. We had challenges to build the network, 
finance it, and challenges to sell. But it was not at all 
unusual for sales people to characterize their targets as 
challenging or aggressive.
    The fact is, these targets were benchmarked against what 
our competition was doing. They were benchmarked against the 
original business cases that were constructed--that were put 
together when we built these assets. And those business cases 
were built on independent forecasts from outside consultants 
that provided demand forecasts, and we benchmarked targets 
against information like that.
    Mr. Greenwood. Well, one would expect there to be tension 
between the sales force and the top office, if, in fact, deals 
are being done to generate revenues when there is no--there are 
no customers to use that capacity. That--I don't know how 
anything could be more clear than these consistent memos that 
indicate that the sales force is rejecting these deals because 
they don't make business sense, and the corporate guys at the 
top are saying, ``Do it anyway, because we need to meet these 
numbers.''
    And that--the concern that we have with that is that it 
created the impression that the revenue stream was in good 
shape when, in fact, it was a shell game.
    Mr. Cohrs. Mr. Chairman, I don't see, in this particular 
memo, an assertion that there was no business purpose. And, in 
fact----
    Mr. Greenwood. Crazy deals--if someone in the sales 
department calls a crazy deal--something a crazy deal that is 
done for the purpose of meeting unreasonable revenue 
expectations, how else would you characterize that?
    Mr. Cohrs. My understanding is that she was referring to 
the price at which we were selling this capacity. In her view, 
perhaps these prices were low. But the fact is that when we 
were selling capacity, we were always benchmarking our prices 
against--not only against our list prices, which the sales 
force tended to start with, we were also benchmarking against 
the cost of new capacity, which in our case was very low, 
because we had the network with a lot of capacity to sell, and 
our incremental cost of selling it was very low.
    So it is not always the case that the sales person really 
understood the economics of this business. At this time, there 
was work that my staff was performing that indicated that we 
were selling--on our systems we were selling at prices that 
were lower than we originally forecast in the business cases, 
but we were selling capacity at much faster rates.
    So, in other words, prices were lower than we had 
projected. Volumes were much higher. More cash was coming in 
faster, and the net present value of our investments, in fact, 
was higher than we had forecast based on higher prices. It is 
not clear to me that the sales force understood that analysis, 
and there was no need for them to understand that type of 
analysis.
    Mr. Greenwood. My time has long since expired.
    The Chair recognizes the gentleman from Florida for 10 
minutes.
    Mr. Deutsch. Thank you, Mr. Chairman.
    Mr. Winnick, I assume you were here in my opening comments, 
and I mentioned last Thursday's Wall Street Journal front page 
story about another industry at another point in time, the 
railroad industry in the 1870's. Could you comment on that 
article and the implications for your industry?
    Mr. Winnick. Well, I think, you know, in--Congressman 
Deutsch, the short answer to that is that the early mover in 
the railroad industry, in the latter part of the 19th century, 
had a big first mover advantage. And a lot of people came along 
in building spurs, smaller routes, in other parts of the 
developed parts of the country, and they all started to 
compete.
    I can't relate to what the economic climate was during that 
period of time, but many of those railroads went bankrupt.
    The telecom business is not, in my view--and I am certainly 
not going to dispute a noted journalist from The Wall Street 
Journal, who I believe we have one sitting back here today. The 
telecommunication industry is very different.
    One of the things that is lost in the discussions that we 
are having today and you had last week with other 
representatives of our company is that 50 percent of the cost 
of completing a phone call goes out in a bounty to the local 
phone companies around this country and internationally.
    So that a cost of delivering a call across the Atlantic 
Ocean, Global Crossing changed the paradigm of pricing in our 
initial Atlantic crossing system by reducing the price to 20 
percent of the incumbent price. So that the unit price is 20 
cents of the old dollar that was once being charged.
    But once you get onto land, and you work your way into the 
city through some what they call back haul, and you go into a 
collocation facility, for example, in London, that is where the 
bounty begins. And the same thing applies here in the U.S.
    The biggest cost that we had in our company outside of the 
network costs--and David could address this, because I know it 
was a big frustration for David, what they referred to as the 
local access cost, and I know we had conversations on this over 
the summer at some point about a year ago. For us, on $3 
billion of revenue going out approximately in the local 
service, $1.5 billion is going as a bounty to the local phone 
companies.
    And what is going to happen is that is not going to change, 
because it was companies like us who try to compete, and the 
large incumbent tel-cos did everything they possibly could to 
prevent companies like ourselves being competitive in terms of 
the local access to the consumer or the commercial customer. 
Very different dynamic than in the railroad industry.
    So, yes, as a--in gross, as an industry, they failed. But 
we have had these 25-year floods in this country every 10 
years. We had the hospital industry implode in the 1980's. Not 
one hospital company, but every hospital company. Tenant Health 
Care, Humana, HCA, they all imploded. We had the real estate 
industry in the early 1990's implode.
    What I find, Congressman Deutsch, very unfortunate is that 
our company, who worked very hard in building something that is 
very unique, that whoever the buyer is of our company, whether 
it is Hutchinson One Power, Singapore Technologies, or it turns 
out to be somebody else, is going to make an incredibly good 
acquisition, because we built a worldwide platform that cost us 
over $12 billion.
    Mr. Deutsch. I guess the question related to the article, 
though, was that the overcapacity issue--and, again, hopefully 
that is--you know, in terms of the access charges, is something 
that we can deal with, you know, in our position as oversight 
of the telecom industry.
    But I guess the question of the capacity--I mean, at this 
point in time, even with different changes of capacity, and the 
overcapacity of the railroad system, obviously was used at a 
relatively short period of time. I mean, what this chart is 
showing is that within about a 4-year period of time, the 
stocks crashed, the railroad stocks crashed. They ended up 
having, you know, a statistically amazing significant increase 
in a relatively short period of time.
    And I guess, you know, that was really the question in 
terms of the overcapacity, the $12 billion that you billed. I 
mean, I just--from my own perspective, I just envisioned that 
hopefully that capacity is going to be used, and we are going 
to need to be using more in a relatively short period of time, 
because all of the projections that we talked about, in terms 
of video on demand and other issues, still are not there yet. I 
mean, there are still other uses for that capacity that we 
still have not touched in any shape, manner, or form.
    Let me jump to a couple----
    Mr. Winnick. I might add----
    Mr. Deutsch. Okay.
    Mr. Winnick. --Congressman, I totally agree with your 
analysis as it relates to capacity.
    Mr. Deutsch. Let me jump back, because it really--in a 
sense, you know, I mean, the focus, as you have been asked by 
several members who have been here, really, the transaction on 
May 23. And I really want to talk about it a little bit more.
    And, you know, the--let me refer--and you don't need a 
copy, because I am going to mention enough of it--a Newsweek 
article that was in this week's Newsweek. And the spokesperson 
for this committee is quoted as saying, you know, and I will 
quote, ``Is Winnick a choir boy, or did he steal from the 
church's collection plate?''
    And it refers to, let us see, documents that suggest 
Winnick was well aware of Global's financial troubles, even as 
the company was preparing to present a rosy picture to Wall 
Street. And, specifically, at a February 26, 2001, meeting that 
we have referred to earlier, according to documents obtained, 
obviously obtained through--more than likely through us, I 
assume, ``us'' being the committee, documents obtained by Time, 
when it learned that Global was $200 million short of the first 
quarter target set by Wall Street.
    That is actually the first document--Document 1. I mean, if 
you can refer to it in the tab. And, again, it is the Office of 
the Chairman meeting of February 26, a document that was given 
to Time for them to write the article that they wrote. And it 
talks--there are--specifically, it brings us $200 million short 
of quarter target.
    I mean, do you have a specific recollection of that 
discussion in the meeting?
    Mr. Winnick. Well, I don't have--I think I was asked that 
question by Chairman Tauzin on the February 26. I don't have a 
specific recollection of that Office of the Chairman. I 
certainly would not deny that I was there, if it is stated that 
I was there. So I don't have any issues with that.
    The bigger issue is that the company did make its quarters 
for the first quarter ending in March. The company did disclose 
to the Board of Directors sometime in mid-April that it had 
made its numbers, and we believed, notwithstanding opinions 
here or e-mails that may suggest something different, it is my 
understanding that every transaction that was done in this 
company was done for legitimate business purposes, and there 
were a lot of safeguards to make sure that would not be 
violated by any one person.
    Mr. Deutsch. Let me just go back again, because, clearly, 
the inference in the article that I am referring to in Newsweek 
is that this May 26--I am sorry, is it Time? I am sorry. He 
knows who he gives the information to, so it is Time magazine. 
I am sorry. Time magazine.
    So the article refers to that meeting of February 26, and, 
clearly, it then goes on to, you know, report that, you know, 
the company gave its--which we have talked about--the first 
quarter, the analyst phone call, and then going on to May 23 
selling--you know, you were selling the shares, which is 
really, you know, the focus of really most of the--or a great 
deal of questioning here today.
    And I guess what--I mean, would your position, then, be 
that, No. 1, it was irrelevant in terms of that, because you 
actually met the quarter projections? So the discussion, if 
there was a discussion, in a sense became irrelevant anyway 
because you made the quarter projection?
    Mr. Winnick. Well, also--yes. The answer is yes, but I also 
didn't sell the stock until 3 months after this particular 
date. And there were a lot of things that happened between that 
date leading up to the time of our sale.
    Mr. Deutsch. Let me follow up on the May--yes, go ahead.
    Mr. Cohrs. These notes say that the funnel of existing 
opportunities brings us $200 million short. It doesn't say 
anything about what happened in the remainder of the quarter. 
This says, ``Existing opportunities as of February 26.''
    Mr. Deutsch. Okay.
    Mr. Cohrs. So it doesn't say--it doesn't--this is not a 
forecast.
    Mr. Deutsch. So, I mean, can you elaborate what that 
actually, then, would mean? Because clearly, again, the 
inference is, you know, from this article and from some of the 
questioning that the company was, at that point in time, 
inside--I mean, clearly, let us talk about what the inference 
is. The inference is that the insiders knew that the company 
was basically vaporizing and----
    Mr. Cohrs. I can understand----
    Mr. Deutsch. And, you know, you as well as Mr. Winnick and 
others here today transacted insider trades, you know, cashed 
out hundreds of millions of dollars, and that is the inference. 
I mean, that is clearly the inference that people on this dais 
have made, the inference from this article. And, you know, I 
mean, I am trying to give you an opportunity to say what your 
perspective is on that.
    Mr. Cohrs. I can certainly understand the inference, 
because that is the inference that is typically made when this 
information is provided out of context and interpreted out of 
context. This note says ``funnel of existing opportunities.'' 
It is dated February 26.
    As Mr. Winnick said, by the time we got to the end of the 
quarter, we made our numbers for the quarter. And so between 
this date and the end of the quarter, we found new 
opportunities. This is not a forecast. It is not presented as a 
forecast.
    I think Mr. Perrone earlier spoke to the process of going 
from a very preliminary forecast to a forecast on May 9. The 
senior management was ready to endorse. We used that forecast 
with respect to affirming guidance on May 10, and, you know, 
the notes taken----
    Mr. Deutsch. Let me go back, because again I seem----
    Mr. Cohrs. [continuing] does not constitute a forecast.
    Mr. Deutsch. I am trying to wrap up. I see, you know, my 
time has expired on this. But let me just wrap up with a couple 
of followups on this.
    That the May 23 sale--and I really want to focus on that. I 
mean, have you provided the committee, I mean, with the 
documentation that you talked about, that this was not a sale 
you just came up with, that there is a sort of, you know, 
literally several month transaction that actually just occurred 
on May 23? That it very well might have occurred on May 15 or 
June 1 at that--I mean, have you provided that information to 
the staff?
    Mr. Winnick. I am just about to find out what was supplied 
to the committee from my lawyer. He is what I have been told. 
Everything requested by the SEC relating to this particular 
matter has been supplied to the committee. I can't certify 
that, but that is what I am being told.
    But if I could make one point about this sale, which I 
appreciate your spending the time and getting into this. I went 
to Tom Casey and asked him--and told him I was contemplating 
selling, and was he okay in terms of the company's numbers, 
because I would not have sold if I was told anything different. 
I had to rely on Tom Casey at at least the first juncture.
    I then went to my general counsel, who was a partner at 
Skadden Arps, and told him of my conversation with Tom Casey, 
and I said to him, ``Brian''--his name is Brian McCarthy, and I 
said to Brian, ``Would you please have an independent 
conversation with Tom Casey,'' you know, and, again, I am not 
privy to his conversation, ``and would you also check and talk 
with Jim Gorton,'' which I am told he did. And that is also 
additional backup behind that.
    So, as I said earlier, every T was crossed, and every I was 
dotted. And I was very----
    Mr. Deutsch. And, again, let me----
    Mr. Winnick. And I was very careful in terms of the sale.
    Mr. Deutsch. Let me--and you know what? I am going to 
compel myself to really stop at this point with one final 
question, and it relates to your comments regarding your 
employees. And I think all of us heard what you were saying, 
and I think it really came from the heart, and I think each of 
us felt that it came from the heart.
    And I am sure people will follow up and ask you after the 
hearing about this. But if I can understand, then, what you 
have said, and that you will follow up, and, in fact, do, is 
that every employee that worked for Global Crossing, that put 
money into a 401(k), that has lost money based upon their 
purchase of stock in Global Crossing, you are going to make 
them whole, at least on their initial investment, is that what 
you----
    Mr. Winnick. Yes. Let me--again, I am not going to try to 
fine tune it for this committee.
    Mr. Deutsch. Right.
    Mr. Winnick. Because I wasn't intending on making this 
statement here today. I was going to do that in my own time and 
place shortly after this.
    I am told roughly, slightly less, but that is almost 
irrelevant--I am told from our H.R. people, Human Resource 
people at the company, from the time Global Crossing merged 
with Frontier Corporation, the combined companies, all of the 
employees through that period have contributed out of their own 
paychecks or their pocketbook, however money came into the 
account, $25 million.
    I am going to guarantee that $25 million. I am going to 
give $25 million out of my own personal monies to the plan 
administrator and have him deal with the distribution of that 
to the Ms. Crumplers of the world and every other person that 
lost their money. And I also think that other people should 
take that leadership role in companies where their people were 
hurt in their pension plans.
    Mr. Deutsch. Thank you.
    Mr. Greenwood. The Chair thanks the gentleman from Florida 
and recognizes the chairman of the full committee, Mr. Tauzin, 
for 10 minutes.
    Chairman Tauzin. Thank you.
    Mr. Winnick, I wonder who has the billions, however, to put 
into some trust fund for all of the pensioners and 401(k) 
holders of stock in America who have lost money because of 
failures of corporate responsibility in the last several years.
    And as the chairman said, I am not sure there is enough 
money around anywhere except perhaps in the Federal treasury to 
do that, and that would bankrupt the government here.
    We have got--when we left last visiting, you were telling 
me how you--Tom Casey had not informed you of some of these 
warnings, and not informed you of what might be wrong with the 
company. But you did receive an interesting memo back in June 
2000. That is like almost a year before the events we just 
described, right?
    Mr. Winnick. What memo was that?
    Chairman Tauzin. It is Tab 20. It is from the then CEO, Leo 
Hindery, of Global Crossing. Would you turn to that memo? 
First, why don't you tell us who Leo Hindery was. How long was 
he your CEO?
    Mr. Winnick. Leo Hindery was the CEO of one of the 
divisions of Global Crossing called Global Center from January 
2000 to September 2000, I believe. He also became the CEO of 
Global Crossing in March 2000 timeframe.
    Chairman Tauzin. Okay.
    Mr. Winnick. Approximately.
    Chairman Tauzin. And then he left in October, I think?
    Mr. Winnick. Yes, thereabouts.
    Chairman Tauzin. You have the memo in front of you now, 
right?
    Mr. Winnick. Yes, I do.
    Chairman Tauzin. This is a memo dated June 5, 2000, to Gary 
Winnick, Tom Casey, and Lod Cook. And it is self-explanatory. 
It has been written about in the press, but it basically 
describes the fact that of the four notable participants in the 
telecom industry niche in which Global Crossing found itself 
that interestingly--in fact, he describes it rather striking--
that all are now willing to have its ownership change, read 
acquired.
    He goes on to say that ``The stock market can be fooled but 
not forever. And it is fundamentally insightful and always 
unforgiving of being misled.'' And in the very next sentence, 
``The stock market is every day realizing more the perilousness 
of the access transport strategy over the long term despite 
very profitable outcomes in the near.''
    On page 2, he describes a plan of action to you. And the 
third part of his plan of action is to talk publicly every day 
about how better run Global Crossing is, and then meet or 
exceed near-term financial expectations. And, No. 4, without 
looking like we are shaking our booty all over the world to 
sell ourselves quickly to whichever of the six possible 
acquires offer our shareholders the highest value.
    This is a memo basically advising you that this company 
doesn't have a long future, and that you ought to be thinking 
of--while you are telling the public everything is okay, doing 
everything you can to sell. Is that right?
    Mr. Winnick. No, that is not what it says.
    Chairman Tauzin. Well, tell me what it says.
    Mr. Winnick. Well, first of all, this is a cover-your-booty 
memo, okay, as opposed to----
    Chairman Tauzin. This is a what?
    Mr. Winnick. This is a cover-your-booty memo.
    Chairman Tauzin. Could you explain that to us?
    Mr. Winnick. Okay.
    Tom Casey had come to me sometime before this June 5 date 
to tell me that Leo Hindery had gone to a major investment 
banking firm--I will leave them unnamed for now--to talk to 
them about selling the company.
    Chairman Tauzin. Okay.
    Mr. Winnick. And that was unauthorized. Obviously, one 
should have that discussion with its co-chairman, vice 
chairman, and, I would assume, the board of directors. So when 
he was confronted by that, he wrote this memo.
    Chairman Tauzin. And what did you do when you got this memo 
from him?
    Mr. Winnick. Well, I think Leo has--he is obviously very 
gifted in terms of his writing capability. But what this memo 
basically said to me is the following. ``I am a deal guy. Let 
me sell your company. I am selling--trying to sell Global 
Center,'' which we did. We had sold it to Exodus for about $6 
billion in stock during that summer timeframe. ``And let me 
sell it. Let me sell it for $45 to $50 a share,'' I think he 
indicated in his memo here.
    There are, in his view, a number of people out there who 
would be interested. The world is getting competitive. And, 
frankly, I think Leo is a very competent, very clever fellow, 
but I don't think he had any passion to want to run this 
company. And I think this memo was nothing more--an attempt to 
say what he felt. However----
    Chairman Tauzin. Did you take it seriously?
    Mr. Winnick. Oh, yes, we had a discussion on this.
    Chairman Tauzin. What did you tell him?
    Mr. Winnick. I said, ``Leo''--first of all, we had already 
known he went to a major investment banking firm on this. And 
we confronted him with that, and he kind of said, ``Well, I am 
having some discussions.'' And I said, ``Look, if you can get 
an indication for this company of $45 to $50 a share''--I 
assumed the stock was trading at a significant discount from 
that at the time--``we will take it to the board. But we are 
not formally putting the company up for sale.''
    Chairman Tauzin. Okay. He sent you another memo--I have 
just handed out a copy of it--dated June 14, 2000. If you will 
look at it real quickly. And he goes on to say, ``I thought at 
length about how to best describe my plan for the next phase of 
the company, and would propose a brief summary of the following 
for your approval.''
    He says, ``Keep it quiet, confidential. The best way to 
upset this plan is to talk about it on the outside. Spill the 
beans and we spill every possible opportunity. Run the company 
as best you can. Have these other guys give you a hand.'' And 
then there are seven potential buyers. In effect, ``Abandon all 
other strategic issues over the next several months.''
    He is obviously following up on his initial suggestion to 
you. Did you receive this memo?
    Mr. Winnick. Chairman Tauzin?
    Chairman Tauzin. Yes.
    Mr. Winnick. Going back to the June 5 memo for a second----
    Chairman Tauzin. Yes.
    Mr. Winnick. [continuing] I clearly take issue with that 
the stock market can be fooled, but not forever, and always 
unforgiving of being misled. He was the CEO of the company. We 
also had a shareholder meeting, I believe, that month. So this 
memo would be very disingenuous for a CEO to address a 
shareholder meeting and not tell them that the company is 
misleading the investors, which I don't believe is true at all.
    Chairman Tauzin. So you don't deny you said it. You just 
take issue with----
    Mr. Winnick. No. It is in the----
    Chairman Tauzin. It is in a memo to you.
    Mr. Winnick. But his memo really just deals with the 
redundancy and the competitive environment that was developing 
in the industry with Level 3 global aspirations and 360 
networks.
    Chairman Tauzin. I understand that. I understand that.
    Mr. Winnick. I think that is what his memo relates to.
    Chairman Tauzin. I understand that. But the point is that, 
as early as June 2000, at least one of your CEOs is advising 
you that the company may be in some real trouble up ahead, and 
you had better be thinking about selling.
    Mr. Winnick. No, I----
    Chairman Tauzin. You just didn't buy it.
    Mr. Cohrs. He was also opining that the value was $45 to 
$50 per share.
    Chairman Tauzin. I am sorry. Mr. Cohrs?
    Mr. Cohrs. Mr. Hindery was also opining that the value of 
the company was $45 to $50 per share.
    Chairman Tauzin. Yes.
    Mr. Cohrs. Which is not at all consistent with some view 
that the company was about to disappear.
    Chairman Tauzin. Okay. A year later, April 2001 now, we 
have the minutes of the manager's meeting, which you, Mr. 
Winnick, say again you didn't hear about, Casey didn't apprise 
you of.
    Mr. Winnick. Well, I am saying I don't have----
    Chairman Tauzin. A memory of it.
    Mr. Winnick. That is correct.
    Chairman Tauzin. Did you watch last week's hearing, by the 
way?
    Mr. Winnick. Well, interesting enough, I tried to watch 
what I could on Real Networks, but they have a bad carrier 
provider, so it was out a lot.
    Chairman Tauzin. That is life for you. Well, did you hear 
Mr. Joggerst when I asked him if someone told Tom Casey 
something, was that equivalent of making sure Gary Winnick knew 
it, and he said absolutely? That telling Tom Casey something 
was the equivalent of telling Gary Winnick that? Did you hear 
that part?
    Mr. Winnick. Well, after very aggressive questioning, I 
heard it. Okay?
    Chairman Tauzin. So you think I forced him to say that?
    Mr. Winnick. And he said--please let me finish, sir.
    Chairman Tauzin. Okay.
    Mr. Winnick. And he said, ``I assume it.'' Now, he didn't 
know it, but he was very aggressively questioned by your 
committee to try to make that connection.
    Chairman Tauzin. Well, I was just asking about your 
relationship. I asked him if you and Tom Casey were very close. 
He said yes, and you spoke every day. And I simply said, 
``Would telling Tom Casey something be the equivalent of 
telling Gary Winnick?'' He said absolutely, according to the 
relationship, that is what he assumed.
    Mr. Winnick. Well----
    Chairman Tauzin. That is a bad assumption?
    Mr. Winnick. That is a very bad assumption.
    Chairman Tauzin. Okay.
    Mr. Winnick. And----
    Chairman Tauzin. So you said, again, that the management 
meeting on April 16 in which Tom indicated ``we do not have 
room for more reciprocal deals'' is something you have no 
recollection of, and Tom Casey never made that clear to you?
    Mr. Winnick. I just don't have any recollection one way or 
the other on that.
    Chairman Tauzin. How much did you engage--what role did you 
play in these IRUs, these reciprocal transactions that Tom 
Casey complained about on April 16, the company had no more 
room for?
    Mr. Winnick. Oh, I don't--I mean, I don't know what the 
question is.
    Chairman Tauzin. Let me try to restate it.
    Mr. Winnick. Okay.
    Chairman Tauzin. What was your role in these reciprocal 
transactions? Were you aware of them? Did you participate in 
them? Did you help make them happen? Were you part of a team 
that tried to get these reciprocal deals constructed? Or was 
this Tom Casey's problem, or somebody else's problem, and they 
never told you about it?
    Mr. Winnick. Well, the----
    Chairman Tauzin. Let me----
    Mr. Winnick. Okay.
    Chairman Tauzin. Let me get something clear, Mr. Chairman. 
Under our rules, attorneys may be here to advise their client 
upon request, but lawyers cannot coach their witnesses, the 
clients, on the----
    Mr. Winnick. I don't need to be coached.
    Chairman Tauzin. Well, I would hope not. I would just 
remind----
    Mr. Winnick. But I don't need to be coached on this.
    Chairman Tauzin. I thank you, sir. Let me ask you again: 
how involved were you in these IRUs, in pursuing them or 
negotiating them?
    Mr. Winnick. Well, let me take that in some pieces for 
you----
    Chairman Tauzin. Okay.
    Mr. Winnick. [continuing] if I may. I would certainly be 
involved in those IRU or reciprocal transactions that require a 
certain dollar threshold of approval. And as I talked about, I 
was very much involved in the 360 approval process. There was 
another transaction that was done at the same time, and then 
there was a Qwest transaction that Tom had come to me and asked 
for my approval on, even though I found out afterwards, in 
preparation for this, that it didn't even require my threshold 
approval. But I did ask for the business case on it, which had 
been presented to me.
    I would, on occasion, talk to the sales team, toward the 
latter part of the close of the quarter. Whether I initiated 
the call, or it was David Walsh and--was hosting a call and 
might come on, and just get a kind of top-level view of sub-C, 
principally sub-C IRU transactions in the hopper without any 
specificity to what they were or the genetic makeup of the 
reciprocal transaction. That part of it was not at that level 
of discussion with me.
    I also tried on a number of occasions, one in particular, 
to try to enlist the support of our board of directors, which 
was made up of some very prominent people, who had I think a 
very unique reach in terms of corporate leaders, not just U.S. 
but other places, to help us from a top level down get in the 
door, so we could then sell network services, not IRUs and 
wholesale, but network services.
    So I was involved at times. I wasn't involved on a regular 
basis, but I put my nose into it every now and then.
    Chairman Tauzin. Were you involved with the Qwest deal in 
June 2001?
    Mr. Winnick. I wasn't involved in the creation of the deal. 
I signed the deal, because it had been presented to me by Tom 
Casey saying it was a deal he wanted to do, it met all of the 
business conditions, he had all of the necessary sign-offs, and 
even with that I asked Tom to get me the business case. I 
wanted to see it.
    Chairman Tauzin. How about Flag?
    Mr. Winnick. Not that I recall.
    Chairman Tauzin. How about China NetCom?
    Mr. Winnick. No.
    Chairman Tauzin. Velocita?
    Mr. Winnick. No.
    Chairman Tauzin. I have a memo at Tab 32. Would you refer 
to it, Mr. Winnick? By the way, how about SingTel? Were you 
involved in that one? This is one that didn't go through, but I 
understand there was heavy negotiations on it.
    Mr. Winnick. Well, no, I wasn't involved in any business 
deal with SingTel, although I did go to Singapore when our 
cable--actually, when Asia Global Crossing signed their joint 
venture with Singapore Technologies. But I wasn't involved in 
the creation of----
    Chairman Tauzin. Tab 32----
    Mr. Winnick. [continuing] the deal.
    Chairman Tauzin. Tab 32 is a confidential memo from Jim 
Gorton to Gary Winnick.
    Mr. Winnick. Yes.
    Chairman Tauzin. Dated June 19. And it reads as follows, 
``Gary, we have asked Patrick Joggerst to get us a list of 
targeted customers for our board members to help us at your 
suggestion.'' So that is what you are talking about where you 
organized the board to go out and open the doors for some of 
these deals. ``Patrick rightly believes the only deals that we 
should focus on at this critical moment are the IRU deals on 
the table.'' Is that right?
    Mr. Winnick. This is very much out of sequence. If I may 
take a moment here, Chairman Tauzin----
    Chairman Tauzin. Sure.
    Mr. Winnick. [continuing] just to kind of tell you what 
happened here.
    Chairman Tauzin. No problem.
    Mr. Winnick. Because I think it is important----
    Chairman Tauzin. You understand my chairman gets on me when 
I use up too much time.
    Mr. Winnick. Please give an extra minute or 2. Let me----
    Mr. Greenwood. Barely, Mr. Chairman.
    Chairman Tauzin. Okay. Because I want to ask you a few 
other questions about other memos.
    Mr. Winnick. Okay. In the May board meeting, I believe it 
was, May or June board meeting of 2001, I had asked Tom Casey 
and John Legere, who were--John was the CEO of Asia Global 
Crossing at the time, and John--and Tom Casey the CEO of Global 
Crossing.
    If they could bring their network service people to the 
board, where they could both have their people make 
presentations to our directors, and showing them the unique 
capability that this network that was close to completion would 
create in terms of opportunities for our company as this--as we 
were evolving from a wholesale to a more service model.
    At the end of the presentation, I think most of the 
directors, if not all, were pretty overwhelmed with what had 
been created, myself included, because I never really got to 
see this presentation. So it was pretty unique.
    That stimulated a conversation with directors, if they 
would find a way and be willing to help us get a foot in the 
door with the major multinational type corporations and 
enterprise customers--you know, the major auto companies, the 
advertising companies, the food companies, the lodging 
companies, and that type of thing, because many of our 
directors had that type of reach. And they were all very 
willing to do so.
    And I asked Lod Cook, my co-chairman, if he would put a 
book together, a list of prospects, circulate it to directors, 
and have the directors come back and tell us who and where they 
might have a relationship, and then we would organize the next 
level of that pursuit of business.
    This memo is probably a result of that discussion, but it 
was not the intention of me or Lod Cook to have our directors 
go out and sell wholesale services and IRUs. Their intention 
wasn't to sell the specific product. They weren't selling 
shoes. They were going to just try to get us the customer in 
the store. Okay?
    So this thing is out of context, but----
    Chairman Tauzin. Let me put one in context. Tab 31. This is 
a confidential memo from David Walsh to Tom Casey, and with 
copies to yourself and others. There is a message from Nancy 
Davidson, on behalf of Gary Winnick, to Tom Casey. Subject: 
Tom, I spoke with Jeff Skilling, and there are three people 
vying for the business. We are one of them. They are looking to 
do something here by quarter end. I indicated 300 for assets, 
900 for reciprocal business,'' right? That is one of these 
trades, right? Indicated that people may want to do it. You 
were involved with that one, were you not?
    Mr. Winnick. Involved exactly as this states.
    Chairman Tauzin. You didn't do that deal, did you?
    Mr. Winnick. No, that deal was rejected.
    Chairman Tauzin. But I have another memo at Tab 54 from Tom 
Casey to you.
    Mr. Winnick. By the way, Chairman Tauzin----
    Chairman Tauzin. Go ahead. I am sorry.
    Mr. Winnick. [continuing] on this memo 31, which I happened 
to read today in the newspapers, the----
    Chairman Tauzin. Mr. Winnick----
    Mr. Winnick. [continuing] I was asked by David Walsh----
    Chairman Tauzin. Mr. Winnick, I want to make a point for 
the record. We invited you to come and discuss all of these 
memos with us, with our investigators, time and time again. I 
believe you offered to do this only with the condition that you 
wouldn't have to come testify, but you understand we would have 
loved to discuss all these memos with you in private at an----
    Mr. Winnick. No, I am not disputing it.
    Chairman Tauzin. [continuing] but we didn't have that 
opportunity.
    Mr. Winnick. I am not disputing it. But----
    Chairman Tauzin. Right.
    Mr. Winnick. [continuing] you know, for my wife to get up 
this morning and to look at the newspapers----
    Chairman Tauzin. Right.
    Mr. Winnick. [continuing] and to see things here, it was 
just a little unsettling, sir, before I came in, but----
    Chairman Tauzin. Well, it is a little unsettling for us 
when we--when people won't come in and just visit with us and 
talk about these things either. But thank you, sir.
    Mr. Winnick. I was asked by David Walsh--and I am sure it 
came about through some discussion I had with David or in some 
meeting somewhere--that David was working on a very sizable 
transaction with Enron, and he asked me if I knew anyone there, 
and I told him I had just met Jeff Skilling at some industry 
conference for, you know, just walking by and saying hello. And 
I said I would call him, and that is all I did here.
    And I think I may have actually called him again, which he 
may not have returned the call, but this Enron transaction that 
the company had ultimately rejected in the third quarter of 
2001, David Walsh could be better----
    Chairman Tauzin. Yes. It was rejected. Tab 54, if you will 
go to it.
    Mr. Winnick. Okay.
    Chairman Tauzin. This is a memo from Tom Casey to you. It 
looks like his handwriting, apparently. It is a handwritten 
message addressed to GW, and it reads as follows, ``Ken Lay 
left a voice mail saying he had left--he had sent an executive 
summary of the fund. He is willing to think creatively.'' It 
says, in effect, ``He is in New York today and could meet if 
you have the time and interest in talking.'' Did you receive 
this memo?
    Mr. Winnick. I don't remember seeing this memo, but I do 
remember having a visit with Ken Lay in the summer of that 
time, with Lod Cook and Tom Casey, when Ken Lay was--then 
became the CEO of the company I guess around that time.
    Chairman Tauzin. But it was in reference to this proposed 
deal?
    Mr. Winnick. I am sorry?
    Chairman Tauzin. Was it in reference to this proposed deal 
that you had discussed with Jeff Skilling?
    Mr. Winnick. I think so, but, again, I don't--I don't have 
a date.
    Chairman Tauzin. Yes, I don't have a date on it either. 
That is why it was confusing to us.
    Mr. Cohrs. Mr. Chairman, if I may, there is no date here. 
This refers to Bob Anunziata.
    Mr. Greenwood. Move the microphone over, Mr. Cohrs.
    Mr. Cohrs. This memo, at the bottom, there is no date on 
this memo. It refers at the bottom to ``Bob,'' which is a clear 
reference to Bob Anunziata, who was the CEO, and his term as 
CEO ended in, as I recall, spring of 2000 or something--the 
point is, this memo is from a much earlier time period. It had 
nothing to do with----
    Chairman Tauzin. Now many CEOs did you have at the company? 
Because we have had----
    Mr. Winnick. Which year?
    Chairman Tauzin. I know. How many do you go through, Mr. 
Winnick?
    Mr. Winnick. Go through?
    Chairman Tauzin. Well, how many have you had? How many----
    Mr. Winnick. Was that a leading question?
    Chairman Tauzin. No, I apologize. How many CEOs did you 
have during this period?
    Mr. Winnick. Let us see. Four or five approximately. 
Chairman Tauzin?
    Chairman Tauzin. Yes, I want to move to another tab.
    Mr. Winnick. But just going back to this----
    Chairman Tauzin. Go ahead.
    Mr. Winnick. [continuing] this Ken Lay memo----
    Chairman Tauzin. Yes.
    Mr. Winnick. [continuing] I may be out of time on this, and 
I don't remember this memo, but I did have a meeting with Ken 
Lay and Lod Cook and Tom Casey around the time after Skilling 
left the company----
    Chairman Tauzin. Ah.
    Mr. Winnick. [continuing] relating to a transaction that 
David was----
    Chairman Tauzin. So your testimony is you did meet with Ken 
Lay reference to this deal you talked about with----
    Mr. Winnick. No, not to this deal, just to----
    Chairman Tauzin. Just to meet with him.
    Mr. Winnick. Ken Lay was in New York. Lod knew him. Lod 
invited him up to the office, and we met for the first time. 
And there wasn't any specific transaction done, just a, you 
know, meet and greet.
    Chairman Tauzin. Let us go to Tab 42.
    Mr. Winnick. Which tab?
    Chairman Tauzin. It is the August 13--42--August 13, 2001, 
set of e-mails, I suppose. And this is from David Walsh, again, 
to Fitzpatrick, Brian; Joggerst, Patrick; copies to yourself 
and others, to Casey, to Lod, to Winnick, to Gary, etcetera. 
And it is entitled ``Big Deal Battle Plan.'' Patrick and Brian, 
``We need to put a battle plan together on the accounts listed 
below. Winnick wants to make sure we are putting the right 
amount of energy in the right places. We need an overall plan 
for each of the following A accounts,'' and then it lists a 
whole bunch of them, including WorldCom, which has--assisted by 
Gary Winnick and John Legore.
    Mr. Winnick. Right.
    Chairman Tauzin. Explain this e-mail to us.
    Mr. Winnick. Sure.
    Chairman Tauzin. Again, are you--what kind of battle plan 
were you putting into effect, and what were these accounts?
    Mr. Winnick. Well, these were large telephone companies, 
both what we refer to as RBOCs in the U.S. and PTTs outside the 
U.S.--France Telecom, Cable and Wireless, and so forth, 
Deutsche Telecom.
    The battle plan was really, now that the network was 
virtually complete and it was a very unique set of assets, and 
the capital markets are basically drying up around this 
timeframe in terms of access to capital, both for small 
companies and big companies, these companies still had large 
transmission needs.
    The forecast, notwithstanding what may have been happening 
in the financial markets, really hadn't changed. And we wanted 
to be the outsourcing partner for Deutsche Telecom. In fact, 
our company had been working on a transaction with them for 
probably a year or more, where we were hopeful that we might 
get an outsource contract to be their backbone network 
provider.
    I had conversations with Dave Dormand at AT&T, who had been 
installed as the President, with Tom Casey. We met with him for 
dinner one night in New Jersey to try to find a way how we 
could be the overlay to their network. No one had the reach 
that Global Crossing's network had. And if you have it, you 
need to use it. And it was a unique set.
    WorldCom is here because John Legere, who ran Asia Global 
Crossing, didn't know the WorldCom folks. And I had met their 
CFO, Scott Sullivan, and their Director of Operations, Ron 
Beaumont, once or twice before. So John just asked me if I 
would help reach out to them. But it was--again, it was an 
introduction.
    These were the type of customers that we wanted our network 
to overlay. Instead of them going out and building fiber and 
cable stations and undersea cables, they didn't have to do 
that. They could come to us. It was one-stop shopping.
    Chairman Tauzin. Let me read the list--France Telecom, 
C&W--Cable and Wireless--Telephonia, TeleGlobe, Bell South, 
Verizon, WorldCom, and Deutsche.
    Mr. Winnick. Right.
    Chairman Tauzin. Were these potential swaps?
    Mr. Winnick. I don't know specifically whether there was 
any reciprocal nature to the transactions. I just don't--I 
don't know.
    Chairman Tauzin. You don't know? Is that your testimony?
    Mr. Winnick. I don't remember. It is possible that might 
have been some of it.
    Chairman Tauzin. Was SingTel a potential swap?
    Mr. Winnick. SingTel?
    Chairman Tauzin. Yes.
    Mr. Winnick. As opposed to SingTech?
    Chairman Tauzin. We have SingTel Cable. Tab 25, if you will 
go to that.
    Mr. Winnick. Oh, okay.
    Chairman Tauzin. It is a memo from John Legere to Gary 
Winnick, and it is--it includes----
    Mr. Winnick. Yes, SingTel.
    Chairman Tauzin. [continuing] exchanges in which you are 
basically saying, ``I will be meeting with B.G. Lee tomorrow 
morning. Send additional information and comments for Nancy to 
fax to me.'' Was that a swap--a potential swap deal? I know it 
didn't go through, to my understanding.
    Mr. Winnick. No, I don't--I don't think there was any deal 
there. It was just I was in Singapore----
    Chairman Tauzin. Okay.
    Mr. Winnick. [continuing] around this timeframe. I was 
there with the former Ambassador to Singapore, who knew B.G. 
Lee, who was making the introduction for me.
    Chairman Tauzin. Okay.
    Mr. Winnick. And it was just, you know, a meet-and-greet 
and kind of, ``Is there a way our companies could do business 
with each other?''
    Chairman Tauzin. Tab 30. This is a message, again, 
confidential from Brian Fitzpatrick to David Walsh, but it is 
entitled ``All Hands On Deck.'' And it reads to Patrick and 
Brian, ``Tom will be traveling to Beverly Hills tomorrow to 
update Gary and Lod on the outlook of the quarter. Right now--
right after today's call, could you prepare the update. I would 
like the report to be organized as follows: completed, 
contractually obligated, single deals, primary targets.'' And 
then strategic big deals are listed WorldCom, Velocita, 
Emergia, China NetCom, TeleGlobe, Flag, and Qwest. Was that a 
list of potential swap deals as well?
    Mr. Winnick. This memo is not addressed to me. David Walsh 
is here. Probably perhaps he can put some better light on it.
    Chairman Tauzin. But do you know whether or not those deals 
were potential swap deals? Just to your knowledge.
    Mr. Winnick. I can't say at this point.
    Chairman Tauzin. It also says, ``We could use some help 
from Gary and Tom on the Pay Tech deal.'' Did you assist in 
that negotiation?
    Mr. Winnick. Pay Tech is a small, very well run phone 
company in Rochester. I have an investment in the company. My 
understanding is that company had been doing business with 
Frontier for some time in terms of the U.S. network. And I was 
asked by somebody if I would reach out to the CEO, in terms of 
him having an interest in buying capacity. I don't believe 
there was any swap or reciprocal nature to anything there.
    Chairman Tauzin. Okay. Tab----
    Mr. Winnick. And it didn't happen.
    Chairman Tauzin. I am sorry. Tab 32, this is dated June 28, 
2001. This is a confidential memo from Virginia Covine.
    Mr. Winnick. I am sorry. Which one? 32?
    Chairman Tauzin. Tab 32.
    Mr. Winnick. 32?
    Chairman Tauzin. Yes.
    Mr. Winnick. Okay.
    Chairman Tauzin. And the subject is a Qwest conference call 
in which you were involved, apparently, along with Mr. Cohrs, 
Mr. Gorton, Mr. Casey, Mr. Walsh, and it deals with the--
apparently, a potential deal with Qwest, is that right?
    Mr. Winnick. Chairman Tauzin, I don't think we are on the 
same page.
    Chairman Tauzin. I am sorry? I have Tab 32. Is that 
correct? What is it? It is 37.
    Mr. Winnick. Okay.
    Chairman Tauzin. Seven looks like two here. I apologize. It 
is a confidential memo from Virginia Covine regarding a Qwest 
conference call in which you purportedly were involved with 
Messrs. Casey, Walsh, Gorton, and Cohrs. Is that correct? Do 
you recall that call?
    Mr. Winnick. Honestly, I don't.
    Chairman Tauzin. Were you involved in the negotiations on 
Qwest personally?
    Mr. Winnick. No.
    Chairman Tauzin. You were not?
    Mr. Winnick. I don't believe so. I mean, you know, the 
definition of ``negotiation,'' as I indicated to you before, 
Tom Casey did come to me with a Qwest deal and asked me to sign 
it.
    Chairman Tauzin. And you would sign off at the end on all 
of these when they were finally negotiated, right?
    Mr. Winnick. No. Actually, quite the contrary.
    Chairman Tauzin. What happened?
    Mr. Winnick. There were some deals that I wouldn't and 
didn't support doing.
    Chairman Tauzin. Well, I understand. But I am saying they 
had to get your signature, your approval at the end?
    Mr. Winnick. Only if it reached a dollar threshold.
    Chairman Tauzin. A dollar threshold.
    Mr. Winnick. Yes.
    Chairman Tauzin. But here is my question at the end of all 
of this. All of these documents seem to indicate at least that 
you were giving instructions or commands, ``all hands on 
deck,'' or, ``here is the battle strategy to get these deals 
done,'' that you actually get named on some of these memos as 
being responsible for one or the other of the contacts. All of 
this between June and August.
    All of this is occurring in the third quarter following the 
series of dire warnings that we saw--that I quoted to you 
earlier when we talked, that you say you never heard from Tom 
Casey or from anyone else in the company, not the least of 
which was an April 16 manager's meeting which said, ``We can't 
do any more of these deals. We just can't do any more.''
    And yet there is a host of information that literally puts 
you and the other managers of this company on a track where you 
are desperately--aggressively at least, not desperately--
aggressively trying to get these deals, many of which are 
swaps, when according to the manager's meeting at least Tom 
Casey told everybody, ``We can't do any more of these deals.'' 
And I am looking for an explanation.
    Mr. Winnick. Okay. I would be happy to, and I think it is a 
good point. But I think it is a very big stretch.
    Chairman Tauzin. Try it.
    Mr. Winnick. In June 2001, Jim Gorton had determined that 
there was some information that was being generated by our 
financial staff that would force the window to be closed 
prematurely.
    Chairman Tauzin. Window on what?
    Mr. Winnick. Window on stock sales by executives.
    Chairman Tauzin. All right.
    Mr. Winnick. I was very upset about that, because I had 
known I had sold stock a few weeks before.
    Chairman Tauzin. And explain that just a bit for us. What 
did that mean?
    Mr. Winnick. What it means is that no other executives--no 
executives of the company would be able to sell any stock, 
because it had been determined that even though it was 
preliminary in nature that there was going to be a variance 
from what Tom Casey and Dan Cohrs felt was their appropriate 
guidance.
    Chairman Tauzin. So you----
    Mr. Winnick. Please let me finish my point.
    Chairman Tauzin. But explain----
    Mr. Winnick. This is very--it is very important to get 
this.
    Chairman Tauzin. [continuing] who was threatening to close 
the window early?
    Mr. Winnick. It was threatened. It was----
    Chairman Tauzin. What was it, exactly?
    Mr. Winnick. Jim Gorton just came up to a meeting and said, 
``I am closing the window.''
    Chairman Tauzin. Wow. Okay. And you had just sold some 
stock.
    Mr. Winnick. Well, I sold stock a few weeks before.
    Chairman Tauzin. Right. Maybe Jim Gorton can help us with 
that.
    Mr. Winnick. Can I just finish my point, because----
    Chairman Tauzin. Go ahead, please.
    Mr. Winnick. You see in this June period a little bit 
more--the third quarter, a little bit more activity?
    Chairman Tauzin. Yes.
    Mr. Winnick. Because if you look back in prior periods you 
will not see----
    Chairman Tauzin. Quite as much.
    Mr. Winnick. Well, you will see very little activity----
    Chairman Tauzin. Okay.
    Mr. Winnick. [continuing] on my part in sales.
    Chairman Tauzin. Okay.
    Mr. Winnick. I wanted to know what was going on. And I 
requested from Tom Casey that I wanted to go back, and I wanted 
to meet with David Walsh, I wanted to meet with another senior 
executive in sales, and I wanted to meet the person who was 
handling these local access--and I felt that my presence was 
needed because the company was concerned it would not be able 
to meet its numbers during this June period--I mean, in--not 
the June period but the--I guess it was in June it came out.
    And that is why you see me having a little bit more 
activity and a little bit more involvement and trying to be a 
little bit more creative about, how do we take this precious 
asset that has been created, where billions of dollars have 
been spent, and why are we just doing, you know, IRUs or 
reciprocals? Let us become the heart and soul of these 
international networks like Intel is to the computer, or as 
WorldCom is to the internet, and still is to the internet.
    How could we be this backbone transmission provider in a 
global marketplace? And that is what more of my involvement was 
like.
    Chairman Tauzin. All right. I am going to have to move, but 
I want to understand this. Mr. Gorton brings you this message 
that they are going to close the window a little early. Is that 
the first you hear from anybody that the company may not make 
its numbers? Where did you hear that from?
    Mr. Winnick. I heard it from Jim Gorton.
    Chairman Tauzin. He is the only one who told you that? Tom 
Casey never told you that?
    Mr. Winnick. I have said it a half a dozen times today, 
Chairman Tauzin, that the--I specifically went to Tom, and I 
had my agents go to Tom and to Jim Gorton prior to the sale to 
make sure everything was done according to procedure.
    Chairman Tauzin. Mr. Chairman, I realize time is short, and 
I apologize. But I think it is critical we hear from Mr. Gorton 
on this.
    What exactly happened here? What changed between right 
before the sale on May 23 and in--right immediately in June? 
Now you are telling him we are going to close this window 
because we have got problems. What happened?
    Mr. Gorton. In New York, at a management meeting--and I 
believe it was June 4, it was a Monday or a Tuesday, June 4, 
June 5--Tom Casey sometime in the early part of that management 
meeting said that the company was going to have to take a 
restructuring charge or head count reduction or real estate 
consolidation, and he said, ``There is a problem with recurring 
revenue that may make us--cause us to have to reduce our 
guidance to the street down for the rest of the year.''
    Chairman Tauzin. Is that the first time you heard that?
    Mr. Gorton. That is the first time I heard that we were 
going to have to revise our guidance down to the street, yes, 
sir.
    Chairman Tauzin. And you reported directly to Mr. Winnick 
this problem?
    Mr. Gorton. I don't recall that, actually. Instead, what I 
did is I--it was either the next day or the next day I put in a 
call to--because I was in New York, and my office was out in 
Los Angeles. I put in a call to my assistant general counsel, 
Liz Greenwood, who was the person who generally kept charge of 
the window period, and I informed her that I felt we should 
close the window. And so I don't recall----
    Chairman Tauzin. You don't recall telling that directly to 
Mr. Winnick?
    Mr. Gorton. I don't recall telling Mr. Winnick that 
directly. I did have a conversation with Mr. Winnick about that 
at the board meeting which took place the following Wednesday, 
which was June 13.
    Chairman Tauzin. Mr. Winnick----
    Mr. Winnick. Yes, sir.
    Chairman Tauzin. [continuing] do you want to clarify this? 
When did you first hear from Mr. Gorton that this problem 
existed?
    Mr. Greenwood. This will have to be the last response.
    Chairman Tauzin. This will be the last one. I promise.
    Mr. Winnick. You know, my--the best of my recollection is I 
do recall Jim coming over to my offices, which were not in the 
Global Crossing building, informing--it may not have been Jim. 
It may have been somebody else, but I seem to remember it being 
Jim--telling Tom Casey and myself, and I believe Liz Greenwood 
was with Jim, but I could be wrong on this--telling us that 
they had to close the window, that they had some variance.
    I remember being very upset, rightfully so. I also remember 
Tom being visibly shaken, and, in fact, turning white. And that 
is the first I heard this.
    Chairman Tauzin. Thank you, Mr. Chairman.
    Mr. Greenwood. The gentlelady from Colorado.
    Ms. DeGette. Thank you, Mr. Chairman.
    Mr. Cohrs, I think you may have heard me talking earlier to 
Mr. Winnick about the--several things, but one of them was the 
number of players in the global telecommunications market 
around the time of all the transactions. And as I understand 
it, there were really only four or five companies that were 
trying to do these global kinds of networks. Would that be 
accurate? Would you know about that?
    Mr. Cohrs. Yes, I would. I think in terms of actually 
building global networks, there were perhaps three--Global 
Crossing, TyCom, and 360. And the other network builders tended 
to be more regionally focused.
    Ms. DeGette. And that would have included Qwest, right?
    Mr. Cohrs. Yes, they were focused mainly in the United 
States and, well, in Europe----
    Ms. DeGette. But they were also trying to get some 
agreements to take them internationally as well, right?
    Mr. Cohrs. That is correct. Qwest, in fact, purchased 
significant amounts of capacity from Global Crossing.
    Ms. DeGette. Right. Exactly.
    Mr. Cohrs. My understanding was specifically so that they 
could extend their network internationally.
    Ms. DeGette. Right. Exactly. And I know that Global 
Crossing was also interested in doing business with Qwest, and 
I am wondering if you can tell me what Global Crossing's 
business reasons for doing business with a company like Qwest 
might be.
    Mr. Cohrs. Well, Qwest--actually, the original business 
with Qwest was when Frontier purchased an IRU for 12 fiber-pair 
on the Qwest network in the United States. The Frontier network 
that we acquired actually was a network that originally was 
developed by Qwest.
    Ms. DeGette. Okay. But you did additional deals after that 
with Qwest.
    Mr. Cohrs. That is correct. And as----
    Ms. DeGette. And what was the business purpose for those?
    Mr. Cohrs. As time went by, we had various business 
purposes. We would buy capacity from Qwest in some cases to 
extend our network to locations that it didn't reach, to 
connect, you know, new locations.
    In some cases, it was to--in the case of our U.S. network, 
it might have been to add capacity on specific routes or to--
probably in the case of Qwest, it would have been to add some 
redundancy, so that our network would be more robust and have 
better backup capabilities, which made the network more 
reliable as well as more efficient.
    Ms. DeGette. Right.
    Mr. Cohrs. In general, those would be the types of reasons 
we would do business with them.
    Ms. DeGette. And Qwest being one of the bigger players in 
the industry, you were very eager to do deals with Qwest, 
correct?
    Mr. Cohrs. Well, Qwest was an important customer to us.
    Ms. DeGette. Right.
    Mr. Cohrs. That is correct.
    Ms. DeGette. I mean, Robin Wright told us, you know, it was 
important to keep that business relationship going and to do 
those deals. Would that be fair to say?
    Mr. Cohrs. It is certainly fair to say that it--yes, that 
they were an important customer, and we both bought capacity 
from Qwest and sold capacity to Qwest.
    Ms. DeGette. Now, Mr. Perrone, I think you might be able to 
answer this question best. But if someone else has a better 
idea, I would like to hear it. Here is what we were told last 
week--that when you all did business deals, and, in particular, 
what we call swaps, which may not be the correct term of art, 
according to Mr. Cohrs, but that is what we call them--where 
you are doing a business deal with Qwest, your accounting 
methods allowed you to amortize that deal over time because you 
were characterizing it as a service contract.
    So you didn't actually have to have anything delivered, 
because you could characterize it as a service contract. Would 
that be a fair characterization?
    Mr. Perrone. Well, I mean, just broadly speaking, all of 
our contracts were amortized over the life of the contracts.
    Ms. DeGette. Right.
    Mr. Perrone. We did not recognize any revenue up front.
    Ms. DeGette. So you did not recognize the revenue up front, 
correct?
    Mr. Perrone. That is correct.
    Ms. DeGette. But Qwest had an accounting system which 
required it to recognize the income, the sales income, by 
quarter, and so they had to actually have--they had to pay 
money out and get something back for it, right?
    Mr. Perrone. I am not really familiar with exactly what----
    Ms. DeGette. Well, are you familiar with the Qwest deals 
with Global Crossing?
    Mr. Perrone. Generally speaking, yes.
    Ms. DeGette. I mean, isn't it true that--I mean, didn't you 
know that when you did a deal with Qwest they wanted to book 
the income at the end of each quarter, and it had--so they had 
to characterize the accounting transaction that way, as a sale?
    Mr. Perrone. Generally speaking, yes.
    Ms. DeGette. Okay.
    Mr. Perrone. Yes.
    Ms. DeGette. And, Mr. Walsh, did you know about that 
distinction?
    Mr. Walsh. I really didn't pay much attention to----
    Ms. DeGette. Can you put the microphone up to your----
    Mr. Walsh. Yes. I really didn't pay much attention to our 
customers' accounting requirements and rules.
    Ms. DeGette. Did Robin Wright or anybody else tell you 
about that?
    Mr. Walsh. Occasionally, you would hear that there was a 
revenue recognition issue. That could be voiced in a sales 
call. But we didn't spend a lot of time trying to understand 
the rules and the accounting rules in the sales organization.
    Ms. DeGette. Why not?
    Mr. Walsh. From our perspective, in selling something, we 
always add financial and legal support to ensure that all our 
transactions were proper. But in terms of trying to understand 
the financial rules, and how they account for things, at least 
our customers, that would be of little interest to us.
    Mr. Cohrs. Congresswoman DeGette, may I clarify the record 
on this? The facts are that in the early part of 2001, it was 
not disclosed by Qwest that they were booking sales type lease 
revenue. And I believe the first disclosure of that came in the 
Morgan Stanley research reports that were published in the 
summer of 2001.
    Ms. DeGette. When would that have been?
    Mr. Cohrs. I don't recall the exact date, but I can 
remember that Morgan Stanley research analysts--and this was 
discussed at last week's hearing--published reports that 
analyzed this issue. Prior to that, it was not known that----
    Ms. DeGette. Well, once you knew it, did it change the way 
you dealt with Qwest?
    Mr. Cohrs. No.
    Ms. DeGette. Okay. Mr. Walsh, you might want to take a look 
at Tab 35 in your notebook.
    Mr. Cohrs, you might want to look at it, too.
    Mr. Cohrs. I am sorry. Which tab is it? 35?
    Ms. DeGette. This is a memo from Robin Wright to Mr. 
Joggerst. And, Mr. Walsh, you are copied on this memo. And what 
it says is, ``I wanted to alert you to''--and this is in June 
2001. Okay? June 25.
    ``I wanted to alert you to an issue that came up this 
evening. It had to do with portability. Here is the deal. In 
our deals with Qwest, any capacity dark fiber that we buy from 
them has to be activated in order for them to get revenue 
recognition. Since in many cases we buy a bucket of services, 
they just activate what they can, and we, in turn, have the 
right to port that to what we want once we decide what we want. 
We have always agreed that the value of that is what we paid 
for it, not fair market value.''
    And then it goes on. Do you recall seeing that memo, Mr. 
Walsh?
    Mr. Walsh. I don't recall specifically seeing this memo. 
But I do recall this issue being brought up.
    Ms. DeGette. Tell me how you recall it being brought up.
    Mr. Walsh. I don't specifically remember the forum for it, 
but I do remember that portability with Qwest was something 
that was an issue, and----
    Ms. DeGette. And why was it an issue?
    Mr. Walsh. It is an issue because when you buy services 
ahead of demand, let us say, buy a product that you don't know 
exactly who you are going to sell it to and what they are going 
to need immediately, you like to have a feature called 
portability. What that allows you to do is to turn that back in 
exchange for something you might need.
    Ms. DeGette. Right.
    Mr. Walsh. So that flexibility was always something that we 
were interested in as a buyer.
    Ms. DeGette. And that is the nub of it, because you guys 
wanted portability, so that you could shift what you needed in 
the future, and that was just fine under your accounting system 
because you were amortizing that over time. You didn't need to 
recognize the purchase right then. You could have portability, 
right?
    Mr. Walsh. Yes. Well, I don't know--I didn't spend a lot of 
time on the accounting rules.
    Ms. DeGette. Okay. Well, Mr. Cohrs, would that be----
    Mr. Walsh. But I do know from a business standpoint----
    Ms. DeGette. Hang on. Would that be right?
    Mr. Cohrs. I believe that is correct----
    Ms. DeGette. Okay.
    Mr. Cohrs. [continuing] as you described it.
    Ms. DeGette. Okay. But--oh, go ahead.
    Mr. Walsh. But from a business perspective, portability was 
something that we always looked to try to get if we could.
    Ms. DeGette. Right.
    Mr. Walsh. And it was also a sales tool which allowed us to 
compete against other carriers who didn't have the depth of 
product that we had.
    Ms. DeGette. Right.
    Mr. Walsh. So portability was really a strategic weapon 
that we had that we could use to compete----
    Ms. DeGette. Right.
    Mr. Walsh. [continuing] against other carriers.
    Ms. DeGette. But for Qwest, this was a problem because you 
had to--because since they were booking the income at the end 
of every quarter, they had to say they were buying something 
definite, right?
    Mr. Walsh. It is entirely possible. Like I said, I wasn't 
familiar with their accounting rules. I know there is a lot 
of----
    Ms. DeGette. Well, did you become--I mean, did you become 
aware of the issues in this memo dated June 25?
    Mr. Walsh. Yes. And I think our intention was we need 
portability.
    Ms. DeGette. Okay.
    Mr. Walsh. And that has always been our intention.
    Ms. DeGette. Now, did you become aware of side agreements 
that Robin Wright and others entered--oral agreements that 
Robin Wright and others entered into with Qwest, which 
essentially said, ``Even though we are telling you that we are 
selling you this, you can change it in the future''?
    Mr. Walsh. The oral agreements weren't intended to change 
the agreement. We had requested for specific language our legal 
team, and we were not able to get the exact language we needed. 
So we were working toward a compromise on the language.
    And what happened was is since we couldn't get exactly what 
we wanted, the account team in the group from Qwest said that, 
``Look, we will give you our verbal assurances that we are not 
interpreting this some other way. And this isn't intended to 
hurt you or change the spirit of the agreement.''
    So nothing we had from a verbal perspective was meant to 
change our understanding of the written contract.
    Ms. DeGette. But later on in your dealings with Qwest, you 
had trouble with them because they weren't willing to give you 
the flexibility that they had earlier said. Is that true?
    Mr. Walsh. Well, later on, you know, each one of these 
deals has a tendency to take on a life of its own when you 
negotiate them. So the fact that in the next transaction they 
might be looking for different terms is not unusual. In fact, 
that is very customary, for us to have to, you know, make 
modifications and----
    Ms. DeGette. Well, yes, I understand what you are saying. 
But you had problems later in the future with Qwest when you 
tried to get that flexibility.
    Mr. Walsh. Yes. You may be referring to a time after I was 
out of the company. I don't know.
    Ms. DeGette. Oh. That is a good point. When did you leave?
    Mr. Walsh. I left just after the third quarter.
    Ms. DeGette. Of 2001?
    Mr. Walsh. Correct.
    Ms. DeGette. So you don't know of any deals that had that 
problem before that?
    Mr. Walsh. No. I think--are you--I don't know if you are 
referring to the fact when we asked to port, they didn't port. 
I have heard that as an issue. But I wasn't there, I believe, 
when those things happened. And if I was, I was not aware of 
them.
    Ms. DeGette. Okay. Mr. Cohrs, let me ask you, were you 
aware of some of these issues I have been discussing with Mr.--
--
    Mr. Cohrs. No, not at the time, I was not. I was----
    Ms. DeGette. When did you become aware of those issues?
    Mr. Cohrs. In the course of preparing for these hearings 
and dealing with some of these issues in the investigations.
    Ms. DeGette. Okay. If you could take a look quickly at Tab 
40. And it says--I guess it is referring to a newspaper story. 
It is from you to a bunch of people, and it says, ``The story 
is that Qwest is booking sales type lease revenue as GAAP 
revenue,'' which is what I am just discussing with these 
others, ``and not breaking it out. At least we get credit for 
breaking it out. The bad news is this is raising visibility on 
the swap issue.'' What did you mean----
    Mr. Cohrs. I would just like to clarify when I said I 
wasn't----
    Ms. DeGette. Yes.
    Mr. Cohrs. I was talking about these portability issues 
when I said I wasn't aware at the time.
    Ms. DeGette. Okay.
    Mr. Cohrs. But I was certainly aware of this.
    Ms. DeGette. Sure. All right. Well, tell me what you meant 
by that memo.
    Mr. Cohrs. By this memo?
    Ms. DeGette. Yes.
    Mr. Cohrs. Well----
    Ms. DeGette. The bad news is this is raising visibility on 
the swap issue.
    Mr. Cohrs. Well, this is--this really relates directly to 
what I said earlier. Swap is a term that we were very careful 
about how we used publicly. In other words, we were getting 
questions about, are these concurrent transactions? Are they 
swaps? The answer to that was no, they were not swaps. And it 
was sort of an issue in the sense that it was being discussed, 
and analysts and investors were asking us, are these swaps?
    Ms. DeGette. What is the problem with swaps?
    Mr. Cohrs. The answer to that is no. From an accounting 
point of view, they were not swaps.
    Ms. DeGette. Okay. What is the----
    Mr. Cohrs. But it is not----
    Ms. DeGette. What is the problem with swaps?
    Mr. Cohrs. Well, because it is a substantive distinction, 
not just an accounting distinction, because the fundamental 
difference between what I would call a swap and what I would 
call a concurrent transaction is that--is business purpose.
    Ms. DeGette. Right.
    Mr. Cohrs. In other words, when we did these transactions, 
we had business purpose, business cases, justifications, demand 
studies, financial forecasts, etcetera, that were carefully 
prepared and approved that showed that we had good business 
reasons for what we are doing.
    Part of the importance of that was that those business 
cases actually were important for determining the fair value of 
the assets. Without such business cases, it was our policy, it 
was our accounting policy, that these transactions would have 
been booked at carryover basis, rather than fair value.
    Ms. DeGette. I understand completely what you are saying. 
My question is: what is the problem with swaps? Is it that in 
the definition you are talking about and referring to in this 
memo, Tab 40, that the swaps you are referring to would be 
deals that have no business purpose?
    Mr. Cohrs. If the deals we did were ``swaps,'' using that 
term carefully, then you would say--if it was a swap, it would 
be booked at historical value, meaning no revenue or no cash 
revenue. But the reason, if you went back to, why would you 
book it as a swap, the reason for that would have been no valid 
business purpose. But, in fact, we had valid business purpose.
    Ms. DeGette. Right. I understand. I kind of look at----
    Mr. Cohrs. And that is the heart of the issue.
    Ms. DeGette. Exactly.
    Mr. Cohrs. And the heart of why we did not refer to these 
as swaps.
    Ms. DeGette. Right. But, I mean, in my lay person's view, 
there can be legitimate swaps, if there is a legitimate 
business reason, but what----
    Mr. Cohrs. I agree with that. I just would not use the word 
``swaps,'' but I understand what you----
    Ms. DeGette. Because it is taking on a bad connotation?
    Mr. Cohrs. Because it takes--because the word ``swaps'' 
then takes--the word ``swaps'' takes us into the accounting 
definition of swaps, which means if it is an accounting swap, 
it has no valid business purpose.
    Ms. DeGette. Okay.
    Mr. Cohrs. And that is what I am--why I am trying to be 
very careful about not using the word ``swaps.''
    Ms. DeGette. Okay. So getting back to my original question, 
what were you meaning when you wrote this memo? ``The bad news 
is that this is raising visibility on the swap issue.'' Were 
you concerned as of August 3, 2001, about swaps?
    Mr. Cohrs. Well, my concern was that people were confusing 
the issue very much along the lines of the interchange we just 
had. People were saying, ``Aren't these just swaps?'' and we 
were saying, ``No, these are simultaneous purchases and sales 
properly booked at fair value.'' We were relying on the 
accounting policy approved by Arthur Andersen at the time to do 
this accounting. By the way, approved by Arthur Andersen and 
reviewed by every other major accounting firm.
    At this time, my concern was not--had to do with the 
characterization of these transactions as swaps. When this memo 
was written, we had already disclosed in two press releases 
that we were doing the transactions.
    Ms. DeGette. Okay. But then you--but you say, ``The story 
says that Qwest is booking sales type lease revenue as GAAP 
revenue and not breaking it out.'' Is that why you were 
concerned? Was this the first you found out that Qwest was 
doing that?
    Mr. Cohrs. I believe so, yes. I don't recall exactly, but 
this----
    Ms. DeGette. So you don't recall learning earlier from any 
of your sales team that these--that transactions had to be 
characterized in the agreements in a certain way, because Qwest 
had to recognize its income in a certain way?
    Mr. Cohrs. I don't have a recollection of that before this, 
no.
    Ms. DeGette. And so the first--so your testimony is the 
first you found out about that was in August when you saw 
apparently some kind of story?
    Mr. Cohrs. To the best of my recollection, that is--yes, 
that is my testimony.
    Ms. DeGette. Okay. And what happened after this memo as a 
result of your I guess I don't know--the e-mail? I don't know 
what it was. It looks like an e-mail----
    Mr. Cohrs. I believe it was.
    Ms. DeGette. [continuing] to this team of people. Did you 
guys discuss what you should do about the issue of this memo, 
that Qwest is booking sales type lease revenue as GAPP, and 
that it is raising visibility on the swap issue? What did you 
do about that?
    Mr. Cohrs. There was nothing required for us to do.
    Ms. DeGette. Well, I mean, you were concerned about it, 
right?
    Mr. Cohrs. I wasn't concerned about how Qwest was doing 
their accounting. I mean, that is----
    Ms. DeGette. What were you concerned about?
    Mr. Cohrs. Well, as I said, there was a discussion going on 
at the time in which the term ``swaps'' was being misused and 
misunderstood.
    Ms. DeGette. And why were you concerned?
    Mr. Cohrs. And I was concerned because the implication of 
people who--people who--I am talking about Global Crossing now.
    Ms. DeGette. Right. I understand, yes.
    Mr. Cohrs. Because people who referred to our transactions 
as swaps were--by using the word ``swaps,'' were implying that 
the transactions had no good business purpose, in my--in the 
way we were using the term at the time.
    Ms. DeGette. So you felt that they were implying that 
Global Crossing had no business purpose. You weren't worried 
about Qwest.
    Mr. Cohrs. Correct.
    Ms. DeGette. And do you know, or any of the rest of you 
gentlemen know, after August 3, 2001, did Global Crossing take 
any measures in negotiating its deals with Qwest to alleviate 
some of the issues raised here? In other words, to make it--to 
make the transactions make--look more transparent, or to make 
them look like there really was a business purpose, and that 
they weren't just swaps with no business purpose.
    Mr. Cohrs. When we were analyzing the business purpose, we 
were concerned about the business purpose for Global Crossing 
in these transactions.
    Ms. DeGette. Okay.
    Mr. Cohrs. And, you know----
    Ms. DeGette. Let me try again.
    Mr. Cohrs. Qwest accounting and----
    Ms. DeGette. I am just trying to ask a simple question.
    Mr. Cohrs. Yes.
    Ms. DeGette. Did you, or any of the rest of you gentlemen, 
take any action after August 2001 to make sure your contracts 
with Qwest were transparent in terms of what was being bought 
and what was sold, so it was clear that there was this 
legitimate business purpose?
    Mr. Greenwood. This will have to be the last question.
    Mr. Cohrs. It is my understanding that the contracts always 
made it clear what was being bought and sold. I don't--I am not 
aware of any fundamental change that was made.
    Ms. DeGette. Anyone else?
    Thank you, Mr. Chairman.
    Mr. Greenwood. Thank you.
    One quick final question that I would like to address to 
Mr. Gorton. It refers to Tab 41. On August 6, you received a 
letter that was written by Roy Olofson, who----
    Mr. Gorton. That is correct.
    Mr. Greenwood. [continuing] testified last week he views 
himself as a whistleblower. He raised a lot of questions about 
how Global Crossing was conducting its business. He said this 
is a very--in the last paragraph, he said, ``This is a very 
complex issue that needs to be addressed. As an employee and a 
shareholder of Global Crossing, I believe that a thorough 
investigation of all of the facts should be undertaken and the 
appropriate action be taken immediately to correct any 
improprieties. I feel strongly that neither Dan Cohrs nor Joe 
Perrone should be involved in this investigation. Furthermore, 
Joe Perrone and Arthur Andersen may have a conflict of interest 
inasmuch as he was the engagement partner on Global Crossing 
prior to joining the company.''
    I believe last night you told our investigators that you 
were told not to take this letter to the audit committee. Is 
that what you told our investigators last night?
    Mr. Gorton. I had a meeting with----
    Mr. Greenwood. Pull your microphone up close to you, 
please, sir.
    Mr. Gorton. I am sorry. We had a--after receiving this 
letter, I think I got this letter on a Monday afternoon, and 
there was going to be an audit committee meeting on the 
Wednesday, which was 2 days later. And there was a meeting, and 
I can't recall who the people were because--the reason I 
remember is I asked the question whether this letter was going 
to be presented at the audit committee meeting.
    I had only been to one audit committee meeting in the 
history of Global Crossing, and that was to explain some 
litigation that we had just brought.
    On the basis of hearing that they weren't going to take it 
to the audit committee at that time--and I felt their reasons 
were good. They said that they felt that they had just gotten 
it, and it would be very quick to try to react to it at this 
moment and give it to the audit committee.
    I still felt, since I had already announced that I was 
leaving Global Crossing, that it was important for the chairman 
of the audit committee to know about this. So I actually went 
to the audit committee meeting on Wednesday, and I saw a break 
in the meeting, and I asked the chairman to come out into the 
hall, at which point I told him that we had received this 
letter.
    Mr. Greenwood. When you left Global Crossing, did you 
leave, in part, because you had concerns about the propriety of 
some of these transactions?
    Mr. Gorton. No. I had other reasons for leaving Global 
Crossing.
    Mr. Greenwood. Okay. Pardon me?
    Mr. Gorton. Would you like me to----
    Mr. Greenwood. I would appreciate it if you would expand 
upon that.
    Mr. Gorton. Okay. Principally, the people I had come into 
the company with, the early founders of the company--Barry 
Porter, Abbott Brown, David Lee--and the early CEOs of the 
company--Jack Scanlon and Bob Anunziata--were all very close 
relationships of mine, and they had all left.
    And when they left, my role in the company really changed 
from being one of--it was much more a consensus decisionmaking 
process at that time, and I had had sort of a valued business 
role. As time developed after they left, my role became much 
more the person who headed the legal department. And while that 
is a great job, it just wasn't the job that I was comfortable 
with in Global Crossing. And that was the primary factor in my 
going.
    Mr. Greenwood. Very well. Thank you.
    I want to thank all of you for coming. It has been 5 hours. 
We all appreciate your willingness to be here and to testify, 
and you are excused.
    I would--for the benefit of us all, I would note that we 
will now take a break until 2:30, at which time we will call 
forward the Qwest panel.
    The committee is in recess.
    [Recess.]
    Mr. Greenwood. The committee will come to order. Our guests 
will please be seated.
    And we welcome our panel for this afternoon. Let me 
introduce them. They are Mr. Joseph Nacchio, the former 
Chairman and Chief Executive of Qwest Communications 
International. We welcome you, sir. Thank you for being here.
    Mr. Afshin Mohebbi, the President and Chief Operating 
Officer of Qwest Communications. We welcome you, sir.
    Mr. Peter Hellman, who is the Chairman of the Audit 
Committee of Qwest Communications. Thank you for joining us.
    And Mr. Oren Shaffer, the Vice President and Chief 
Financial Officer of Qwest Communications International.
    Gentlemen, you are I think aware that this is--this 
committee is holding an investigative hearing. And when we hold 
investigative hearings, it is our practice to take testimony 
under oath. Do any of you object to offering your testimony 
under oath today?
    Okay. Seeing no such objections, I should advise you that 
pursuant to the rules of this subcommittee, and the rules of 
the House of Representatives, each of you is entitled to be 
represented by counsel.
    Mr. Nacchio, are you represented by counsel today?
    Mr. Nacchio. Yes, I am, sir.
    Mr. Greenwood. Would you identify him by name?
    Mr. Nacchio. Mr. Charles Stillman.
    Mr. Stillman. Good afternoon, sir.
    Mr. Greenwood. Good afternoon. Welcome, sir.
    Mr. Mohebbi, are you represented by counsel?
    Mr. Mohebbi. Yes, Mr. Chairman.
    Mr. Greenwood. And who is that?
    Mr. Mohebbi. Mr. Paul Grand.
    Mr. Greenwood. And which one is he? Mr. Grand, welcome.
    Mr. Grand. Thank you. And also, my partner Jack Tyke.
    Mr. Mohebbi. And Mr. Jack Tyke.
    Mr. Greenwood. And Mr. Shaffer, are you represented by 
counsel?
    Mr. Shaffer. I am, Mr. Chairman.
    Mr. Greenwood. And that is?
    Mr. Shaffer. It is Mr. Joseph Brenner.
    Mr. Greenwood. Okay. Welcome, sir.
    And Mr. Hellman?
    Mr. Hellman. Yes, I am, Mr. Chairman.
    Mr. Greenwood. And your attorney is?
    Mr. Hellman. Jim Lyons.
    Mr. Greenwood. Okay. And that is the gentleman right there. 
Thank you. Okay.
    In that case, if you would rise and raise your right hand, 
I will swear you in.
    [Witnesses sworn.]
    Okay. You may be seated. You are under oath.
    And, Mr. Nacchio, do you have an opening statement?
    Mr. Nacchio. Yes, Mr. Chairman, I do.
    Mr. Greenwood. You are recognized to give it, then.
    Mr. Nacchio. Thank you.
    Mr. Greenwood. For 5 minutes.

   TESTIMONY OF JOSEPH P. NACCHIO, FORMER CHAIRMAN AND CHIEF 
  EXECUTIVE OFFICER, QWEST COMMUNICATIONS INTERNATIONAL INC.; 
 AFSHIN MOHEBBI, PRESIDENT AND CHIEF OPERATING OFFICER, QWEST 
 COMMUNICATIONS INTERNATIONAL INC.; PETER S. HELLMAN, CHAIRMAN 
  OF THE AUDIT COMMITTEE, QWEST COMMUNICATIONS INTERNATIONAL 
 INC.; AND OREN G. SHAFFER, VICE PRESIDENT AND CHIEF FINANCIAL 
        OFFICER, QWEST COMMUNICATIONS INTERNATIONAL INC.

    Mr. Nacchio. Mr. Chairman, distinguished members of the 
committee, my name is Joseph Nacchio, and I am the former Chief 
Executive Officer and Co-Chairman of the Board of Directors of 
Qwest Communications. I welcome this opportunity to assist the 
committee in its investigation.
    As the committee should know, I have made every effort to 
aid the various investigations concerning Qwest. I am here 
today voluntarily, and I spent a day with the SEC, and I 
believe about 5 hours with the staff of this committee on 
September 19.
    When I became the CEO of Qwest in 1997, we set out to 
create a world-class, national, and global telecommunications 
network. We did by buying a telecommunications infrastructure, 
initially digging trenches to lay conduit and fiber optics 
cable along railroad rights-of-way. We also spanned gaps in our 
network by acquiring capacity or facilities built by other 
companies.
    From the beginning, we were able to finance our activities 
and defer construction costs by selling as much as half the 
fiber in our network to other telecommunications companies. In 
the late 1990's, technology made it increasingly practical to 
sell permanent rights to the wave lengths or signals carried 
over fiber optics networks rather than simply selling the fiber 
itself. These rights are commonly referred to as indefeasible 
rights of use or IRUs.
    For Qwest, there were important reasons for selling IRUs 
and for buying them. Selling allowed Qwest to raise capital and 
expand the number of carriers and service providers operating 
on our network. Buying IRUs allowed us to expand our network 
quickly, more cost effectively, and without the regulatory 
hurdles that came with building our own facilities. Sales of 
IRUs never accounted for more than 5 percent of our annual 
income--annual revenues.
    While the individual transactions rarely warranted my 
involvement as CEO, I believed each transaction was subject to 
meaningful oversight and review by the relevant business units, 
the finance department, and the legal department of Qwest. The 
company relied on the advice of its outside auditors for proper 
accounting treatment.
    The CFO could bring any matter to the attention of the 
board of directors, independent audit committee, of which I was 
not a member. When Qwest was selling IRUs, we were informed by 
our outside auditors that under the generally accepted 
accounting principles the sales of IRUs, if they met certain 
criteria, qualified as sales type leases that should be booked 
as current revenues.
    During my tenure as CEO, to my knowledge, every purchase of 
capacity by Qwest was with the intent of furthering the 
company's business plan. That plan was to build a truly world-
class national and fiber optics network. We have a map to my 
left, to your right. That is what we were building.
    The network was constructed to meet the forecasted demand 
of the explosive growth in internet traffic, which the U.S. 
Department of Commerce estimated to be doubling every 100 days.
    Qwest's purchase capacity--had I been aware of any proposal 
for Qwest to purchase capacity solely to induce a 
contemporaneous sale, to inflate revenues, I would have vetoed 
the deal.
    I also want to tell you I had no reason to believe that 
senior management at Qwest tolerated unethical conduct or 
forced employees to meet unrealistic earnings forecasts. The 
operating budgets, including revenue, were ultimately subject 
to the review and approval of the full board of directors, to 
whom I reported.
    Once budgets were in place, neither I nor, to my knowledge, 
did any senior manager ever suggest, tacitly or expressly, that 
the company should attempt to meet its budget by ``cooking the 
books or fabricating IRU transactions.'' Indeed, in late June 
2001, in the one IRU transaction in which I recall personal 
involvement, I killed a $680 million transaction because it did 
not meet Qwest's business or financial goals. And I told three 
board members that, as a result, I thought there was a 
possibility that Qwest would not meet its budget for the second 
quarter.
    That same year, on September 10, 2001, I announced that 
Qwest was lowering its guidance for the third quarter, and for 
the balance of 2001, due to softening market conditions across 
Qwest's entire business, including a foreseen drop in the 
company's sales of IRUs.
    Furthermore, I never suggested that unethical conduct of 
any kind would be tolerated. During my tenure as CEO, I believe 
all company employees from senior officers to sales personnel 
were required to act in compliance with the Qwest Code of 
Conduct. The Qwest Code of Conduct are guidelines demanding the 
highest level of ethics and responsibility, including 
responsibility against specific directives, against falsifying 
financial records or using unethical or deceptive means to make 
sales.
    It is true that I earned significant compensation from the 
sale of Qwest stock. The compensation I received as CEO was 
honestly come by. I paid full taxes on it. I worked my entire 
32-year career in the telecom industry as an engineer, a 
marketing executive, and then as a senior executive. I was not 
born into wealth.
    I want this committee to know, as the press has seen fit to 
ignore, that my stock sales derived from stock options granted 
in 1997, that carried a five and a half year maturity, leaving 
me with the choice of exercising options or losing them 
entirely.
    I sold my shares based upon advice of my financial advisors 
in order to diversify my holdings, yet I have always remained 
heavily invested in Qwest. Today, I still own--hold 470,000 
shares. When I sold shares, I did so in full compliance with 
all applicable regulations and with all necessary and 
appropriate disclosures to the Securities and Exchange 
Commission and to the Board of Directors.
    Any time I sold Qwest stock, I believed the company's 
financial statements represented a full and accurate picture of 
its financial condition. I regret that I was unable to complete 
the job of building Qwest into a global telecommunications 
leader that we had envisioned. And I am truly sorry for any 
losses suffered by Qwest share owners, but particularly for the 
thousands of Qwest employees who have lost their jobs as the 
telecommunication industry and Qwest has fallen onto hard 
times.
    I now appear voluntarily before this honorable committee to 
answer all of its questions completely and to the best of my 
ability.
    Thank you.
    [The prepared statement of Joseph P. Nacchio follows:]
Prepared Statement of Joseph P. Nacchio, Former Chief Executive Officer 
       and Co-Chairman, Board of Directors, Qwest Communications
    Mr. Chairman, distinguished members of the Committee, my name is 
Joseph Nacchio, and I am the former Chief Executive Officer and Co-
Chairman of the Board of Directors of Qwest Communications. I welcome 
this opportunity to assist the Committee in its investigation. As this 
Committee should know, I have made every effort to aid the various 
investigations concerning Qwest: I testified before the SEC, I met for 
hours with this Committee's staff, and I appear voluntarily today. I do 
so out of respect for my government, and my own sense of 
responsibility. It is with this same sense of respect and 
responsibility that I served, until recently, as Chairman of the 
President's National Security Telecommunications Advisory Committee and 
as Chairman of the Federal Communications Commission's Network 
Reliability and Interoperability Committee.
    When I became the CEO of Qwest in 1997, we set out to create a 
world class national and global telecommunications network. We did this 
by building a telecommunications infrastructure, initially digging 
trenches to lay conduit and fiber optic cable along railroad rights-of-
way. We also spanned gaps in our network by acquiring capacity or 
facilities built by other companies. From the beginning, we were able 
to finance our activities and defer construction costs by selling as 
much as half the fiber in our network to other telecommunications 
companies. In the late nineties, technological advances made it 
increasingly practical to sell permanent rights to the wavelengths or 
signals carried over fiber optic networks, rather than simply selling 
the fiber itself. These rights are commonly referred to as indefeasible 
rights of use or IRUs.
    For Qwest, there were important reasons for selling IRUs and for 
buying them. Selling IRUs allowed Qwest to raise capital and to expand 
the number of carriers and service providers operating on our network. 
Buying IRUs, on the other hand, often allowed us to expand our network 
more quickly, more cost effectively, and without the regulatory hurdles 
that came with building our own facilities. IRU transactions therefore 
had strategic importance to Qwest, although financially they remained a 
small portion of our business, with sales of IRUs never accounting for 
more than five percent of annual revenue.
    Qwest became a substantial purchaser and seller of IRUs at a time 
when the demand for fiber optic capacity to build and expand global 
networks was at record levels following the Internet boom of the late 
nineties. We found that we could leverage our buying power by 
persuading potential sellers of capacity to purchase their needed IRU 
capacity from Qwest. As a result, many of the IRU transactions executed 
by Qwest involved contemporaneous transactions''--what some have called 
``swaps''--transactions where each party is both selling capacity in 
certain areas and buying network capacity in other areas.
    That is the context in which these transactions arose, and as 
members of this Committee have acknowledged, there is nothing 
inherently suspicious about the mere fact of simultaneous IRU 
transactions. While the individual transactions rarely warranted my 
involvement as CEO, I believe each transaction was subject to 
meaningful oversight and re view by the relevant business units, the 
finance department, and the legal department. With respect to matters 
of financial accounting for these transactions, the company relied on 
the advice of its outside auditors along with Qwest's financial staff 
who reported to the company's Chief Financial Officer. The CFO in turn 
could bring any matter to the attention of the Board of Directors 
independent audit committee, of which I was not a, member. When Qwest 
was selling IRU capacity, we were informed by our outside auditors 
that, under Generally Accepted Accounting Principles, the sale of IRUs, 
if they met certain define criteria, qualified as sales-type leases 
that should be booked as current revenue. At the time, we had no reason 
to doubt Arthur Andersen's advice, then one of the country's leading 
accounting firms.
    Today, I am of course aware of allegations that these 
contemporaneous transactions were sham deals designed to inflate 
revenues to meet earnings forecasts. I am in no position to comment on 
the motives of other companies, such as Global Crossing, who are 
alleged to have purchased capacity they did not need. I can tell you 
that during my tenure as CEO, to my knowledge every purchase of 
capacity by Qwest was with the intent of furthering the company's 
business plan. That plan was to build a truly world class national and 
international fiber optic network. Our plan was ambitious, but it also 
sought to be selective. Had I been aware of any proposal for Qwest to 
purchase capacity solely to induce a contemporaneous sale in order to 
inflate revenues, I would have vetoed the deal. That is not the way 
Qwest did business. That is not the way I did business.
    I also want to tell you that I had no reason to believe that senior 
management at Qwest tolerated unethical conduct or forced employees to 
meet unrealistic earnings forecasts. The company's operating budget, 
including revenue, reflected the collective knowledge of the entire 
company, with input from individual operating units, coordination and 
oversight by the CFO and the president, and approval by me as the CEO. 
The operating budgets, including revenue, were ultimately subject to 
the review and approval of the full Board of Directors, to whom I 
reported. In addition, the compensation schedule derived from these 
budgets were reviewed and approved by the Board's Compensation 
Committee. Once budgets were in place, neither I nor to my knowledge 
did any senior manager ever suggest, tacitly or expressly, that the 
company should attempt to meet its budget by ``cooking the books,'' or 
fabricating IRU transactions.
    To the contrary, in late June 2001, in the one IRU negotiation in 
which I recall personal involvement, I killed a $680 million 
transaction because it did not meet Qwest's business or financial 
goals, and I told three Board members that, as a result, there was a 
possibility that Qwest would not meet its budget for the second 
quarter. That same year, on September 10, 2001, I announced to our 
investors and the analyst community that Qwest was lowering its 
guidance for the third quarter and the balance of 2001 due to softening 
market conditions across Qwest's business, including a foreseen drop in 
the company's sales of IRUs. And I subsequently recommended to the 
Compensation Committee on two occasions that we lower the financial 
targets that were used to determine employee bonuses, because I did not 
want to punish our workforce for a sagging economy.
    Furthermore, I never suggested that unethical conduct of any kind 
would be tolerated. During my tenure as CEO, I believe all company 
employees, from senior managers to sales personnel, were required to 
act in compliance with Qwest's Code of Conduct. The Qwest Code of 
Conduct is a set of guidelines demanding the highest levels of ethics 
and responsibility, including specific directives against falsifying 
financial records or using unethical or deceptive means to make sales. 
It is my understanding that in appropriate cases, employees found to 
have engaged in unethical or illegal conduct were disciplined, 
discharged, and in some cases referred to law enforcement authorities 
for prosecution. Recent suggestions that Qwest's workers operated in an 
ethical vacuum cast an undeserved stigma upon the company's 55,000 men 
and women who built one of the most robust and diverse 
telecommunications companies in the country.
    It is true that I earned significant compensation from the sale of 
Qwest stock. The compensation I received as CEO was honestly come by. I 
paid full taxes on it. I worked my entire 32-year career in the telecom 
industry as an engineer, a marketing executive, and then a senior 
executive. I was not born into wealth. I want this Committee to know, 
as the press has seen fit to ignore, that my stock sales derived from 
stock options granted in 1997 that carried a 5-and-a-half year 
maturity, leaving me with the choice of exercising the options or 
losing them entirely. I sold shares based upon the advice of my 
financial advisors in order to diversify my holdings. Yet I have always 
remained heavily invested in Qwest, and today I still hold 470,000 
Qwest shares. When I sold shares, I did so in full compliance with all 
applicable regulations, and with all necessary and appropriate 
disclosures to the SEC and the Board of Directors. I always believed in 
the value of the company, and when I eventually implemented a daily 
stock-selling plan, I placed a stop order at 38 dollars, a stop order 
that I never lifted. As a result, once Qwest stock dropped below 38 
dollars in May 2001, I never exercised my remaining options, roughly 
two thirds of those I was granted from Qwest, and I never sold a single 
share of Qwest stock.
    At any time I sold Qwest stock, I believed that the company's 
financial statements represented a full and accurate picture of its 
financial condition. I regret that I was unable to complete the job of 
building Qwest into the global telecommunications leader we had 
envisioned, and I am truly sorry for any losses suffered by Qwest's 
shareholders and for the thousands of Qwest employees who lost their 
jobs as the telecommunications industry and the company fell into hard 
times. I now appear voluntarily before this honorable Committee to 
answer all of its questions completely and to the best of my ability.

    Mr. Greenwood. Thank you, Mr. Nacchio.
    Mr. Mohebbi, do you have an opening statement?
    Mr. Mohebbi. Yes, I do.
    Mr. Greenwood. You are recognized for 5 minutes.

                   TESTIMONY OF AFSHIN MOHEBBI

    Mr. Mohebbi. Thank you very much, Mr. Chairman, ranking 
member, and members of the subcommittee. My name is Afshin 
Mohebbi, and I am President and Chief Operating Officer of 
Qwest Communications International Inc. I would like to thank 
you for inviting me to appear at this important hearing today.
    Qwest has a state-of-the-art worldwide fiber optic network 
running throughout the United States, Asia, and Latin America. 
Our strategy in building our domestic network was to construct 
facilities for our own use while, at the same time, building 
facilities for sale to our customers. As we completed that 
project, we sought to expand overseas. Qwest decided that it 
would be more efficient to purchase rather than build its 
international facilities.
    It was in this context that Qwest entered into IRU 
transactions with other companies. The purchase and sale of 
IRUs were a major part of our consistent business strategy to 
build a global network and create shareholder value. In some 
cases, Qwest entered into IRU transactions where we bought and 
sold capacity from the same customers at or near the same time.
    These transactions were not sham transactions. I believe we 
were buying capacity we needed and were selling capacity that 
we had built to be sold. There are established policies and 
processes at Qwest through which all large contracts that the 
company enters into must pass prior to being finalized. Each 
IRU contract is shepherded through the process by a team of 
Qwest employees to ensure that it is both beneficial to Qwest 
and meets all legal and accounting requirements.
    Each team consists of employees from numerous departments, 
including sales, engineering, accounting, finance, and legal. 
It is these specialists who made the determinations as to how 
transactions would be booked and how the contracts would be 
finalized.
    At the hearing last week, a question arose as to whether 
Qwest's policies and procedures had been undercut by secret 
side agreements. Since I joined Qwest, the company has entered 
into hundreds of transactions. I know of no side agreement that 
altered the substance of any Qwest IRU transaction.
    There were discussions at last week's hearing regarding an 
e-mail sent under my name relating to a transaction with the 
company Cable & Wireless. Three essential points must be made 
on that subject.
    First, the e-mail was reviewed and approved by a number of 
members of the transaction team, the legal department, and 
contract management group before it was sent.
    Second, while I do not recall sending the e-mail, I will 
take full responsibility for it.
    Third, I believe, as does the company, that this e-mail did 
not create a unilateral right to port or upgrade for Cable & 
Wireless, but, rather, provided a pricing schedule to be used 
should both companies later agree to do another transaction.
    I also want to address the allegation that senior managers 
at Qwest created an inappropriate tone at the top concerning 
compliance and ethical issues. Qwest employees worked 
tirelessly to expand our company, meet our goals, and provide 
world-class service to our customers. We pushed ourselves hard 
to meet our goals, and I, along with other executives, 
encouraged our employees to sell our products and services. But 
I did not authorize or encourage anyone to cut ethical or 
procedural corners.
    Moreover, I felt there was nothing wrong with encouraging 
our employees to meet targets, and today I feel the same way. 
Companies in competitive markets like ours must constantly 
strive to sell our products and generate revenue. Our 
shareholders expect nothing less.
    Mr. Chairman, I take pride in the progress Qwest has been 
making and the work that I have done here during the three and 
a half years of my tenure at the company. In record time, we 
have greatly improved the quality of local telephone service 
that we provide to our customers, as shown in data published by 
the Federal Communications Commission.
    I have the utmost faith in the vast potential of our 
company, as well as the ability and ethics of our employees. As 
a result, I have never sold a single share of Qwest stock or 
exercised a single Qwest stock option. In fact, earlier this 
year, I purchased approximately 25,000 additional shares in the 
company. I am fully committed to the long-term success of my 
company.
    Thank you for the opportunity to make this statement and 
provide testimony today. As you know, I am appearing here 
voluntarily and have cooperated fully with the subcommittee and 
its staff. And I would be glad to respond to any questions that 
the subcommittee may have.
    [The prepared statement of Afshin Mohebbi follows:]
  Prepared Statement of Afshin Mohebbi, President and Chief Operating 
            Officer, Qwest Communications International Inc.
    Good morning, Mr. Chairman and members of the Subcommittee. My name 
is Afshin Mohebbi. I am the President and Chief Operating Officer of 
Qwest Communications International Inc. I would like to thank you for 
inviting me to appear voluntarily at this important hearing today.
    Please permit me to tell you a little bit about my company. Qwest 
is a local telephone company with more than 25 million customers, 
serving a 14-state area throughout the West. We have 55,000 employees, 
more than 55,000 retirees and annual revenues of more than $17 billion. 
We also are the nation's fourth-largest long-distance company and do 
business with more than 60% of the Fortune 1,000 companies worldwide.
    Qwest has a state-of-the-art worldwide fiber optic network running 
throughout the United States, Asia and Latin America. Our strategy in 
building our domestic network was to construct facilities for our own 
use while, at the same time, building facilities for sale to our 
customers. The sales of conduit, fiber and optical capacity that Qwest 
made to customers in accordance with this business strategy paid for a 
substantial portion of the cost of building our U.S. network. As we 
completed that project, we sought to expand overseas. Qwest decided 
that it would be more efficient to purchase, rather than build, its 
international facilities.
    It was in this context that Qwest entered into IRU transactions 
with other companies. An IRU is an ``indefeasible right of use,'' which 
is the exclusive right to use a specified amount of capacity or fiber 
for a specified period of time, usually 20 years or more. IRUs are for 
specific point-to-point assets. The purchase and sale of IRUs were a 
major part of our consistent business strategy to build a global 
network and create shareholder value.
    In some cases, Qwest entered into IRU transactions that occurred at 
or near the same time. Though close in time, it was believed that the 
contracts for the optical capacity were separate agreements, 
individually enforceable. I do not believe that these transactions were 
``sham'' transactions. I believe we were buying capacity we needed and 
were selling capacity we had built to be sold.
    There are established policies and processes at Qwest through which 
all large contracts that the company enters into must pass prior to 
being finalized. Each contract is shepherded through the process by a 
team of Qwest employees assigned to the transaction. In order to ensure 
that the transaction both is beneficial to Qwest and meets all legal 
and accounting requirements, each transaction team consists of a 
diverse group of employees from numerous departments, including Sales, 
Engineering, Accounting, Finance and Legal. Each team has members whose 
responsibility it is to make sure that Legal, Finance and Accounting 
approve of the transaction. The experts at Qwest in those areas made 
the determinations as to how transactions would be booked and how the 
contracts would read.
    At the hearing before this Subcommittee last week, a question arose 
as to whether Qwest's policies and procedures had been undercut by 
secret side agreements. Since I joined Qwest, the company has entered 
into hundreds of transactions. I know of no side agreement that has 
altered the substance of any of Qwest's IRU transactions.
    There was discussion at last week's hearing regarding a particular 
e-mail relating to a transaction with the company Cable & Wireless. 
Three essential points must be made on that subject. First, the e-mail 
was reviewed and approved by a number of members of the transaction 
team, the Legal Department and contract management group before it was 
sent. Second, while I do not recall sending the e-mail, I take full 
responsibility for it. Third, I believe, as does the Company, that it 
did not create a unilateral right to port or upgrade for Cable and 
Wireless, but, rather, provided a pricing schedule to be used should 
both companies later agree to another transaction.
    I also want to address the allegation that senior managers at Qwest 
created an ``inappropriate tone at the top'' concerning compliance and 
ethical issues. Qwest employees worked tirelessly to expand our 
company, meet our goals and provide world-class service to our 
customers. We pushed ourselves hard to meet our goals and I along with 
other executives encouraged our employees to sell our products and 
services. But I did not authorize or encourage anyone to cut ethical or 
procedural corners.
    Moreover, I felt there was nothing wrong with encouraging our 
employees to meet targets and today I feel the same way. Companies in 
competitive markets like ours must constantly strive to sell our 
products and generate revenue; our shareholders expect nothing less.
    Mr. Chairman, for the past three and a half years, I have dedicated 
myself to serving Qwest and its shareholders. In June 1999, I joined 
the company as President and Chief Operating Officer. In July 2000, 
after Qwest merged with US West, I became President of Network and 
Worldwide Operations. And in April 2001, I was appointed Chief 
Operating Officer, a position that had been eliminated after the US 
West merger.
    I take great pride in the progress Qwest has made and the work that 
I have done during my tenure at the company. In record time, we have 
greatly improved the quality of local telephone service that we provide 
to our customers, as shown in data published by the Federal 
Communications Commission. I have the utmost faith in the vast 
potential of our company, as well as the ability and ethics of our 
employees. For these reasons and others, I have never sold even a 
single share of Qwest stock or exercised a single Qwest stock option. 
In fact, earlier this year I purchased approximately 25,000 additional 
shares in the company. I am fully committed to the long-term success of 
our company.
    Thank you for the opportunity to make this statement and provide 
testimony today. As you know, I am appearing here voluntarily and have 
cooperated fully with the Subcommittee and its staff, as I have with 
other congressional committees. I would be glad to respond to any 
questions the Subcommittee may have.

    Mr. Greenwood. Thank you, Mr. Mohebbi.
    Mr. Shaffer, do you have an opening statement?
    Mr. Shaffer. I do, Mr. Chairman.
    Mr. Greenwood. You are recognized for 5 minutes.

                  TESTIMONY OF OREN G. SHAFFER

    Mr. Shaffer. I am Oren Shaffer.
    Mr. Greenwood. Make sure that microphone is directed toward 
you, please. That is good. That is better.
    Mr. Shaffer. I am Oren Shaffer. I joined Qwest less than 3 
months ago as the company's Vice Chairman and Chief Financial 
Officer, and I am pleased to be here today to discuss what we 
have done, what we are going to do, and to address some of the 
issues that are of concern to me, to this subcommittee, and to 
the company, as well as our external constituencies.
    Let me begin by stating that Qwest faces significant 
challenges. Primary among these are saving the company, its 
55,000 jobs, the communications service it provides to 25 
million customers, and returning Qwest to the stability that 
our 50,000 plus retirees were part of building.
    To accomplish this, we must first gain the confidence of 
our employees, customers, investors, and regulators. We must 
put the questions about our accounting behind us. In this 
regard, I have been analyzing these issues as expeditiously as 
possible.
    As I will explain, we are well underway in an analysis of 
the company's accounting for IRU transactions and are 
addressing other accounting issues. We have publicly announced 
that this process will result in a restatement of Qwest's 
financial statements, and we have disclosed the total amounts 
of IRU revenue and profits potentially at issue and the 
company's interim conclusions to date.
    We, along with our new auditors KPMG, have initiated a 
review of the company's internal control systems and processes, 
combined with an overall risk assessment to identify those 
high-risk accounting areas that may require special attention. 
We are committed to making any changes that are appropriate in 
systems or in personnel to ensure that the kinds of accounting 
problems we are finding do not occur again.
    At the same time, Qwest has made significant progress in 
improving the financial health of the company and refocusing 
management's attention on profitable and sustainable growth 
once we weather this difficult economic climate. One major step 
was entering into a definitive agreement for the sale of our 
directory services business, QwestDex, for more than $7 
billion. This transaction will be a key to our continuing 
effort to decrease the $25 billion of debt we find on our 
balance sheet.
    Qwest has also amended its $3.4 billion credit facility and 
obtained $750 million of new funding. With our current 
commitments and obligations, we will have the liquidity to 
operate through 2005, which should allow us to implement the 
business plan that new management is establishing.
    Central to our efforts is winning the confidence of our 
employees. Our new Chairman and CEO, Dick Notebaert, has the 
vision and experience to lead this cultural change by 
emphasizing open communications, doing what you believe is 
right, and transparency in all parts of the work environment.
    Qwest disclosed in its 2001 Form 10-K that the total review 
recognized from IRU transactions in the 2000 and 2001 financial 
statement was approximately $1.48 billion, and that this amount 
might be subject to adjustment. Since I arrived in July, the 
company has made subsequent disclosures on July 28, August 19, 
and September 22. And on each occasion, Qwest has told the 
public the status of the ongoing accounting analysis and the 
probable magnitude of the restatement of Qwest's 2000 and 2001 
financial statements.
    Now, we have significantly narrowed the focus of the 
remaining examination following our conclusion that two-thirds, 
or approximately $950 million, of the IRU revenue in 2000 and 
2001 must be reversed. The remaining $531 million of IRU 
revenue in this period remains under examination, and we 
anticipate reaching further conclusions on these within a 
matter of weeks.
    We are continuing to review these remaining IRU 
transactions and certain other accounting issues that we have 
identified. We are committed to concluding this process as 
promptly as possible.
    There are two messages I want to give the subcommittee 
today. First, my only goal is to get it right. With the 
assistance of KPMG and other professional advisors, I will call 
them as I see them. If the accounting is wrong, we will fix it, 
and we will make the appropriate disclosure.
    Second, as part of this process, we will strengthen our 
internal control systems and establish an environment where 
only the best practices are tolerated.
    I also want to leave the committee with a sense of what we 
have achieved in the short period that Dick and I have been at 
Qwest. I believe that Qwest is increasingly well positioned to 
achieve greater stability and profitability in the future, 
bringing with it the benefits of 55,000 jobs, and the 
significant economic impact of a world-class communications 
service provider. I am looking forward to being part of that 
process.
    Again, I am pleased to be here today, and I will try to 
answer your questions as best I can.
    [The prepared statement of Oren G. Shaffer follows:]
    Prepared Statement of Oren G. Shaffer, Vice Chairman and Chief 
       Financial Officer, Qwest Communications International Inc.
    I am Oren G. Shaffer. I joined Qwest less than three months ago as 
the company's Vice Chairman and Chief Financial Officer, and I am 
pleased to be here with you today to discuss what we have done, and are 
doing, to address some of the issues that are of concern to me, to this 
Subcommittee and to the company as well as our external constituencies.
    Let me begin by stating that Qwest faces significant challenges. 
Primary among these is saving the company--its 55,000 jobs and the 
communications service it provides to 25 million customers--and 
returning Qwest to the stability that our 50,000 plus retirees were 
part of building. To accomplish this, we must first regain the 
confidence of our employees, customers, investors and regulators. We 
must put the questions about our accounting behind us. In this regard, 
I have been analyzing these issues as expeditiously as possible.
    As I will explain, we are well underway in an analysis of the 
company's accounting for IRU transactions and addressing other 
accounting issues. We have publicly announced that this process will 
result in a restatement of Qwest's financial statements; and we have 
disclosed the total amounts of IRU revenue and profits potentially at 
issue and the company's interim conclusions to date.
    We, along with our new auditors KPMG, have initiated a review of 
the company's internal control systems and processes, combined with an 
overall risk assessment to identify those high-risk accounting areas 
requiring special attention. We are committed to making any changes 
that are appropriate in systems or in personnel to ensure that the 
kinds of accounting problems we are finding do not occur again.
    At the same time, Qwest has made significant progress in improving 
the financial health of the company and refocusing management's 
attention on profitable and sustainable growth once we weather this 
difficult economic climate. One major step was entering into a 
definitive agreement for the sale of our directory publishing business, 
QwestDex, for more than $7 billion. This transaction will be a key to 
our continuing effort to decrease the $25 billion of debt on the 
company's balance sheet.
    Qwest also has amended its $3.4 billion credit facility to extend 
the maturity date to 2005 as well as to relax the financial covenants 
to obtain greater flexibility for the future. We also obtained in early 
September $750 million of new funding. With our current commitments and 
obligations, once we have completed the sale of QwestDex we will have 
the liquidity to operate into 2005, which should allow us to implement 
the business plan that new management is establishing.
    Central to our efforts is winning the confidence of our employees. 
Our new Chairman and CEO, Dick Notebaert, has the vision and experience 
to lead this cultural change by emphasizing open communication, doing 
what you believe is right and transparency in all areas of the work 
environment.
    I am Committed To Concluding The Restatement of Qwest's Historical 
Financial Statements As Promptly As Possible, And I am Overseeing 
Appropriate Measures To Satisfy our Investors, Employees, Retireees, 
Customers and Other Constituents That The Accounting Problems We Are 
Identifying Do Not Recur.
    The company decided not to re-engage Arthur Andersen and retained 
KPMG as its independent auditors shortly before I joined Qwest in July 
of this year. I and others have worked closely with KPMG to make 
certain that accounting issues of the past are identified, corrected 
and that the accounting is done properly in the future.
    Qwest disclosed in its 2001 Form 10-K that the total revenue 
recognized from IRU transactions in the 2000 and 2001 financial 
statements was approximately $1.48 billion, and that this amount might 
be subject to adjustment. Since I arrived in July, the company has made 
subsequent disclosures on July 28th, August 19th and September 22nd, 
and on each occasion Qwest told the public the status of the on-going 
accounting analysis and the probable magnitude of the restatement of 
Qwest's 2000 and 2001 financial statements.
    We have significantly narrowed the focus of the remaining 
examination following our conclusion that two-thirds, approximately 
$950 million, of the IRU revenue in 2000 and 2001 must be reversed. The 
remaining $531 million of IRU revenue in this period remains under 
examination and we anticipate reaching further conclusions on these 
within a matter of weeks.
    We are continuing to review these remaining IRU transactions and 
certain other accounting issues that we have identified. We are 
committed to concluding this process as promptly as possible, with the 
goal of a complete and accurate restatement of Qwest's financial 
statements so that our security holders and the market can rely with 
confidence on our financial statements. The restatement will not be 
complete until KPMG has reaudited certain historical financial 
statements.
    Qwest Is Committed To Strengthening Its Internal Controls And To 
Instilling a Culture Where Only The Best Practices Are Followed.
    With the help of our new auditors and other professional advisors, 
we are engaged in a major project to review and strengthen our internal 
control systems. As part of that process, our internal audit group is 
conducting a top-to-bottom risk assessment to identify those areas 
where we should focus our internal and external audit resources to 
protect against future errors.
    I should emphasize the word ``future'' here. As we have announced, 
Qwest will not account for future IRU sales in a manner that gives rise 
to the accounting problems we are dealing with today in our historical 
financial statements. We will take the lessons learned from this 
examination of accounting issues and apply them to other areas to 
strengthen the company's financial reporting.
    We are also working hard to foster an open environment where Qwest 
employees are encouraged to challenge assumptions, offer ideas, and 
raise issues, problems and concerns for consideration and resolution. 
At the same time, we are committed to expanding the overall level of 
experience in the finance and accounting organization. We expect that 
these actions will result in a climate where potential errors are more 
quickly identified and avoided, and, if found, quickly corrected and 
resolved.
    We also understand that Qwest cannot build a new future without 
seeking to hold accountable those who were responsible for the problems 
in our past. In addition to cooperating fully with the investigative 
bodies that are principally responsible for holding individuals 
accountable for wrongdoing, Qwest is also conducting its own review; 
and our actions in this regard are ongoing.
    Qwest Is Committed To Work Cooperatively With, Congress, The SEC 
And Other Governmental Agencies.
    We have not undertaken these activities in a vacuum. Rather, as I 
suggested above, our efforts at restatement and reform have been 
accompanied by substantial efforts to cooperate with Congressional 
inquiries and with investigations initiated by the Securities and 
Exchange Commission and other governmental agencies. We have cooperated 
extensively with this Committee, voluntarily making our senior officers 
and board members available for more than 80 hours of interviews and 
testimony. We have also produced more than 250,000 pages of documents 
the Committee has requested. At the same time, we have had constructive 
discussions with the SEC's Office of Chief Accountant concerning some 
of the accounting issues we confront, and we are cooperating with the 
SEC's Division of Enforcement in the hope of resolving its pending 
investigation as promptly as possible.
    There are two assurances I want to give this subcommittee today.
    First, my only goal is to get it right. With the assistance of KPMG 
and our other professional advisors, I call them as I see them. If the 
accounting is wrong, we'll fix it, and we will make the appropriate 
disclosure.
    Second, as part of this process, we will strengthen our internal 
control systems and establish an environment where only the best 
business practices are tolerated.
    I also want to leave the subcommittee with a sense of what we have 
achieved in the short period Dick and I have been at Qwest. I believe 
that Qwest is increasingly well-positioned to achieve greater stability 
and profitability in the future, bringing with it the benefits of 
55,000 jobs and the significant economic impact of a world class 
communications services provider. I look forward to being part of that 
process.
    Again, I am pleased to be here today, and I will try to answer your 
questions as best I can.

    Mr. Greenwood. Thank you.
    Mr. Hellman, do you have an opening statement?
    Mr. Hellman. Mr. Chairman, I have prepared an opening 
statement. In order to best utilize the committee's time, I 
will submit it for the record. I would just like to, as a way 
of introduction, perhaps read the opening paragraph. And the 
statement was submitted to the staff last night. I found a typo 
this morning. I would like to correct that for the record as 
well, but let me start by opening--the opening paragraph of it.
    Mr. Greenwood. By all means. And your entire statement will 
be made a part of the record, including the typo correction.
    Mr. Hellman. Thank you, Mr. Chairman.

                  TESTIMONY OF PETER S. HELLMAN

    Mr. Hellman. My name is Peter Hellman. I am a member of the 
Board of Directors of Qwest Communications International. I 
have been Chairman of its audit committee for the past 4 
months, since May 29, 2002. Prior to that time, I was a member 
of the audit committee since the merger of Qwest and US WEST on 
June 30, 2000. Prior to the merger, I was a member of the Board 
of US WEST and Chairman of its audit committee.
    And with that, sir, the typo is number of audit committee 
meetings held in--there was over 35. In 2000, we met 11 times, 
and in 2002, we have already met 22 times, not the 14 that is 
cited in the statement.
    [The prepared statement of Peter S. Hellman follows:]
  Prepared Statement of Peter S. Hellman, Chairman, Audit Committee, 
                Qwest Communications International, Inc.
    My name is Peter Hellman. I am a member of the Board of Directors 
of Qwest Communications International, Inc., and I have been Chairman 
of its Audit Committee for the past four months, since May 29, 2002. 
Prior to that time, I was a member of the Audit Committee since the 
merger of Qwest and US West on June 30, 2000. Prior to the merger, I 
was a member of the Board of US West and Chairman of its Audit 
Committee.
    The purpose of the Audit Committee is to provide oversight in 
connection with the Company's financial reporting, internal controls, 
and accounting; to facilitate communication between management, the 
Board of Directors and the independent public accountants; and to 
oversee Qwest's relationship with those accountants. In performing our 
duties, we hold five regularly scheduled meetings each year, and 
special meetings on other occasions. Since the merger we have met more 
than thirty-five times. In 2001, we met eleven times; in 2002, we have 
already met fourteen times. As the Subcommittee is aware, we had 
frequent communication among the members of the Audit Committee and 
with management, independent auditors, and other members of the Board. 
We routinely meet with the independent auditors, internal auditors and 
finance management in private, executive sessions. We report our 
reviews and findings to the full Board formally at each subsequent 
Board meeting.
    In order to evaluate the Company's accounting practices and policy, 
as a general matter, we relied heavily on our outside auditors, our 
internal auditors and our finance professionals (including our internal 
research personnel) to provide us with the generally accepted 
accounting guidance (GAAP) and the relevant facts by which to apply 
that guidance. Indeed, by the terms of its charter, the Committee is 
charged with carrying out these duties ``in reliance on senior 
financial management and [Qwest's] independent public accountants.''
    Among the issues which we examined has been Qwest's accounting for 
IRUs and, specifically, whether our revenue recognition policies after 
the merger in 2000 and in 2001 for sales of IRUs were consistent with 
GAAP and in conformity with the guidance of our independent auditor. At 
a meeting of the Audit Committee held in February 2001, Qwest's 
independent auditor expressly informed us that the quality of our 
financial reporting for one-way cash sales of IRUs was acceptable and 
that the reporting for the Company's contemporaneous transactions 
(those involving purchases and sales that occurred in the same quarter 
and that the Company treated as nonmonetary exchanges) was ``acceptable 
but aggressive.''
    The assessment by our independent auditor, at the same meeting, of 
our internal controls was that they were also acceptable. Qwest was 
deemed to have acceptable and effective controls for all of the areas 
evaluated by the auditor, including the adequacy of accounting 
resources.
    Although our auditor specifically told us at that time that our 
IRU-related accounting was ``acceptable,'' we directed management to 
increase disclosures in our quarterly statements concerning IRUs. We 
did this even though IRU sales represented approximately 5% of Company 
revenues for the year 2000. Indeed, each quarter's disclosure was 
increased from that of the prior quarter for the remainder of the year. 
This increased level of disclosure has continued. In the Company's 2001 
Form 10-K, the Company has disclosed the total revenue recognized from 
IRU transactions and that the Company may restate the total amount of 
IRU revenue.
    On October 29, 2001, the Audit Committee was informed by our Chief 
Financial Officer that she had just learned of an e-mail apparently 
sent by Qwest to Cable & Wireless (``C&W'') on December 29, 2000 that 
could be construed as a collateral agreement affecting a sale of an IRU 
by Qwest to C&W. Senior management also reported that they had 
determined that the Company was not obligated by the e-mail to act in 
any fashion that would compromise the Company's accounting. The Audit 
Committee considered whether the Company should restate its earnings to 
delete the revenue recognized in the fourth quarter of 2000 as a result 
of that transaction. After reviewing that accounting and the 
circumstances surrounding the transaction, and after consulting with 
our independent auditor, we concluded that the transaction was not 
improperly accounted for and was not material so as to require 
restatement since it constituted slightly more than one half of one 
percent of 2000 revenues. Given that determination, our independent 
auditor advised the Audit Committee that the transaction had been 
validly recognized as revenue as originally booked by the Company.
    The Audit Committee was, nonetheless, concerned by the 
circumstances of this delayed recognition of information which could 
have affected the accounting of the transaction. Therefore, the Audit 
Committee did not end its inquiry. We directed the finance department 
to conduct an internal review to locate all other documents--regardless 
of their effect on the Company's accounting--that might have affected 
the terms of any IRU transaction. The Audit Committee, which inquired 
about this issue regularly, was assured that no other written ``side 
letter'' or written agreement was found that put the Company's revenue 
recognition into question.
    Consistent with the scope of audit that we reviewed, a confirmation 
letter was sent to each customer to whom an IRU had been sold after 
October 1, 2000. The letter requested confirmation as to the terms of 
all contracts--and specifically inquired whether the customer was aware 
of any ``side letter or oral agreement.'' Although Arthur Andersen 
received responses from many customers, including Global Crossing and 
Cable and Wireless, only one customer, Flag USA, asserted that it had 
rights outside our formal agreements.
    Upon learning that Flag contended that Qwest had orally promised in 
or about June 2001 to permit the exchange of certain fiber optic 
capacity upon demand (in a transaction constituting approximately one-
fifth of 1% of 2001 gross revenue), the Audit Committee instructed the 
Company in January 2002 to investigate all aspects of that transaction. 
The Committee was advised that every sales person involved in the 
transaction was individually interviewed. In February 2002, the Company 
presented to the Audit Committee the results of that review. The 
Committee was informed that no binding agreement existed and that no 
correction was necessary.
    My concerns about the Company's practices were increased by 
comments provided to the Audit Committee in executive session with our 
internal auditor who was leaving the Company. He assured the Committee 
that our policies were appropriate and that management was formally 
providing correct instructions on compliance with them. In his opinion, 
however, the implementation could be better facilitated by senior 
management, starting with the CEO. I reported these comments and my own 
concerns to the chairman of the Audit Committee who concurred. The 
Audit Committee met with the Company's then-Chairman and Chief 
Executive Officer, Mr. Nacchio, in executive session to remind him of 
his obligation to set a proper and proactive ``tone at the top.'' Our 
concern was not with any wrongdoing on his part--it was our purpose to 
ensure that the Company continued to meet revenue expectations without 
compromising accounting, legal or ethical standards. Additionally, 
there was the possibility that, in the pressure to meet quarterly 
targets, sales personnel may have failed to provide information about 
every transaction to the finance department. The Audit Committee urged 
that Mr. Nacchio take the opportunity to reinstill in his operations 
personnel an absolute an unwavering regard for full disclosure and 
transparency throughout the organization, as well as a complete regard 
for accounting standards and the Company's code of conduct.
    In mid-February 2002, the Company was served with a subpoena to 
provide information to the Securities and Exchange Commission, which 
was then conducting an investigation into Global Crossing. The Company 
retained outside counsel and began another review of all of its IRU 
transactions. To be sure, while that further analysis has taken several 
months, it has occurred during a period of great change. The Company 
has since hired a new management team, as well as engaged a new 
independent auditor. Moreover, outside counsel have themselves engaged 
additional new accounting experts.
    Since the merger, the Company entered into 91 IRU transactions. It 
is important to note the pertinent accounting policies have been in 
transition, and with respect to which the views of regulators were 
evolving. Indeed, the White Paper written by Arthur Andersen to provide 
guidance on the accounting for IRU transactions was revised numerous 
times, most recently in early 2002. It is in this context that the 
process of reviewing nearly all of the Company's sales of IRUs has been 
conducted and that the Audit Committee has reviewed and evaluated the 
Company's accounting standards, policies and practices. We have 
conducted this review in a conscientious and methodical fashion with 
appropriate disclosure of our progress.
    To conclude, the Audit Committee specifically probed the method of 
accounting by Qwest for sales of IRUs. It repeatedly sought and then 
relied upon the advice of its independent auditor and its finance 
management in reviewing and approving those accounting policies and 
their application. In the process of obtaining that advice, the Audit 
Committee regularly asked questions of management and pressed both 
management and the auditors to make sure that all accounting 
methodology was proper and that the Company had full compliance. At the 
same time, the Audit Committee insisted on increased public disclosure 
regarding IRU transactions beginning in early 2001. As it learned 
information that could potentially implicate the Company's financial 
statements, it supervised an aggressive investigation and expanded the 
appropriate disclosures. That investigation continues to this day.
    What can be learned? We were dealing with a new business based on 
new technology. The Audit Committee sought from its independent auditor 
an explanation of how its opinions compared with opinions of the FASB 
and the SEC. We were told that traditional accounting wasn't keeping 
pace. The emerging issues task force and the SEC were struggling to 
adapt existing accounting to this technology. The provisions of 
Sarbanes-Oxley will also establish best practices as the standard.
    Again, I wish to express my thanks to the Chairman and members of 
the Subcommittee for inviting the submission of this statement.

    Mr. Greenwood. So it is 22, not 14.
    Mr. Hellman. Correct, sir.
    Mr. Greenwood. Ah ha.
    Thank you, sir. Appreciate that.
    The Chair is going to recognize the chairman of the full 
committee, Mr. Tauzin, to question first, insofar as he has to 
chair a very important energy conference very shortly. The 
gentleman is recognized for 10 minutes.
    Chairman Tauzin. Thank you, Mr. Chairman.
    Mr. Nacchio, who is Russell Knowles?
    Mr. Nacchio. Congressman Tauzin, Russell Knowles was the 
previous--I should say previous from when I left, but previous 
head of our internal auditing group.
    Chairman Tauzin. And on Tab 78, if you will go to the book, 
we have a memo from Mr. Hellman to Tom Stevens. And I want to 
turn to Mr. Hellman first.
    We read this memo into the record last week, and it 
basically starts out by saying, ``We did have a good 
conversation with Russell Knowles, the internal auditor. And 
while he is not leaving because of anything at Qwest directly, 
a factor in his decision is the tone at the top and how that 
makes a job in the corporate more difficult, not that Joe''--I 
assume he is talking about you, Mr. Nacchio--``he is not saying 
the right things, make the numbers and do it the right way, but 
the line people, including the divisional CFOs, are only 
hearing 'make numbers.' In my opinion''--this is you, Mr. 
Hellman, stating this, ``there are well-known consequences for 
not making the numbers, but no clear consequences for cutting 
corners.''
    Would you elaborate just a bit on why you wrote that and 
what it means?
    Mr. Hellman. Yes, I will, Mr. Chairman. And if I could put 
it in a context, it was the fall of last year. Business 
conditions were certainly getting more difficult. We had just 
had an audit committee meeting, and this was the--this was a 
report back to the audit committee chairman of the executive 
session of that meeting, and the chair of the committee was 
able to attend by telephone the audit committee but not the 
executive portion. So I am reporting back the part he didn't 
hear.
    Chairman Tauzin. Yes, I understand.
    Mr. Hellman. And in that meeting, as part of the closing 
discussion, inquiry with our financial management and our 
independent accounts, a transaction was discussed that was 
entered into in the prior quarter, in September 2001, a 
transaction with a company called CalPoint.
    Chairman Tauzin. Okay.
    Mr. Hellman. Now that transaction was accounted correctly, 
but some documents that made that determination more easily, 
that made it more efficient for the finance staff to review, 
weren't in the original set of documents. They had to ask for 
them and get them, if you will.
    And so with the CalPoint transaction, and then--and I will 
discuss Mr. Knowles' comments, he was leaving the company. I am 
of the belief that senior financial management who leave the 
company should have exit interviews, and, if they are senior 
enough, should have exit interviews with the audit committee. 
And so this was, if you will, such a meeting.
    Chairman Tauzin. Yes.
    Mr. Hellman. I had known Mr. Knowles for over 3 years, 
because he was the internal auditor of US West as well. And as 
I said, I led the executive committee discussion with Mr. 
Knowles.
    Chairman Tauzin. What do you mean by saying, ``In my 
opinion, there are well-known consequences for not making the 
numbers,'' what are the well-known consequences?
    Mr. Hellman. Well, I believe that people clearly had their 
compensation altered, because they were either on a commission 
system or on a bonus system. If they didn't produce financial 
results, they were not promoted, and----
    Chairman Tauzin. Was anybody fired?
    Mr. Hellman. I did not know of that. That clearly would be 
a possibility, if one didn't perform.
    Chairman Tauzin. But you make the point that there were no 
clear consequences for cutting the corners--in other words, 
making the numbers any way you can.
    Mr. Hellman. Yes. And let me put that into context.
    Chairman Tauzin. Yes. Will you, please.
    Mr. Hellman. As business--in my experience, as business 
gets more difficult, and management is pushing for results, it 
is a matter of balance. So if you push for results, I think it 
is also important to reemphasize, if you will, the way in which 
the company performs, the way in which those results would be 
developed and delivered. So if you are pushing for results, you 
ought to be reiterating, and we do it the right way.
    Chairman Tauzin. Yes.
    Mr. Hellman. To be going on the proactive, if you will, Mr. 
Chairman.
    Chairman Tauzin. Right. And, in fact, you go on to say in 
the memo, ``Finance people in the business unit were obscuring 
the appropriate facts, both from AA and Robin, to whom they 
directly reported. As far as I am concerned--can determine, 
there were no consequences for the action.'' Who was obscuring 
the facts, and what facts were they obscuring?
    Mr. Hellman. I don't have that information, Mr. Chairman. 
The finance----
    Chairman Tauzin. Well, why would you write that if you 
didn't know that?
    Mr. Hellman. I don't know the particular people's names. I 
was told at the time that those documents weren't readily 
available. I was told at the time that the finance department 
had to go out of its way to get those documents. That is what I 
was referring to.
    Chairman Tauzin. But you are on the audit committee. Why 
wouldn't you know who was obscuring the facts? This is pretty 
important stuff, isn't it?
    Mr. Hellman. Well----
    Chairman Tauzin. Did you look into it and try to find out 
how was obscuring the facts from the standpoint of there would 
be no consequences? When I read your memo, it sounds like you 
are basically saying somebody did something inappropriate, and 
there are no consequences for doing it inappropriately. And I 
am just asking: as the audit committee, wouldn't you want to 
know who is doing inappropriate things and obscuring facts and 
take them into account for them?
    Mr. Hellman. I think, first, the audit committee relies on 
management to manage its employees, until such time as that 
inquiry needs to be elevated. Since the----
    Chairman Tauzin. Well, did anybody else at the table know 
who these people were who were obscuring the facts in the 
finance--the finance people, whoever they were? Anybody want to 
volunteer? Well, you just don't know who those people were?
    Mr. Hellman. Sir, since January, January 2002, we have had 
an active investigation. We have hired an independent counsel, 
both for the company and for the board. The priority of that 
review, that investigation, has been to determine the 
appropriate accounting.
    Chairman Tauzin. Well----
    Mr. Hellman. And it--oh, sorry.
    Chairman Tauzin. [continuing] you mentioned Mr. Knowles. 
And, Mr. Nacchio, I want to come back to you at this point. We 
don't have Mr. Knowles before us. We tried to bring him here. 
We just interviewed him on Saturday. But when we did interview 
him, he pointed out to us that he, according to him at least, 
he met with Joe Nacchio to discuss his concerns regarding 
Qwest's corporate environment and overly aggressive accounting. 
Do you recall such a meeting, Mr. Nacchio?
    Mr. Nacchio. Congressman Tauzin, I met with Russell Knowles 
each quarter as our internal auditor.
    Chairman Tauzin. Yes.
    Mr. Nacchio. I do not remember that coming up. Russell came 
into those meetings with a long list of items. He had open 
access to me in between those meetings. I also just want to 
note, I interviewed Russell on his exit from the company also. 
And he did not bring up these matters to me.
    Chairman Tauzin. He tells us that you advised him that you 
did not advocate anyone doing anything unethical or illegal in 
the company, and you told him you would talk to his direct 
reports about these concerns. You don't recall that?
    Mr. Nacchio. I don't recall that. But had he brought it up, 
I would have said that, and I would have done that. But I don't 
specifically recall that.
    Chairman Tauzin. In fact, you did have a meeting, didn't 
you, with the leaders of the business units regarding ethics 
and integrity?
    Mr. Nacchio. We spoke of that I would say systematically if 
not regularly. I know we had an annual review of the Code of 
Conduct, and I actually believe in the period since the 
takeover of US WEST we did it four times in those 2 years, 
because of it being a new company. But I am not refuting that 
Mr. Knowles may have said that. I don't remember. I did meet 
with him quarterly. He had open access. And I did meet with him 
when he was choosing to leave the company. I actually tried to 
encourage him to stay.
    Chairman Tauzin. Well, he said you gave him the right 
answer. He said you didn't encourage anybody, and you would 
have a meeting with the people, and you did end up having a 
meeting.
    Mr. Nacchio. That is fine, but I don't remember that.
    Chairman Tauzin. You don't remember that.
    Mr. Nacchio. Right.
    Chairman Tauzin. There is also, I understand, a difference 
of opinion as to what is remembered or what happened between 
you and Ms. Szeliga. Last week, she told us that, in fact, 
looking at a memo in Tab 64, if you will follow along with me--
--
    Mr. Nacchio. 64?
    Chairman Tauzin. Yes, 64, to Qwest Communications 
International Incorporated, Audit Committee of the Board of 
Directors.
    Mr. Nacchio. 64. I have not----
    Chairman Tauzin. There are two----
    Mr. Nacchio. Oh, I am sorry.
    Chairman Tauzin. 64. Okay. If you will look at that second 
document, you will see that in it is--it contains the following 
report. Mr. Szeliga also informed the committee that she had 
discussed the matter with J.P. Nacchio, Chairman and Chief 
Executive Officer of the corporation.
    The matter they are talking about is the size of the 
transactions and the accounting--financial reporting of those 
transactions, her concerns about the side agreements and what 
might be going on. She testified, if you recall, last week that 
she had become concerned about these side agreements and these 
oral assurances, and that this made it very difficult for 
them--for her and others to deal with the accountants. They 
said, ``You can't do that. You can't have these side 
agreements. You can't have these oral agreements and still 
account for these transactions the way you have.''
    And she claims at least here that she discussed this matter 
with you. What have you to say about that?
    Mr. Nacchio. Ms. Szeliga was my Chief Financial Officer----
    Chairman Tauzin. Yes.
    Mr. Nacchio. [continuing] as you know. Her office was next 
to mine. We met daily, and we met, I would say, formally at 
times when we had a monthly review of results, but we also met 
frequently on an informal basis. She had open access. I know 
she has said this. I have seen this memo presented, I think, on 
the September 19 meeting.
    Chairman Tauzin. Yes.
    Mr. Nacchio. She may have said it to me. I do know she did 
the right things and did the things I would have told her to 
do, if we had that conversation. If she had brought that to my 
attention, I would have said to her, ``Go to our general 
counsel, investigate the matter. If I can help, have me 
involved. Bring it to the audit committee, so we have an 
independent assessment. And make me a recommendation.''
    Now, she subsequently did all of that. The recommendation I 
got back--I don't remember it coming from Ms. Szeliga. I 
remember in a February e-mail that I saw--I believe this was 
referencing a C&W transaction, and I know this in the sense of 
having been prepared on the September 19 meeting, that I saw an 
e-mail that I had passed to my general counsel to investigate, 
and he came back to me at some subsequent time and said, ``That 
matter has been taken care of.''
    Now I get a lot of complaints daily from lots of customers, 
small customers in the local telephone service to 
multinationals. I generally pass them to the right people. I 
ask for follow up. But I generally don't quiz them when they 
tell me it has been solved.
    Chairman Tauzin. Now, you testified that you did interview 
Mr. Knowles upon his leaving the company.
    Mr. Nacchio. Yes.
    Chairman Tauzin. What did he tell you when you interviewed 
him were his reasons for leaving?
    Mr. Nacchio. Two principal reasons. He had worked for US 
WEST I think for 18 years. I don't know the exact amount of 
time. He had a good opportunity, I think it was in Minneapolis, 
Minnesota, and I was of some impression there were some family 
circumstances that also were influencing his decision to move 
to Minnesota.
    Chairman Tauzin. Now, again, I don't have him here in front 
of us, so you can both discuss this, and I apologize for that. 
We did try to get him. But in our interview with him Saturday, 
he told us that he left because it was becoming too difficult 
to navigate within the acceptable levels of risk in the current 
Qwest corporate environment, and that good business people were 
being pushed to do unethical things for the sake of meeting 
their goals. He mentioned none of this to you?
    Mr. Nacchio. Congressman Tauzin, I only wish he had. He did 
not mention it to me. Had he mentioned it to me, I would have 
taken appropriate action.
    Chairman Tauzin. And, Mr. Hellman, did Mr. Knowles ever 
tell you anything like that?
    Mr. Hellman. No, sir. I think my I guess it is an e-mail to 
Tom Stevens was a fair recitation of his comments to me, and 
you can tell it was sent the next day, so it would have been 
vivid in my memory. Clearly, he discussed concerns about the 
ability of the internal audit function to have the appropriate 
priority among line management. I think that would be how he 
stated it, not----
    Chairman Tauzin. Are you----
    Mr. Hellman. [continuing] clearly the intensity of his 
comments to you last week, or the committee last week.
    Chairman Tauzin. You were at the audit committee of the 
board of directors meeting that is referred to in Tab 64 
wherein Ms. Szeliga claims that she informed the committee that 
she had discussed these problems with the chairman, Joe 
Nacchio. Do you recall that meeting, first of all?
    Mr. Hellman. Yes, I do. I attended by phone. It was a 
telephonic----
    Chairman Tauzin. Do you recall Ms. Szeliga making that 
comment?
    Mr. Hellman. I do recall that.
    Chairman Tauzin. So you confirm that she at least told the 
committee that she had reported these problems to the chairman, 
Joe Nacchio?
    Mr. Hellman. I do--sorry, I missed your question exactly, 
but that is what she said. The minutes of the meeting are 
correct.
    Chairman Tauzin. That is essentially what I was trying to 
get to.
    Mr. Nacchio, you simply don't recall whether she did talk 
to you?
    Mr. Nacchio. She may have. I don't recall any specific 
discussion with her about that item.
    Chairman Tauzin. What she was concerned about is pretty 
serious stuff.
    Mr. Nacchio. Absolutely.
    Chairman Tauzin. That these transactions had been accounted 
for in a way that the accountants could qualify some of these 
deals as income in the corporation. And yet these side 
agreements, these perhaps side letters, were they known to the 
accountants, would force a restatement of income, or would 
force the reevaluation of how that accounting had occurred. 
That is pretty serious business, wasn't it, for you?
    Mr. Nacchio. Yes, it would be.
    Chairman Tauzin. So if she had told you that, why wouldn't 
you remember that?
    Mr. Nacchio. Again, Congressman, I believe this, as I 
understand it, was a response to, did I know about a very 
specific transaction. When I appointed Ms. Szeliga in the 
spring of 2001----
    Chairman Tauzin. Yes.
    Mr. Nacchio. [continuing] she had been with Qwest, had been 
Senior Financial--Vice President of Financial Planning, knew 
the Qwest side of the business, did not know the larger part of 
the business we just acquired.
    Chairman Tauzin. Yes.
    Mr. Nacchio. I sat with her and said, ``Robin, one of the 
things you have to do, this is just good plain old advice, is 
we have got a big part of the business you are not familiar 
with. Concentrate on controls as one of your early things.''
    And as any new executive, she had opportunities where she 
came to me for coaching about relationships with other 
executives. And part of what you do as a CEO is know how to try 
to get them through that without operating in a heavy-handed 
way.
    So the notion that she had problems with controls was 
something we had discussed earlier. I am answering specifically 
about as I understand this to be a transaction related to a 
side letter on a specific transaction. Matter of fact, she put 
in very specific policies in her tenure--early tenure as CFO 
about all types of accounting activities and disclosure to her 
financial staff, which was placed in each business unit.
    Chairman Tauzin. Now, there was another audit committee 
meeting on December 5, Mr. Hellman. Do you remember that 
meeting?
    Mr. Hellman. Yes, I do, sir.
    Chairman Tauzin. Ms. Szeliga gave us some information about 
it, basically that she had been asked to leave, and that audit 
committee members had some tough words after that. Do you 
recall that meeting, and can you tell us about it?
    Mr. Hellman. Yes, I recall the meeting. It was a meeting in 
Denver. I actually attended by phone, so I can't tell you 
everything about it. It was limited by being on the phone, but 
I--I can tell you about it.
    Chairman Tauzin. Please do.
    Mr. Hellman. The meeting was a regularly scheduled board 
meeting, followed by an executive session, and the executive 
session we invited Joe Nacchio to attend that portion of the 
meeting.
    Chairman Tauzin. And what occurred in this meeting? Wasn't 
there a discussion regarding the current accounting issues at 
that meeting?
    Mr. Hellman. There was, sir. Do you have in the record the 
minutes that I could refer to?
    Chairman Tauzin. I don't think we do. We can make a copy 
and give you a copy.
    Mr. Hellman. I mean, so----
    Chairman Tauzin. Let us do that.
    Mr. Hellman. My recollection, sir, is that----
    Chairman Tauzin. Let us do that, make a copy and give it 
to----
    Mr. Greenwood. I believe that document, Mr. Hellman, is in 
the stack right in front of you.
    Mr. Hellman. This here? I may have it here, Mr. Chairman.
    Chairman Tauzin. I want to make sure you have it before I 
interview you.
    Mr. Hellman. So I do.
    Chairman Tauzin. No, that is fair. And I--if you don't have 
it, I will move on and come back to it.
    Mr. Hellman. I will quickly go through this.
    Chairman Tauzin. While you are looking at it, Mr. Nacchio, 
these--just the last two areas I want to cover, Mr. Chairman.
    You have now apparently--the company has now restated 
income to the tune of $950 million. But we understand there is 
another $531 million of revenue previously recognized from the 
sales of optical capacity. Perhaps, Mr. Shaffer, you can help 
us with this one. What is all that about? What is this extra 
$531 million that is in question?
    Mr. Shaffer. Congressman, the $531 million amount concerns 
a group of IRU transactions which we are still studying and 
reviewing. They are the remainder, if you will, of the entire 
universe of IRU transactions. As you are aware, we have written 
off already $950 million of those transactions.
    Chairman Tauzin. And are they likely to get restated as 
well?
    Mr. Shaffer. I think there is a high degree of probability 
that they are going to be adjusted. At this particular moment, 
I just don't have the transaction-by-transaction review to give 
you the exact answer, but I believe they will be adjusted.
    Chairman Tauzin. All right. Now, Mr. Hellman, have you 
acquainted----
    Mr. Hellman. Yes, I have, sir.
    Chairman Tauzin. [continuing] yourself a little bit with 
the document? And can you tell us what all happened at that 
meeting and whether or not the meeting involved a discussion of 
the current accounting issues that were before the board at 
that time?
    Mr. Hellman. Yes. Actually, it was an audit committee 
meeting that I think we are referencing.
    Chairman Tauzin. Yes.
    Mr. Hellman. And there were several accounting issues we 
addressed. As you will see on page 1 toward the bottom, the 
issue on goodwill, this is just going into the new year where 
FAS 142 is being adopted. We instructed the staff to begin the 
process of evaluation of goodwill.
    Chairman Tauzin. Was there a discussion of the tone at the 
top?
    Mr. Hellman. Sir, that was in the executive session where 
that was discussed. But one point I would like to make before 
we get there is Ms. Szeliga did come back to the committee, as 
we instructed in the October meeting----
    Chairman Tauzin. Yes.
    Mr. Hellman. [continuing] to say that she had had a 
thorough review of all processes and documentation and found no 
other side agreement or ancillary or collateral agreement.
    Chairman Tauzin. Okay. But tell us about what happened in 
the executive session.
    Mr. Hellman. Fine, sir. In the executive session, our 
committee chair Tom Stevens spoke to Mr. Nacchio about the 
importance in this environment of reinstilling, of 
communicating broadly in a proactive fashion, the need within 
the organization to maintain the highest level of legal and 
ethical standards.
    Chairman Tauzin. Why did that happen?
    Mr. Hellman. I think it was----
    Chairman Tauzin. Was there a concern in the audit committee 
that that was not occurring in the corporation?
    Mr. Hellman. I think it was a followup to my memo of--or my 
e-mail of October 25. And so what our chairman was doing was 
exactly what I asked him to--to speak to the CEO. He chose to 
do it in an executive session of the audit committee.
    Chairman Tauzin. I understand.
    Mr. Hellman. But to establish the same tone at the top, 
sir.
    Chairman Tauzin. And, Mr. Nacchio, would you want to 
comment about that meeting?
    Mr. Nacchio. Yes, I would be happy to. I was asked in--my 
recollection it was either the end of the audit committee or 
the beginning of the board meeting, but in either case there 
were multiple directors there. That is not something I am 
challenging.
    Mr. Tom Stevens--Mr. Stevens had a document that was a 
document I believe that was recently issued from some New York 
law firm about, given all of the accounting issues corporate 
America was facing, what they considered now to be the new gold 
standard. And Tom led the discussion that basically said, ``I 
think we ought to adopt these gold standard procedures.'' And I 
said, ``Absolutely.'' I mean, why not?
    What should we do differently? There were no proposals 
made. There was no suggestions of something being done 
differently in terms of line management. And it was a general, 
and I would say, somewhat undirected discussion about the 
importance of the heightened scrutiny that corporate America 
was under, and how we should strive for the highest ethical 
standards, and, you know----
    Chairman Tauzin. Were you offended that they were concerned 
about the tone at the top?
    Mr. Nacchio. No. Congressman, I am not offended when my 
board is trying to be constructive. What does annoy me is when 
e-mails get passed behind my back and I don't see them, and I, 
therefore, don't know. I can't, through magic, figure out what 
is on people's minds if they don't communicate.
    Chairman Tauzin. What kind of instructions did you give 
them following that executive session?
    Mr. Nacchio. I was given no instructions for following----
    Chairman Tauzin. Did you give--you gave no instructions?
    Mr. Nacchio. Yes. I asked them to give me or to help me 
with anything that they were seeing, because this was my, so to 
speak, independent committee also, even though I wasn't on it, 
who had different visibility. And I think, quite frankly, a 
conversation that someone might not want to have with me--and I 
will just refer back to the Mr. Knowles conversation, not 
suggesting it happened--they might feel less intimidated not 
having it with the CEO and having it with an independent group, 
which is a good way to facilitate communication. That is part 
of why corporate governance generally----
    Chairman Tauzin. Because he was leaving. I mean, why 
wouldn't he tell you this when he is on the way out?
    Mr. Nacchio. I am using it as an example. Part of the 
reason we have our CFO, at least in the companies I ran, report 
into the audit committee independent of the CEO is so there is 
this independence.
    Chairman Tauzin. I understand that. But the guy was leaving 
your company. Wouldn't he be honest with you on the way out?
    Mr. Nacchio. I would hope he would, and there was no reason 
not to be. But, again, I can't put words in people's minds.
    Chairman Tauzin. I understand.
    Mr. Hellman, is that your recollection, too, that Mr. 
Nacchio gave instructions to straighten things out?
    Mr. Hellman. I don't know what actions he took after the 
meeting, sir. I mean, I believe that we found him to be 
professional. We found him to understand our concerns and to 
say that he would take the appropriate actions. And I believe 
that he did so, but I don't have first-hand knowledge of that.
    Chairman Tauzin. Is your recollection the same as his about 
the discussion of this gold standard accounting, this new 
accounting gold standard that you should follow? Is that 
accurate?
    Mr. Hellman. I don't recall that portion of the meeting. 
The portion that I recall was this establishment of a tone, 
being proactive, talking to line management about be sure we do 
it the right way.
    Chairman Tauzin. Thank you very much, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentlelady from Colorado, Ms. DeGette, for 10 
minutes.
    Ms. DeGette. Thank you, Mr. Chairman.
    Now, Mr. Nacchio, my records show that between 1999 and 
2001 you sold about $235 million worth of Qwest stock. Is that 
accurate?
    Mr. Nacchio. Approximately right.
    Ms. DeGette. Okay. And between 1997 and 2001, Qwest 
executives sold about $640 million worth of stocks.
    Mr. Nacchio. I don't know if that is--I mean, it could be.
    Ms. DeGette. You wouldn't disagree with that.
    Mr. Nacchio. I have no reason to agree or disagree. There 
are lots of executives who came and left, and I think, as you 
know, our founder sold a lot of stock, and I think that is not 
in that number.
    Ms. DeGette. Okay. Now, when you were the CEO of Qwest, 
were you aware that the company was counting revenue from the 
employee pension fund as operating revenue on the books?
    Mr. Nacchio. When I was the CEO of Qwest, post the merger 
with US WEST, because that is where you had the over--that is 
where you had an accounting I guess----
    Ms. DeGette. Okay. Post the merger----
    Mr. Nacchio. That was the pension fund that would have 
generated, under the accounting rules, surpluses which had to 
be counted as operating income. That was something we inherited 
with the acquisition of US WEST.
    Ms. DeGette. So someone told you you were required to count 
the revenue from the employee pension fund as operating 
revenue?
    Mr. Nacchio. I am aware of the issue, because at the time 
of the merger we were picking up a pension fund that we were 
inheriting from the old--the US WEST company.
    Ms. DeGette. Gotcha.
    Mr. Nacchio. I knew--and it was--this has been written 
about in the press for years about pension fund accounting and 
people doing things. And I knew of the general area. No one 
came to me specifically. The pension fund is managed by an 
independent group of executives.
    Ms. DeGette. Right.
    Mr. Nacchio. And so I know of the general topic. I am just 
trying to answer the question. I know of the general topic, but 
no one came to me, if your question was, to get guidance on the 
pension fund?
    Ms. DeGette. No. I asked you----
    Mr. Nacchio. Oh.
    Ms. DeGette. [continuing] actually, a very simple question, 
which was, were you aware that the company was counting revenue 
from the employee pension fund as operating revenue on the 
books?
    Mr. Nacchio. As operating revenue?
    Ms. DeGette. Right.
    Mr. Nacchio. No, I am not aware of that.
    Ms. DeGette. Do you deny that that is true?
    Mr. Nacchio. I have no reason to know----
    Ms. DeGette. Mr. Mohebbi, do you know whether that is true?
    Mr. Mohebbi. Congresswoman, I do not.
    Ms. DeGette. Anyone else? Mr. Hellman, do you know whether 
that is true?
    Mr. Hellman. Yes, it is appropriate. In the footnotes of 
our annual report, both US WEST and Qwest, has shown as income 
on its income statement a portion of the overfunded position of 
the pension fund.
    Ms. DeGette. As operating income.
    Mr. Hellman. I can't recall which part--how far down the 
income statement--clearly on the income statement, clearly in 
the footnotes. I don't know if it is operating or below 
operating income level.
    Ms. DeGette. Because, obviously, if it is a pension fund, 
you wouldn't be able to use those funds as operating income, 
would you?
    Mr. Hellman. It is income recognition, Madam.
    Ms. DeGette. Right.
    Mr. Hellman. It is not movement of cash.
    Ms. DeGette. Right. Exactly.
    And, Mr. Nacchio, I want to ask you, after you left Qwest, 
were you retained as a consultant by Qwest?
    Mr. Nacchio. Yes, I was retained as a consultant for Qwest 
for 2 years.
    Ms. DeGette. And when did your contract begin?
    Mr. Nacchio. September 17, 2002.
    Ms. DeGette. So you will be retained as a consultant for 
roughly 2 years.
    Mr. Nacchio. September 16, 2004.
    Ms. DeGette. Great. And what is--how much do you receive in 
compensation as a consultant?
    Mr. Nacchio. $1.5 million annually.
    Ms. DeGette. And let me also ask you, please describe the 
terms of your severance package with Qwest to us.
    Mr. Nacchio. My severance package was defined by my 
employment agreement. It is basically two times base salary 
plus targeted bonus. There was a----
    Ms. DeGette. For what period of time?
    Mr. Nacchio. For--well, it is paid at the time you leave 
the company. It is paid--it was paid about a month or 6 weeks 
later.
    Ms. DeGette. And how much was that that you received?
    Mr. Nacchio. I am just trying to get you the numbers. It is 
two times base plus bonus, which I think is $10.5 million. And 
then there was a partial year accrued bonus of $1.2 million, or 
something. So it is somewhere around $12 million in total.
    Ms. DeGette. Okay. Now, Mr. Nacchio, unfortunately, you 
weren't in the room when Ms. Smith testified. And Ms. Smith 
is----
    Mr. Nacchio. Smith?
    Ms. DeGette. I am sorry?
    Mr. Nacchio. Ms. Smith?
    Ms. DeGette. Yes.
    Mr. Nacchio. Okay.
    Ms. DeGette. She is one of your former employees, and she 
is also my constituent. And what she said when she was in this 
room was that she worked for US WEST, and then for Qwest, for a 
period of 20 years. I believe she was a technical writer is 
what her job was.
    And she was laid off just like a whole bunch of other 
people from Qwest, 27,000 employees in fact during your tenure 
at Qwest, and she lost $230,000 from her retirement savings. 
Now, she could have sold the stock that she contributed to the 
plan but not the stock contributed by Qwest.
    And what she testified is everybody at Qwest who had been 
there when your team came on, when Qwest took over, they felt 
like a family, and they felt like they were, you know, as Mr. 
Mohebbi said in his written opening statement, the local phone 
company. So they thought that they would be made whole.
    And now here they all are, 27,000 people, mostly in Denver, 
my district, they don't have jobs. And I don't know if you 
heard the last panel.
    Mr. Nacchio. No, I did not.
    Ms. DeGette. Okay. You didn't hear the last panel. But Mr. 
Winnick came in and he testified, and he apologized to the 
employees for what had happened to their pensions and to their 
jobs.
    Ms. Smith told me she has two girls. She wants to send them 
to college. And they are in their teens now. She doesn't know 
how that is going to happen, because that $230,000, that was 
for their college and for her retirement.
    And so I asked Mr. Winnick, you know, it is one thing to 
apologize to your employees, which is, frankly, not even 
anything I have heard from you here today--an apology to these 
27,000 people.
    Mr. Nacchio. I think my opening statement covered that, 
Congresswoman.
    Ms. DeGette. Okay. Well, you know what? The people who are 
watching this on TV in Denver did not see your written 
statement.
    Mr. Nacchio. I read it.
    Ms. DeGette. And the thing is, I said to Mr. Winnick, I 
said, ``Mr. Winnick, what are you going to do besides 
apologize?'' And Mr. Winnick said, ``You know what? I am going 
to take--I talked about it with my wife, and I am going to take 
$25 million from my pocket and put it back into the pension 
fund.'' I want to know, is there anything you plan to do to 
make the pensioners who lost their jobs and the employees who 
lost their jobs while you were the CEO whole?
    Mr. Nacchio. Can I respond to several things that you said 
in that statement, or----
    Ms. DeGette. Sure.
    Mr. Nacchio. [continuing] do you want just a short answer? 
I mean, seriously, because I did not lay off 27,000 people. 
When we merged the two companies, it was 72,000 employees. When 
I left Qwest, the number was about 60,000. It would be 12.
    Second, when I----
    Ms. DeGette. So only 12,000 lost their jobs.
    Mr. Nacchio. Yes. Last week alone, SBC announced 11,000 
employees being laid off. Every Bell operating company in this 
country has laid off employees because of the--I won't blame it 
on the economy. I will say the economy, the industry structure, 
the substitution by wireless, by cable. Whatever the fact is, 
every company that used to be a Bell operating company is 
laying off employees, literally as we speak.
    The second thing, about that 401(k) plan, we inherited a 
401(k) plan from US WEST where employees of US WEST, prior to 
the merger, were locked up on the company contribution. 
Employees who came from Qwest were not locked up. Employees who 
joined the company after the merger were not locked up.
    When that issue was brought to my attention in early 2002, 
I went to the board of directors and changed that provision. So 
that was something we inherited that I was not aware of, and I 
feel bad I didn't know about it earlier.
    Now, in terms of Mr. Winnick's proposal, as I understand 
what you just told me, I have not heard about it. I have no 
reflection on it. Mr. Winnick----
    Ms. DeGette. I think he just came up with it today.
    Mr. Nacchio. Mr. Winnick's company also went bankrupt. 
Qwest is not a bankrupt company. It has a pension plan, and 
there are lots of reasons why the telecommunications industry 
is on hard times.
    Ms. DeGette. So I guess your answer to Ms. Smith and to 
other people is: tough luck.
    Mr. Nacchio. No, that isn't what I just said.
    Ms. DeGette. Well, I mean, that is the way they are going 
to think of it.
    Mr. Shaffer, let me ask you, because this is a real concern 
of mine, and I think it is a real concern of Mr. Notebaert's as 
well. What does the new management of Qwest intend to do about 
these folks who have been laid off, who have lost their 
retirement, who are really looking to the new leadership to do 
something?
    Mr. Shaffer. Congresswoman, we are right now paying most of 
our attention--in fact, I would say all of our attention--to, 
in fact, saving the current company and its 55,000 employees 
and continuing to not, as Mr. Nacchio said, go into bankruptcy 
in which not only do we lose the benefits for all of the 
employees, but the 55,000 employees, the pension benefits for 
the 50,000 employees which do receive benefits from the 
company.
    So we are concentrating now on improving the operations of 
Qwest, creating value in Qwest, continuing the company as a 
good employer, as a good contributor to the economy, and, quite 
frankly, have not thought about what has happened in the past 
or trying to remedy that.
    Ms. DeGette. Well, Mr. Shaffer, I know you all are trying 
to be--you have come in and inherited a mess. You are trying to 
be good corporate citizens. I would hope that you would 
consider these folks who are sitting out there with nothing as 
you work through your plan.
    Mr. Shaffer. If I could just respond. I would go further 
and say that we will be good corporate citizens. We do have a 
different approach to not only our communications internally 
but also externally with our constituencies around the company 
and in different states. And this is something which you 
correctly point out that Dick Notebaert has stated his opinions 
very clearly.
    And, you know, if it would do anything, I might read you a 
letter here from Morty Barr, who is the president of the CWA. 
They have 700,000 members in their union, mostly in the 
telecommunications area. But this is an unsolicited letter from 
Morty. Wall Street, along with----
    Ms. DeGette. To save time----
    Mr. Shaffer. --Qwest customers and----
    Ms. DeGette. Sir?
    Mr. Shaffer. [continuing] business partners, can have full 
confidence----
    Ms. DeGette. Sir?
    Mr. Shaffer. [continuing] in Dick Notebaert's commitment to 
setting the highest ethical standards in his experienced and 
executive ability.
    Ms. DeGette. Mr. Shaffer? Excuse me. I have limited time. 
If I can just ask unanimous consent, we can include that letter 
in the record.
    Mr. Shaffer. Actually, that is fine. I would love to give 
it to you, because I think it is a great letter, and from a 
very, very large constituency.
    Ms. DeGette. Thank you.
    Mr. Shaffer. You are welcome.
    Ms. DeGette. I would just like to follow up briefly on the 
chairman's questions, if I may, about the audit committee 
meetings in the fall and into the winter of 2001.
    Mr. Shaffer, I believe that the company has restated, as of 
September 22 of this year, about $900 million. Is that correct?
    Mr. Shaffer. $950 million.
    Ms. DeGette. And how much of that was IRUs?
    Mr. Shaffer. The entire amount was IRU.
    Ms. DeGette. The entire amount. And you are looking at 
potentially restating around $500 million more?
    Mr. Shaffer. It is a different category of IRU, but we are 
reviewing that, and we are viewing it on a case-by-case basis.
    Ms. DeGette. Okay. Now, Mr. Hellman, going back to Chairman 
Tauzin's questions, I know that the board was concerned about 
the accounting treatment of a lot of these transactions clear 
back--I believe all the way back to 2000, 2001. Would that be 
accurate to state?
    Mr. Hellman. I joined the audit committee, in fact the 
board of Qwest, in mid-year 2000. I have been told that in the 
first audit committee meeting there was a discussion on IRUs. 
To be candid, I don't recall that October 2000 meeting. It is 
part of material that has been shown to me.
    Ms. DeGette. Was the board aware of the IRUs at that time, 
in 2000?
    Mr. Hellman. Oh, clearly. Yes, sir--I mean, ma'am.
    Ms. DeGette. That is okay.
    And if you will take a look at Tab 63 in your notebook, the 
first part of that is the audit committee minutes, which you 
talked about with the chairman. And then attached to that is a 
presentation that Arthur Andersen did to the audit committee 
October 4, 2000. Were you on the audit committee at that time?
    Mr. Hellman. Yes, I was.
    Ms. DeGette. Okay. And in that memo that Arthur Andersen 
presented, they talked to you about these IRUs and about the 
SEC investigating them, that you didn't--SEC emphasis on no 
future benefit to the company and no future revenue generation 
from the activity. SEC vigorously challenging sales treatment. 
So you were aware of these problems clear back in 2000, right?
    Mr. Hellman. I was at the time. I don't recall this 
meeting, but clearly the IRUs were addressed at almost every 
meeting of the audit committee. And we met 35 times.
    Ms. DeGette. And was Mr. Nacchio present at those meetings?
    Mr. Hellman. As a common practice, no.
    Ms. DeGette. Okay. Do you know if Mr. Nacchio was aware of 
the concerns about the IRUs?
    Mr. Hellman. He would have been, in that the audit 
committee reported back to the full board, and he was a member 
of the full board. So, clearly, from the audit committee 
standpoint, he would have been aware of those concerns. And I 
can't address whether he would also be aware of the concerns 
meeting directly with the independent auditors or his chief 
financial officer.
    Ms. DeGette. And what specifically were the concerns of the 
audit committee?
    Mr. Hellman. The concerns----
    Ms. DeGette. About the IRUs.
    Mr. Hellman. The concerns of the IRU is it is an extremely 
complex transaction, and it has to be appropriately applied to 
the specific transaction the company is entering into. Arthur 
Andersen----
    Ms. DeGette. And it has to have a business purpose.
    Mr. Hellman. It has to have a business purpose. But that is 
only one of the multitude of elements that an IRU would have to 
have to achieve the recognition of income that the company's 
policy called for.
    Ms. DeGette. Okay. And you testified, when the chairman 
asked you the questions, that when Ms. Szeliga came to you and 
talked to you about the Cable & Wireless deal--remember that? 
That was the end of October. That involved about $109 million. 
Is that correct?
    Mr. Hellman. Yes.
    Ms. DeGette. And later on you learned about additional 
deals with side agreements or--that is what we call them, 
because, you know, we are not accountants. And those totaled I 
guess, from what we have heard from Mr. Shaffer, around $950 
million, right?
    Mr. Hellman. No, I think he was referring to all IRUs.
    Ms. DeGette. Okay.
    Mr. Hellman. Not just IRUs that would potentially have a 
side agreement.
    Ms. DeGette. How many of the IRUs did you learn about with 
a side agreement?
    Mr. Hellman. I believe there have been three.
    Ms. DeGette. And what was the total of those three 
transactions? I think you are right.
    Mr. Hellman. Well, it would be 109 plus the other two, 
which I can't----
    Ms. DeGette. Right.
    Mr. Hellman. And I----
    Ms. DeGette. Even I took high school math, so I got that 
far.
    Mr. Hellman. Okay. So I am trying to think on my feet. I 
don't know exactly.
    Ms. DeGette. Okay. And did Ms. Szeliga also----
    Mr. Hellman. But it would be a small portion of the 
subtotal.
    Ms. DeGette. Did Ms. Szeliga also advise you that the other 
two did not need to be restated, the other two IRUs with the 
side agreements?
    Mr. Hellman. No. I think we had a more formal investigation 
by the time that those transactions were discovered. It was not 
in the October 2000----
    Ms. DeGette. When were those discovered?
    Mr. Hellman. Well, Flag I think was one that you addressed 
last week.
    Ms. DeGette. Right.
    Mr. Hellman. And I believe that that was--arose from the 
mailing by our independent auditor as part of the scope of 
audit that the board approved in the beginning of 2002. And, 
therefore, I assume that it was first brought to Arthur 
Andersen's attention in January or February 2002.
    Ms. DeGette. Okay.
    Mr. Hellman. At that point, we conducted an investigation 
to determine if, indeed, there was--and that was an oral 
agreement, and to determine if there was an oral agreement. All 
people party to that transaction were interviewed, and we found 
that there was no substantiation that an oral agreement 
existed. The investigation is continuing as we are continuing 
all investigations.
    Ms. DeGette. So in your opinion, that Flag agreement--there 
was no oral side agreement? Or you just don't?
    Mr. Hellman. That is the company position.
    Ms. DeGette. Hmm?
    Mr. Hellman. That is the company position.
    Ms. DeGette. Okay. Well, let me ask you, Mr. Shaffer. Why, 
then, have--or maybe you, too, Mr. Hellman. Why, then, have you 
restated that income from that transaction?
    Mr. Hellman. As a part of the overall IRU accounting 
analysis, not because of any individual side agreement or 
collateral agreement.
    Ms. DeGette. Mr. Shaffer, why was all of the IRU revenue 
restated?
    Mr. Hellman. And I should point out when I was referring 
to--I was referring to contemporaneous transactions.
    Ms. DeGette. Right.
    Mr. Shaffer. As Peter correctly points out, the 
contemporaneous transactions we have restated, the $950 million 
worth----
    Ms. DeGette. Right.
    Mr. Shaffer. [continuing] is the result of an analysis of 
our own policies and practices, as well as the underlying 
records in the company. At the conclusion of that analysis, I 
determined, in conjunction with our external auditors, that we 
could not sustain the accounting treatment which required 
revenue recognition. That is the reason that I----
    Ms. DeGette. And why did you not believe you could sustain 
that?
    Mr. Shaffer. Well, this may get too specific, but, please, 
I hope not. One of the basic parameters of recognizing revenue 
on a contemporaneous transaction is that the assets that you 
have on both sides are dissimilar, meaning that you are 
giving----
    Ms. DeGette. Right. We have been through this--last week, 
yes.
    Mr. Shaffer. And when we went to our records--and that 
would require, of course, if they were dissimilar that the 
records should reflect a group of assets. When we looked at the 
specific records, they were lacking. And as this is such a 
bright line test as far as recognition and revenue recognition 
is concerned, I--in my judgment, we had to restate the 
accounts, and that is why we did it.
    Ms. DeGette. Thank you.
    I will finish my questioning in a minute.
    Mr. Greenwood. The time of the gentlelady has expired. We 
will do a second round.
    As a matter of housekeeping, the Chair would ask unanimous 
consent that the--all of the documents in the binder be part of 
the record, as well as the--those discussed today, including 
the letter just introduced by Mr. Shaffer. Without objection, 
so it is.
    The Chair recognizes himself for 10 minutes and turns to 
Mr. Mohebbi. And I would ask you to turn to Tab 62 in the 
binder, which is a series of e-mails, in part between you and a 
gentleman by the name of David Boast. They were sent on June 
13, 2000. Do you have that document, sir?
    Mr. Mohebbi. Yes, Mr. Chairman.
    Mr. Greenwood. Let me read from it in part. Mr. Boast 
writes to you, ``We agreed at the time of the Touch America 
card allocation that we would not be able to do both this IRU 
and Touch America. This is not a challenge. It is impossible, 
and we shouldn't spend any time at all on this, or we could 
jeopardize our other activities. Let us get Sales to find 
another IRU--to find other IRU opportunities.''
    And then you wrote back, ``What if we misroute the IRU, and 
then route it as it is supposed to?'' And Mr. Boast writes back 
to you, ``If we could do this, which I am not sure we can, then 
all we have to do is get audited, get caught, and get 
screwed,'' to which you respond, ``I know it is risky. I will 
take the fall for it.'' Could you elaborate on that series of 
e-mails?
    Mr. Mohebbi. Yes. Actually, I would be delighted to get the 
opportunity to do that. And if I could, I would like to set the 
stage in terms of what the discussion is. The series of e-
mails, Mr. Chairman, that are here start with an e-mail from--
that have to do with engineering. There is a person in the 
wholesale organization that is concerned about a sale--
potential sale to a customer that may not be completed because 
there is a lack of equipment.
    It was escalated to me by the person who ran the wholesale 
organization, and I obviously sent it to Mr. Boast, who was at 
that time responsible for operations and engineering. And one 
of the things that I do in my job is obviously to try to 
encourage people to do as good as they can and make sure that 
they get the work done.
    Mr. Boast, in this particular case, at the moment thought 
that it was impossible to get these two particular jobs done at 
the same time. And my suggestion was: what if we misroute the 
IRU and then route it as it is supposed to? Misroute, in the 
long haul engineering parlance, is when you cannot connect from 
point A to point B.
    Let us say, if you have an IRU, engineering-wise, if you 
can't connect by the shortest distance, and for a number of 
reasons--you don't have enough circuits, your network is 
incomplete--and you have to go maybe on a route that is not the 
shortest distance, the customer doesn't pay for it, but you 
have to go through a longer route to get there, that is really 
what the definition of the misroute is.
    And I said, ``Is it possible for us to do that and then 
maybe''----
    Mr. Greenwood. Well, let me understand you. You said a 
misroute comes when you----
    Mr. Mohebbi. Yes.
    Mr. Greenwood. [continuing] cannot connect point A to point 
B.
    Mr. Mohebbi. That is correct. That becomes so----
    Mr. Greenwood. Just let me finish. Which then requires you, 
because of your inability to connect A and B, to go around. 
Now, it seems to me to be another thing entirely if you say, 
``What if we misroute it,'' because there you are not being 
forced to, you are choosing to.
    Mr. Mohebbi. Yes.
    Mr. Greenwood. Correct? Okay.
    Mr. Mohebbi. So as I was saying, that the shortest 
connection between two points is the route. If you connect 
point A and point B but don't connect it through the shortest 
route, that becomes a misroute in the engineering parlance. And 
eventually--you can do a lot of misroutes.
    And most of the people that have ``new networks'' have a 
lot of new--have what is called a misroute, and then later on 
you have to work with the customers, obviously, because 
misroutes--to change the misroutes and reroute them, you have 
to bring the circuit down. And if the purchaser is a carrier, 
for example, they will be out of service for a day, for 2 days, 
etcetera.
    So in that particular case, my suggestion was, is it 
possible--you don't have--I understand you don't have the 
circuits to build that particular route--that we could go 
elsewhere and then come back?
    Mr. Boast is obviously, then, talking about accounting and 
why this could be a potential with accounting, and uses, you 
know, the words that you mentioned. I believe that Mr. Boast 
mentioned those because he was worrying about what happens if 
revenue is recognized on this particular route. And then later 
on, if you want to change that particular route, there should 
be--there could be concerns about it.
    Mr. Greenwood. And when he said that to you, when he----
    Mr. Mohebbi. Yes.
    Mr. Greenwood. [continuing] when he communicated that to 
you, did you understand that that is what he was communicating 
to you, an audit concern?
    Mr. Mohebbi. Again, at the time, I am--this is--I am going 
with what I am seeing right now, and I saw this e-mail, 
obviously, a few days ago. But my reading right now is, Mr. 
Chairman, that he was concerned about the audit potential 
because of the revenue recognition implications on----
    Mr. Greenwood. I understand that. My question is: do you 
assume that that is what you--that is what you believed his 
concern to be then?
    Mr. Mohebbi. I believed that concern to be then, yes.
    Mr. Greenwood. Okay. So, then, and he--he talked about 
concern that you would get audited, get caught.
    Mr. Mohebbi. Yes.
    Mr. Greenwood. And I assume ``get screwed'' means get in 
trouble with the law.
    Mr. Mohebbi. Yes. Or with internal auditors.
    Mr. Greenwood. Okay.
    Mr. Mohebbi. That is----
    Mr. Greenwood. So when you saw him respond that way, and 
you responded by saying, ``I know it is risky. I will take the 
fall for it''----
    Mr. Mohebbi. Yes.
    Mr. Greenwood. [continuing] what did you mean? That was not 
an engineering fall, was it?
    Mr. Mohebbi. No. Specifically, again, I am glad that you 
have--I have an opportunity to talk to you about that, because 
the words usually go with the people, and you have to know the 
nature of the people. In this particular case, I was dealing 
with engineers and operating people, and this was maybe the 
shortest way. The choice of words could be, again, discussed.
    But this was the shortest way for me to say, ``Look, you 
deal with the operational issues that you have. Try your best 
to try to get the two jobs done at the same time.'' If there 
are--the concerns--the risks have to do with revenue 
recognition. If there are any concerns, we do the work. And let 
us say the accountants come back and say that the revenue can't 
be recognized, I am going to take the blame for that. And that 
was what I was trying to communicate to Mr. Boast at that the 
time, to try to get the job done. Do your best to get the job 
done here.
    And, again, if I could just provide the follow up, Mr. 
Chairman, since I had the opportunity, and I thank the staff 
for providing us with the information ahead of time. I checked 
on this particular scenario, and, indeed, Mr. Boast was 
incorrect. So the impossible did get done possibly, and the two 
jobs got done on the route, and the revenue was recognized in 
the quarter.
    And by the way, the revenue wasn't required in terms of 
what our objectives were for the quarters. But it was a risk 
that I was taking, believing that if the operating people did 
their work, you know, that that's what I was asking them to do.
    Mr. Greenwood. But it wasn't a legal risk you were taking. 
You weren't saying, ``Go ahead and break the law. And if you 
get caught, I will take the--I will go to jail''?
    Mr. Mohebbi. No, Mr. Chairman. That is----
    Mr. Greenwood. That is not what you were----
    Mr. Mohebbi. That was definitely not what I meant.
    Mr. Greenwood. Very well. The e-mail to Nick Jeffery at C&W 
that came from your e-mail account has been the subject of a 
lot of controversy.
    Mr. Mohebbi. That is right.
    Mr. Greenwood. I think it can be found in Tab 64.
    Mr. Mohebbi. Yes, sir.
    Mr. Greenwood. If you don't have it in front of you right 
now.
    Mr. Mohebbi. Yes, I do, Mr. Chairman.
    Mr. Greenwood. Okay. Now, do you recall sending that e-
mail?
    Mr. Mohebbi. I do not recall sending this e-mail, Mr. 
Chairman.
    Mr. Greenwood. Okay. Did you give anyone else permission to 
send this e-mail from your account?
    Mr. Mohebbi. I do not recall giving someone permission from 
my account to send it, no.
    Mr. Greenwood. Can you imagine how an e-mail would be sent 
from your account without you sending it or you giving someone 
else permission to send it from your account?
    Mr. Mohebbi. Again, I do not. And one of the key things 
that I wanted to do was I wanted to make sure, because it is an 
important part of the discussions that we have had here----
    Mr. Greenwood. Right.
    Mr. Mohebbi. [continuing] and I think it is important that 
as we find out what the technicality is and how an e-mail can 
be sent, it is important to note that we do know that it went 
from my computer, that it went from a computer that had my name 
on it. So I better, and I will, take full responsibility for 
the e-mail. I have reviewed----
    Mr. Greenwood. Although you say you don't recall sending 
the e-mail, you don't rule out the possibility that, in fact, 
you typed all these words into your computer and sent it?
    Mr. Mohebbi. No. I believe that I have--I think we have 
enough data that we have provided that showed these particular 
words were actually negotiated extensively by the contract 
team. As I mentioned in my opening testimony, there are 
contract teams in Qwest that work on contracts and addendums, 
etcetera. These particular words I think were presented, 
negotiated. And, again, I did not notice obviously at the time. 
This is all that we have found out so far, Mr. Chairman.
    These words were negotiated, a lot of back and forth in 
terms of what they meant, and then they were okayed by the 
experts. While I did not recall sending it, if I am looking at 
it right now, and if it was presented to me in the process, the 
way that we have a process to work, if somebody asks me within 
the process to send an e-mail, mainly because the customer 
needs a comfort level of some sort, I would have sent it.
    Mr. Greenwood. But you are familiar with this particular 
C&W deal, correct?
    Mr. Mohebbi. I have read about it, and so I am a bit 
familiar with it, Mr. Chairman.
    Mr. Greenwood. Mr. Jeffery of C&W swore in an affidavit 
provided to the committee last week that he spoke with you 
about this deal and about the contents of the e-mail prior to 
the e-mail being sent. Do you recall this conversation?
    Mr. Mohebbi. I do not recall that conversation.
    Mr. Greenwood. Okay.
    Mr. Mohebbi. My recollection is that the first time I 
talked live in person with Mr.--I have not yet met Mr. Jeffery 
in person. But the first time I actually talked to him on the 
phone was sometime in 2002 when there were other issues with 
Cable & Wireless, and they specifically asked for me to be on a 
particular phone call.
    Mr. Greenwood. Well, regardless of who sent the e-mail and 
whether you recall this conversation, the statements in this e-
mail are problematic for Qwest in recognizing revenue up front, 
are they not?
    Mr. Mohebbi. I have not seen the statement, Mr. Chairman, 
of Mr. Jeffery.
    Mr. Greenwood. No, the e-mail itself.
    Mr. Mohebbi. I do not believe so.
    Mr. Greenwood. Why not?
    Mr. Mohebbi. Again, for the number of reasons that I 
mentioned. The text of this particular e-mail was reviewed and 
okayed by our experts, and the company, as well as the 
experts--you can add my name on it that I am not the experts--
believe that this particular e-mail does not change the 
substance of the transaction, and that the transaction at hand, 
it was mainly provided as a comfort level and to provide some 
pricing, and that is the position that the company has taken 
all along.
    Mr. Greenwood. Did Ms. Szeliga disagree with that 
statement?
    Mr. Mohebbi. I don't know why Ms. Szeliga would disagree 
with that particular statement.
    Mr. Greenwood. She didn't find a problem with this e-mail 
and with this practice?
    Mr. Mohebbi. I think, again, I am providing you with my 
opinion, Mr. Chairman. I think Ms. Szeliga could have had 
issues with the process, which is when you have a particular e-
mail like this one that is sent, obviously there is a contract 
file, and there is a filing process, and maybe she has got a 
problem with a particular process.
    But it has been the experts' definition and the experts' 
opinion that have seen this particular e-mail that this does 
not change the substance of the transaction at hand.
    Mr. Greenwood. Well, Robin Szeliga told us last week that 
she was very angry because you knew not to do this, and, more 
importantly, that you were the president of the company. She 
said that she was angry and that this bothered her.
    Mr. Mohebbi. Okay. Who did she share her anger with? 
Because, Mr. Chairman, I know that----
    Mr. Greenwood. She said with you. She said that she shared 
that with you.
    Mr. Mohebbi. Ms. Szeliga, to the best of my recollection, 
after this particular e-mail was identified, was--had actually 
stopped by my office. And I believe at the time counsel was 
with her as well. And she indicated about the existence of the 
e-mail. The tone of the discussion was, again--generally, the 
tone of the discussion with me is very regular. It wasn't----
    Mr. Greenwood. Why do you suppose she didn't know about 
this e-mail for 10 months after it was issued?
    Mr. Mohebbi. And that is, Mr. Chairman, what I was saying, 
is that if there was an issue, maybe the issue was that there 
is an e-mail. The content of the e-mail, the experts have 
looked at it, they have negotiated the words, and it does not 
change the substance of it, so maybe----
    Mr. Greenwood. Why wouldn't this language--if this was 
important to send to--this is important information, why 
wouldn't this be part of the upfront contract? Why did this 
have to travel in e-mail form, unbeknownst to others in the 
company, for as much as 10 months?
    Mr. Mohebbi. That is a good----
    Mr. Greenwood. It certainly strikes us as kind of a secret 
side deal that might have been necessary in order to allow for 
the accounting to be done the way that it was without this kind 
of an agreement being visible to the world.
    Mr. Mohebbi. Mr. Chairman, certainly there were no intents 
to hide this particular agreement. My understanding is, in 
particular, that there is a process that these documents go 
through, and this document went through that process, to the 
degree that we have found them.
    I think if there is an issue it goes back to once that 
document was sent, what happened to the filing of the document, 
but you asked a specific question which--which I agree, and I 
would like to respond to, and that is, why is there even a need 
for addendums to contracts? And, again, my----
    Mr. Greenwood. Well, addendums to contracts are just that. 
They are appended to the contract.
    Mr. Mohebbi. Okay. That is correct.
    Mr. Greenwood. They become part of the original document.
    Mr. Mohebbi. That is----
    Mr. Greenwood. An addition to the document. They become 
visible to anyone who would examine the document.
    Mr. Mohebbi. And, Mr. Chairman, sometime----
    Mr. Greenwood. They are not written on the palm of your 
hand and flashed up and then held down.
    Mr. Mohebbi. Mr. Chairman, in this particular case, I 
believe, as I found out, that the customer required some 
comfort regarding particular pricing, and this particular----
    Mr. Greenwood. Then, why didn't--that would--why was that 
not, then, included or amended, appended to the contract?
    Mr. Mohebbi. That is a good question. I do not have the 
answer to that question, because I don't do the specific 
contracting, and I don't want to come up with a reason that 
that is not correct. What I can tell you is that the one point 
that I could say is--that you could look at, and if you say 
going through this whole process is once a particular document, 
no matter whether it is a comfort letter, etcetera, it has got 
my name on it, and that is obviously significant if it has gone 
from Qwest.
    I believe maybe the filing of a particular document like 
this one is important. And I cannot attest to you that when 
this particular document was sent from my computer that the way 
that it was filed was something that I followed up on, and 
maybe that is something that I had to find out about, and the 
filing was something to go after.
    But I don't think--I want to make sure--from where I sit, 
and from what I know, I don't think there was an attempt made, 
Mr. Chairman, to try to write a quick e-mail and then have it 
be anywhere.
    Mr. Greenwood. Okay. But you understand what you are 
testifying under oath to. You are saying, ``This came from my 
computer, but I didn't do it.'' You are saying----
    Mr. Mohebbi. But I----
    Mr. Greenwood. [continuing] that, ``Yes, it was not 
included in the contract, but I don't know why.'' You are 
saying that, ``It took 10 months for the finance people to know 
about this, but I don't really understand why that is.'' And so 
you can't explain any of this.
    It is a great mystery to you. And yet there is a plausible 
explanation that those of us trying to interpret all of this 
would have, and that would be that this would be a very 
convenient way to manage the revenues the way you wanted to, 
and be able to have it both ways--in other words, be able to 
have the accountants treat the revenues one way and yet this 
not show up on the legal documents, because, in fact, it may 
very well have been that if it was incorporated in the legal 
documents, it wouldn't have been--you wouldn't have been able 
to account for the revenues that way.
    So on the one hand, you have a very plausible, a very 
logical reason why this would be done in a surreptitious 
fashion. On the other hand, we have your explanation which 
says, ``I don't understand how it came out of my computer. I 
don't understand why it wasn't part of the document. I don't 
understand why the finance people didn't know about it for 10 
months.''
    Mr. Mohebbi. If I could reply to that, Mr. Chairman.
    Mr. Greenwood. Please.
    Mr. Mohebbi. I think one of the things that I wanted to 
make sure to be helpful to the subcommittee was that there was 
a lot of discussion, and I believe it was the ranking member 
that says it is interesting that nobody is taking 
responsibility for this e-mail being sent.
    And one of the things that I said was, obviously, I want to 
make sure you knew what the circumstances around the e-mail is. 
But I take full responsibility for the e-mail. It has got my 
name on it. I don't recall sending it, but that is an issue 
separate from--it is--I take accountability for this e-mail.
    I believe also that what I tried to tell you is that the 
experts at the company that had reviewed this particular--we 
have done, as a company, a lot of work in this particular area. 
The experts have reviewed the text of this particular e-mail. 
The experts included contract management, people from the 
financial organization, legal--they had reviewed this 
particular document. And before and after it was sent, those 
particular experts' position has been that this particular e-
mail did not change the content and the--did not change the 
substance of that transaction.
    That is the--that is what I am trying to tell you, is that 
we strongly believe that this particular e-mail did not change 
the substance of transaction. And I don't want the subcommittee 
to be hung about, was the e-mail sent? Was the e-mail not sent? 
We have verified the e-mail was sent. So let us just take it at 
that, and say, ``I will take--it has got my name on it. The 
buck stops with me.''
    Mr. Greenwood. Would you describe the oral agreement with 
Flag in the same way, that it wasn't--the oral agreement with 
Flag, would you describe that in the same way, that it was just 
a matter of comfort, it didn't change the nature of the 
contract? Did you watch the hearings last week or read the 
transcript of them?
    Mr. Mohebbi. No. Some, Mr. Chairman, not the whole--not the 
whole transcript. I apologize. I don't--I was not personally 
involved in a Flag transaction, in terms of what a particular 
Flag transaction was. If you would like me to familiarize 
myself----
    Mr. Greenwood. Well, my time has expired. I am going to 
recognize the gentlelady from Colorado for a second round now.
    Ms. DeGette. Thank you, Mr. Chairman.
    Mr. Mohebbi, just to follow up on a question of the 
chairman's, you said that Ms. Szeliga, when she learned about 
this e-mail, which apparently is unnumbered--you know the one I 
mean----
    Mr. Mohebbi. Yes, Congresswoman.
    Ms. DeGette. The famous e-mail. That Ms. Szeliga showed up 
at your office with counsel.
    Mr. Mohebbi. That is my----
    Ms. DeGette. Okay. Who was the counsel she showed up with?
    Mr. Mohebbi. It could be a number of people, but I 
believe----
    Ms. DeGette. Was it an internal attorney?
    Mr. Mohebbi. Yes.
    Ms. DeGette. Okay. And did she--was she prone to showing up 
at your office with a lawyer?
    Mr. Mohebbi. No.
    Ms. DeGette. So was this the first time she had done that?
    Mr. Mohebbi. I don't think so. There had been other times.
    Ms. DeGette. How many times?
    Mr. Mohebbi. I can't state that many.
    Ms. DeGette. Like less than 10?
    Mr. Mohebbi. Fair statement, Congresswoman.
    Ms. DeGette. I mean, if someone shows up at your office 
with a lawyer, you kind of pay attention, huh?
    Mr. Mohebbi. No.
    Ms. DeGette. No, you don't?
    Mr. Mohebbi. Given--actually, in terms of my day-to-day 
activities, a lot of lawyers show up at my office and for 
different----
    Ms. DeGette. Okay. So now you are saying, no, it wasn't 
unusual for her to show up with a lawyer?
    Mr. Mohebbi. No. You specifically asked, ``Did Ms. Szeliga 
showing up with a counsel was an unusual event''?
    Ms. DeGette. Okay. But that brought your attention to the 
issue, right?
    Mr. Mohebbi. Not anything more than usual, but----
    Ms. DeGette. And what did you and Ms. Szeliga and the 
counsel discuss at that meeting?
    Mr. Mohebbi. I don't remember the exact discussion. I 
believe the gist of it was that Ms. Szeliga had identified this 
particular e-mail.
    Ms. DeGette. Right.
    Mr. Mohebbi. And wanted to make me, first of all, aware of 
it, that it existed. And told me, you know, did you write this 
e-mail? And----
    Ms. DeGette. And what did you say?
    Mr. Mohebbi. I don't remember exactly what I said, but I 
would say the gist of it is that I don't believe I wrote this 
e-mail. And----
    Ms. DeGette. And what was the result of the meeting?
    Mr. Mohebbi. I don't think there was a result.
    Ms. DeGette. Did she tell you, ``Don't do this anymore. 
This is against company policy''? No?
    Mr. Mohebbi. Congresswoman, there were no discussions like 
that. It was more of a----
    Ms. DeGette. Did she tell you she was going to take this 
matter to the audit committee because it was inappropriate 
under your accounting rules?
    Mr. Mohebbi. I don't believe so, Congresswoman.
    Ms. DeGette. Okay. So you remember she showed up with 
counsel. You don't really remember what was discussed. Do you 
remember, was she mad or not? Angry?
    Mr. Mohebbi. I don't remember if she was mad.
    Ms. DeGette. Take a look, Mr. Mohebbi, at Tab 35 in your 
notebook. That is a May 2001 e-mail to Greg Casey.
    Mr. Mohebbi. 35?
    Ms. DeGette. Yes. Oh, wait, that is in the first binder. 
Have we got that into--I am sorry. We get a new binder every 
time we come, so----
    Mr. Mohebbi. No problem.
    Ms. DeGette. It is dated--while she is looking for that--I 
will come back to that. I have a couple more questions for Mr. 
Hellman. Oh, 66.
    Mr. Mohebbi. Yes, ma'am.
    Ms. DeGette. And that is an e-mail from you to Greg Casey 
dated--your e-mail is dated May 14, and there is a prior one 
dated May 12. And on May 12, you say to Mr. Casey, ``What do 
you think about this quarter? Can we make it? Business is in 
bad shape. This is a bad April. So we need a ton of one-time 
items to make the quarter.''
    And then you say in the next--May 13 memo--I guess that is 
from Mr. Casey to you. He says, ``I think that Robin said we 
weren't going to do any more deals where we pick up facilities 
at the same time someone buys them from us.'' And then it goes 
on.
    So my question to you--and then you respond and you say, 
``I will talk to Robin on the accounting rules.'' This is in 
May 2001. Did you ever talk to Robin Szeliga about the 
accounting rules?
    Mr. Mohebbi. Congresswoman, I do not remember I did that. 
And one of the reasons that I don't remember doing that is 
because, if you look at that particular e-mail, it cc'd Bill 
Eveleth, who is a senior financial executive in the company. 
And I think I cc'd him, and I particularly wanted him to deal 
with the issue. And my----
    Ms. DeGette. Well, but that is not what your e-mail says.
    Mr. Mohebbi. No. My----
    Ms. DeGette. Your e-mail doesn't say, ``Bill, talk to Robin 
about the accounting rules.'' It says, ``I will talk to Robin 
about the accounting rules.''
    Mr. Mohebbi. I don't believe or I don't----
    Ms. DeGette. You don't remember talking to Robin about the 
accounting rules?
    Mr. Mohebbi. No, Congresswoman.
    Ms. DeGette. Do you know what happened to this WorldCom 
deal that this was--that was being discussed in this e-mail? 
And was a port agreement ever negotiated?
    Mr. Mohebbi. A version, a particular transaction with 
WorldCom. I am just speaking from memory. I am not sure. I 
believe a particular transaction with WorldCom was negotiated.
    I also--if I could make a statement on this particular e-
mail----
    Ms. DeGette. Brief.
    Mr. Mohebbi. Because I have seen this particular e-mail. 
When I talk about----
    Ms. DeGette. Oh, good. Go ahead.
    Mr. Mohebbi. Can I?
    Ms. DeGette. Yes.
    Mr. Mohebbi. Thank you very much. When I am talking about 
business is in bad shape in this particular e-mail that you 
mentioned to the original--to Mr. Casey, that is the Business 
division, not business--we had four particular divisions that 
were revenue-generating divisions.
    Ms. DeGette. Right.
    Mr. Mohebbi. National Division, Consumer Division, Business 
Division, and Wholesale Division.
    Ms. DeGette. Right.
    Mr. Mohebbi. And so I just want to specifically make sure 
you understand I wasn't talking about the corporation. It 
wasn't an issue of corporation. It was me talking to somebody 
who ran a sales force, and I wanted to see how good--how much 
more--the e-mail started by saying, ``Look how good we are 
doing.'' Generally, when you send me an e-mail like that, my 
next question is, ``How much better can you do?'' And this was 
a way I had to try to ask that.
    Ms. DeGette. Well, I don't know, because the May 12 one 
then says, ``Can we make it? Business is in bad shape.''
    So let me turn to you, Mr. Hellman. I just have a couple 
more questions to follow up on my previous questions. You said 
that in the executive session, I believe in early December, you 
spoke with Mr. Nacchio about instilling the highest level of 
ethical standards. Remember that? Yes?
    Mr. Hellman. Yes, that is my testimony.
    Ms. DeGette. Okay. Now, in fact, the board was concerned 
about Mr. Nacchio's highest level of ethical standards before 
that, weren't they?
    Mr. Hellman. I think that in the environment--to set the 
context, in the environment we wanted to make sure that he set 
the right tone, that he went out of his way to be proactive.
    Ms. DeGette. Okay. Take a look at Tab 71 in your notebook.
    Mr. Hellman. Okay.
    Ms. DeGette. Got it?
    Mr. Hellman. Yes.
    Ms. DeGette. Now, that is the CEO evaluation results from 
the board of directors meeting September 13 and 14, 2001. That 
would be the evaluation of Mr. Nacchio, right? Were you at that 
meeting?
    Mr. Hellman. I don't believe this was presented in mid-
September because of 9/11. I think this meeting was canceled. 
To the best of my recollection, it was then presented in 
December.
    Ms. DeGette. Okay. So it was presented in December 2001.
    Mr. Hellman. Yes. And I attended that meeting by phone.
    Ms. DeGette. Okay. Did you ever receive this document?
    Mr. Hellman. I did not, but----
    Ms. DeGette. Okay. Well, let me--is this the first you have 
seen it, just now?
    Mr. Hellman. I think it has been shown to me in the course 
of the process.
    Ms. DeGette. Of the hearing. Okay. Well, let me just ask 
you, since you were there by phone, did you discuss some key 
development needs of fostering legal and ethical conduct, 
``make the numbers or else,'' accounting credibility issues?
    Mr. Hellman. Yes, I believe that was discussed in that 
meeting.
    Ms. DeGette. Too short-term oriented, was that discussed?
    Mr. Hellman. I believe it was.
    Ms. DeGette. Keeping the board fully informed, involved, 
utilized, was that discussed?
    Mr. Hellman. I have less of a recollection of that, but I 
have no reason to think it wasn't discussed.
    Ms. DeGette. Okay. I mean, the board really had some 
concerns about the way Mr. Nacchio and his team were treating 
these accounting issues, weren't they?
    Mr. Nacchio. Congresswoman, do I get a chance to respond?
    Ms. DeGette. Sure. We will let you respond after Mr. 
Hellman.
    Mr. Hellman. I think these are shown as key areas of 
improvement. We also, in balance, saw some very good 
professional skills as well.
    Ms. DeGette. Right.
    Mr. Hellman. But, clearly, we were--I mean, the document 
speaks for itself. We were asking him to address these 
developmental----
    Ms. DeGette. And were these issues discussed with Mr. 
Nacchio? Was he there?
    Mr. Hellman. Not being on the phone--the common practice 
would be to meet in executive session, and then have the 
chairman of the compensation committee meet with Mr. Nacchio to 
give him both the assessment, this formal document, plus any 
other discussion items that would occur in the executive 
session. But I can't speak for----
    Ms. DeGette. So you don't know whether those things were 
discussed.
    Mr. Hellman. I do not know. That was the normal practice.
    Ms. DeGette. Mr. Nacchio, were they discussed with you?
    Mr. Nacchio. Congresswoman, thank you for giving me the 
opportunity. My CEO evaluation was discussed with me by the 
compensation committee of the board.
    Ms. DeGette. Okay.
    Mr. Nacchio. I believe it was in October. It was just about 
the time they were asking me to sign a new 4-year contract.
    Ms. DeGette. Right.
    Mr. Nacchio. And I would like to put this in context. First 
of all, I have seen this report now with the detailed opinion 
sheets of all the things I was strong in, all the things I was 
supposedly weak in. And if you look at the bottom of some of 
these pages, you are going to see it says there is a wide 
disparity between board members on this assessment.
    And I would like to set the context. This board of 
directors, for which I was co-chairman--I know for the purposes 
of this meeting I am now the chairman. But when we ran the 
company I was co-chairman. Mr. Anschutz managed the board.
    And I want to make a point. I had a hostile board. Half of 
my board members were, as a result of a hostile acquisition of 
US WEST when they wanted to merge with Global Crossing--half 
those board members were hostile to me as the CEO from day one. 
I am not surprised to see the wide disparity of scores.
    I was prepared to finish my 5-year contract with Qwest in 
the fall of 2001 and leave. I was encouraged to stay for 4 
additional years. As a matter of fact, back to a previous e-
mail that I was--I never got to see, the e-mail from Mr. 
Hellman to Mr. Stevens dated October 24, that happens to be the 
day they signed me to a new contract.
    Ms. DeGette. Right.
    Mr. Nacchio. I was prepared to leave, and it is one of the 
reasons I did not put up a fight at the end, because I was 
prepared to leave 6 months earlier. My 5 years were up. I 
stayed because the board asked me to. The overall evaluation 
was above average, and there was no specific discussion about 
ethical behavior or my leadership of that in that compensation 
committee meeting.
    I apologize for being a little bit direct, but I take this 
personal.
    Ms. DeGette. I understand that, Mr. Nacchio. And that is 
what I wanted to ask you was, did they discuss--did the board 
discuss with you the accounting credibility issue and ``make 
the numbers or else'' accounting credibility issue, did they 
discuss that as a weakness with you?
    Mr. Nacchio. No, they did not.
    Ms. DeGette. Did they ever discuss that as a weakness?
    Mr. Nacchio. No, they did not, not that I remember.
    Ms. DeGette. During the time period December 2001 or 
through the spring of 2002, did they ever discuss the issue of 
they thought that you were too creative on accounting, or they 
would have to restate income on that? Did they never discuss 
that with you?
    Mr. Nacchio. No. First of all, I don't do the accounting 
for the firm. Okay? I am not----
    Ms. DeGette. Right. But you are the captain of----
    Mr. Nacchio. Excuse me.
    Ms. DeGette. [continuing] the ship.
    Mr. Nacchio. May I finish?
    Ms. DeGette. Sure.
    Mr. Nacchio. They never specifically spoke to me about my 
leadership abilities and setting the improper tone on this 
matter or any other matter. In terms of the accounting of the 
firm, as you pointed out earlier in your testimony, on issues 
of IRU accounting and the fact that we were following advice 
from Arthur Andersen, and this issue was being discussed in the 
accounting industry under the emerging industry task force, the 
board was fully aware of all of the issues on our strategy, our 
business purpose, and our accounting from 2000, at least the 
new board that we inherited as a result of the merger, from 
2000 on.
    I was never disciplined. I read a newspaper article 
recently where it was quoted that--I think it might have been 
you being quoted, that someone had the interpretation I was 
severely disciplined, at least verbally. There was a different 
term used. That did not occur. I was encouraged to stay. I 
would have been happy to leave at the end of 2001. I would 
personally have been better off had I left at the end of 2001. 
But I am happy to be here to cooperate.
    Ms. DeGette. So what you are saying is, at the same time 
they are writing in the board minutes that they have concerns 
about your accounting treatments, they are renewing your 
contract for 4 years.
    Mr. Nacchio. Yes.
    Ms. DeGette. Correct? And one last question. You said that 
Mr. Anschutz had dual responsibility with you. My question is: 
how involved with the board and the company was Mr. Anschutz in 
the accounting decisions and in the day-to-day business 
decisions of the firm?
    Mr. Nacchio. Phil Anschutz and I were close friends for 
five and a half years. I spoke to Phil 2 to 3 times a week. 
Every major decision I made at this firm I sought his counsel. 
In the old Qwest, he was the majority owner. He headed the 
executive committee. I always went to Phil Anschutz when I 
needed counsel.
    Many times, I would get calls from Phil just to find out 
what was going on. Phil was very involved. He was helpful to 
me. His vision, combined with my vision, helped us to create 
Qwest. And he was co-chair of the board. For board matters, I 
went to Phil. Phil managed the relationship with the board.
    Ms. DeGette. And so it is your testimony under oath today 
that neither Mr. Anschutz nor the rest of the board ever talked 
to you about concerns about accounting treatments? Is that your 
testimony?
    Mr. Nacchio. To my recollection, they never spoke to me 
about this tone at the top and changing the behavior, other 
than the December 5 audit committee meeting, for which I have 
already given testimony. And I was encouraged to stay at Qwest 
through the fall of 2001. I was encouraged to stay with Qwest 
right up until the end.
    Ms. DeGette. Mr. Shaffer, do you----
    Mr. Nacchio. I mean, board members were calling my wife to 
encourage her to convince me to stay.
    Ms. DeGette. Do you have any information about this, Mr. 
Shaffer, whether these matters were brought to Mr. Nacchio's 
attention?
    Mr. Shaffer. Congresswoman, this is long before my arrival 
at Qwest, so I can't help out there at all.
    Ms. DeGette. Mr. Hellman, do you know of these matters ever 
being brought to Mr. Nacchio's attention? Were you ever there 
besides the December 5 meeting when the accounting issues were 
discussed with Mr. Nacchio, or the issues of the tone and 
everything else?
    Mr. Hellman. As I stated on this evaluation form that you 
gave me, I don't recall getting it. Therefore, since I attended 
the board meeting in December by phone, I assumed it might have 
been done there. If it was done in October, I don't recall 
getting it, just to set the record straight. And I am sorry, I 
have forgotten your question. Do I ever remember that there 
was----
    Ms. DeGette. The question is: were you ever present when 
there were discussions between the board----
    Mr. Hellman. Full board.
    Ms. DeGette. [continuing] and Mr. Nacchio--or any 
subsection of the board, any committee of the board, any 
informal group of directors of the board, telling Mr. Nacchio 
about the concerns which are raised in the document which you 
have seen about the accounting treatments and the ethics?
    Mr. Hellman. The December 5 executive session I was 
present.
    Ms. DeGette. Right.
    Mr. Hellman. He was there. The chairman of the committee--I 
was there by phone, but I was present for that committee, where 
we pointed out our concerns that we wanted him to be more 
proactive in demonstrating tone at the top and in forcefully 
aligning the organization to the Code of Conduct.
    Ms. DeGette. And I assume you were also present at the 
September 19, 2001, meeting, because the minutes reflect that. 
That is Tab 71. Well, no. Did you have a meeting on September 
19? Or was that the one you said got put off until December?
    Mr. Hellman. No, I believe--if I could just look to Tab 71.
    Ms. DeGette. Yes. That is the one we were talking about 
with the CEO evaluation results.
    Mr. Hellman. The CEO evaluation dates I believe was going 
to be a strategic retreat. It was canceled because of 9/11. I 
believe there might have been a September board meeting that 
was later in the month, but it was telephonic because of 
travel, obviously.
    Ms. DeGette. Now, after December 5, you--I mean, you knew 
about a lot of the income that was problematic--the $109 
million, some of the other transactions which you found out 
about later. Between that December 5 meeting and when Mr. 
Nacchio was let go in June of this year, do you recall any 
other discussions between the board and Mr. Nacchio about the 
accounting and ethics issues?
    Mr. Hellman. As we went into the first half of 2002, there 
was a lot of discussion about IRU accounting.
    Ms. DeGette. And was Mr. Nacchio present at those meetings?
    Mr. Hellman. Well, he would have been at the board meeting, 
and I know that, indeed, the audit committee reported back to 
the board, and we would have reported back, and we did report 
back our concern--not necessarily concern. The point is that 
the IRUs were being, by then, fully investigated. We had hired 
outside counsel, which Mr. Nacchio would have been aware of--
actually two, Boyd Schiller and Wilmer Cutler.
    They were going through a thorough review. We had received 
inquiry from the SEC regarding the accounting, and then that 
inquiry had turned into a formal investigation. I believe he 
was aware of the investigation and all of the IRUs issues.
    Ms. DeGette. And why did you all wait until June 2002 to 
terminate his employment?
    Mr. Greenwood. This will be the last question.
    Ms. DeGette. It is the last question.
    Mr. Hellman. I believe that in the backdrop we were also 
dealing in an industrial environment. That we--as I had pointed 
out, there were issues--there were areas of weakness, or areas 
of development I think it is called. But more importantly, the 
industry was going through a down turn, and, on the broadband 
side, a collapse.
    We felt that the skill set that Joe had--and I point to 
skills, those things that he had demonstrated over the years he 
had been with Qwest, were not necessarily the skills that we 
needed going forward in this very different environment, or an 
environment more attune to an RBOC than a broadband internet 
company, more like, if you will, the conventional US WEST, less 
like Qwest.
    Is that responsive?
    Ms. DeGette. Yes, thank you very much.
    And thanks for your comity, Mr. Chairman.
    Mr. Greenwood. Certainly. The Chair thanks the gentlelady 
and recognizes himself for 10 minutes for inquiry.
    Let me go back to you, Mr. Mohebbi, because you and I had a 
dialog a little while ago about the side deal and the e-mail 
and C&W, and you didn't know that it came from--whether it came 
from--you knew it came from your computer, but you don't know 
who sent it, and you didn't know why it was sent, and you don't 
know why it wasn't a part of the contract, and you don't know 
why it took 10 months for the finance folks to find out about 
it.
    And then I asked you about the Flag side agreement that was 
testified--to which we heard testimony last week. And you said 
you didn't know about that.
    Mr. Mohebbi. Not the specifics of it.
    Mr. Greenwood. You don't know about the specifics of that. 
And Global Crossing told us last week that they had what they 
thought was a binding oral agreement. Do you know about that? 
Do you know the details of that?
    Mr. Mohebbi. I don't know the details of that. That one I 
read in the newspapers, Mr. Chairman, and what I can say is I 
have not had direct involvement with Global Crossing executives 
on particular transactions. So I would not----
    Mr. Greenwood. Okay. Here is what I am struggling with.
    Mr. Mohebbi. Yes.
    Mr. Greenwood. You are the President and the Chief 
Operating Officer of this company. Okay? And these are 
transactions that happened in the fourth quarter of 2000, in 
the first and second quarters of 2001, in June 2001. It was a 
while ago. And why is it that I know more about these 
transactions than you do? Why is it that my counsel knows a 
thousand times more about these transactions than you are 
admitting to?
    It would seem to me if, in fact, you knew nothing about 
them then, that you don't have a whole lot else to do except to 
understand how this company operates, that you would have--if 
you didn't know about them then, that by now that you would be 
an expert on them, that you would--that this company has been 
involved in an investigation of these, an internal 
investigation of these matters.
    Why are you not an expert? Why are you not fully informed 
about the motivation for these side agreements, who conducted 
them, what their legal consequences were, what their accounting 
consequences were, who was engaged in them? Why do you not know 
that as of today?
    Mr. Mohebbi. Mr. Chairman, in terms of my responsibilities, 
obviously one of the things that I was responsible for is to 
ensure that there are processes in the company that took care 
of key issues and key transactions.
    Mr. Greenwood. Right.
    Mr. Mohebbi. Obviously, as we discussed, IRUs are key 
transactions.
    Mr. Greenwood. Right.
    Mr. Mohebbi. And we had processes to take a look at them. 
You mentioned the issue of specific transactions and the 
contracts, and that there were concerns that were brought up by 
our former chief financial officer in this area, and they were 
brought up to the board of directors, to the chief executive 
officer. I was not in that particular discussion.
    And then, as the investigations were going on obviously, 
the investigations that were conducted, they were just being 
conducted obviously independently. They were going through 
everything that was happening and checking the processes per 
se.
    So I am here to help you as much as possible, and----
    Mr. Greenwood. But you are still in charge of processes and 
policies, and so forth, are you not?
    Mr. Mohebbi. In charge of processes and policies. I am not 
specifically in charge of processes and policies. I ensure that 
other people are in charge of processes and policies.
    Mr. Greenwood. Okay. You ensure that. I got that.
    Now, if it were my job----
    Mr. Mohebbi. Yes, sir.
    Mr. Greenwood. [continuing] to ensure that the processes 
and policies of the company were followed, one of the first 
things I would have done recently would have been to say, 
``What in the heck was going on with those side agreements?''
    Mr. Mohebbi. Yes, sir.
    Mr. Greenwood. I need to understand, how could an e-mail 
mysteriously be sent from my computer? Why would the finance 
people not know about this? Whose idea was it to have these 
oral agreements? What did they mean? So certainly you would be, 
it would seem to me, busy about trying to understand how these 
things happened, so that going forward everyone was clear. Have 
you done that?
    Mr. Mohebbi. I apologize if the--it if looks like, you 
know, I wasn't looking at them. In my opening statement, Mr. 
Chairman, one of the things that I said was that the 
transactions--I personally haven't gone through every 
particular transaction in the----
    Mr. Greenwood. But these have been the subject of gigantic 
scrutiny.
    Mr. Mohebbi. Yes.
    Mr. Greenwood. I mean, the Congress is scrutinizing these. 
The SEC is scrutinizing these.
    Mr. Mohebbi. And as----
    Mr. Greenwood. The Justice Department is scrutinizing 
these. Journalists are scrutinizing these. Employees of the 
company are scrutinizing these. Everyone is scrutinizing these 
things except you, whose job it is to scrutinize these things.
    Mr. Mohebbi. As a result of the increased concerns, 
obviously in this particular area of the company, as Mr. 
Shaffer and others said, hired a number of outside experts, 
legal counsel, accounting experts.
    Mr. Greenwood. Have you been consulting with them?
    Mr. Mohebbi. They have not, in particular--I have talked to 
them, of course. But they have a job to do, which is to get to 
the bottom of these particular transactions.
    Mr. Greenwood. Is that not also your job?
    Mr. Mohebbi. In this particular case, no, it is not my job. 
So I haven't been involved, and I haven't been asked to go 
through each of these particular transactions.
    Mr. Greenwood. Have you turned to these investigators----
    Mr. Mohebbi. Yes.
    Mr. Greenwood. [continuing] and said, ``In the course of 
your investigation, have you figured out how this e-mail flew 
out of my computer?''
    Mr. Mohebbi. No. But one of the things that I have done 
here is since we haven't gotten to the bottom of that, I have 
come to you and said, ``I come from the school that says if it 
has got my name on it, I am representing the company.''
    Mr. Greenwood. Oh, I understand that.
    Mr. Mohebbi. The buck stops with me.
    Mr. Greenwood. I understand that you take responsibility 
for it, but that is sort of like I take responsibility for it. 
I----
    Mr. Mohebbi. No. No, I said I take full responsibility for 
it.
    Mr. Greenwood. I understand you take full responsibility 
for it, but you don't seem to have a lot of curiosity as to how 
it happened, so that you can understand it.
    Mr. Mohebbi. It is very important for us, as I have 
testified before in terms of other committees, and it was asked 
of the company to do an independent investigation of these 
transactions. It is very important that that independent 
transaction is completed. And I am sure----
    Mr. Greenwood. When is that expected?
    Mr. Mohebbi. I am not sure. I am not the lead person that 
is responsible for the investigations. However, I would like to 
add, you asked a particular question----
    Mr. Greenwood. It has been a year since this e-mail's 
information has been out.
    Mr. Mohebbi. I understand that, sir. But, however, there 
are a couple of things that I wanted to say. And I included 
that in my opening statement, Mr. Chairman, that did I have--
have I had conversations with experts that are working on these 
particular transactions? Yes. And as I made the statement in my 
statement, I am not aware of a side agreement that has altered 
the nature of a particular transaction that we have had with a 
particular customer.
    And, again, if--one of the things that I have stated in 
front of the other committees, as well as your staff, is that 
if we find through our independent investigation----
    Mr. Greenwood. How long ago did that independent 
investigation begin?
    Mr. Mohebbi. I am not sure. Oren, you----
    Mr. Shaffer. Mr. Chairman, I--at the risk of not knowing 
the exact date, but I believe it was February 2002 the board 
directed management to----
    Mr. Greenwood. This specific e-mail? Because we are told by 
the attorneys doing the investigation that they just started to 
look at this e-mail in the last couple of months.
    Mr. Shaffer. Well, I think----
    Mr. Greenwood. Weeks. I am sorry, weeks.
    Mr. Shaffer. Right. That could very well be the stage of 
the review that they were at in the last couple of months, but 
I believe the review began in February 2002.
    Mr. Greenwood. All right. Let me--while you have the 
microphone, just keep it there, Mr. Shaffer, because I have 
some questions for you. You stated just a little while ago that 
the reason that Qwest is restating is because you have 
concluded that the capacity swapped was not dissimilar but was, 
rather, similar.
    This has been the core of what we have been trying to 
understand about your company, about Global Crossing, and about 
others. And that is, whether these swaps were, in fact, done 
for business deals, business purposes, or whether they were 
done simply to enhance revenue. Okay.
    Why has Qwest now determined, and on what basis has Qwest 
determined, that these swaps are of similar assets and not 
dissimilar assets? How did you come to that conclusion?
    Mr. Shaffer. The bright line accounting test, as I said, is 
that in order for them to be dissimilar, even though they are 
both capacity--communications capacity----
    Mr. Greenwood. Right.
    Mr. Shaffer. [continuing] one has to be held for resale as 
part of a business. And then the fact that you would buy 
additional capacity to complete a network would make them 
dissimilar.
    In order to have dissimilarity, however, you have got to 
have a very clear identification of those assets held for sale. 
And as we reviewed our policies and our practices on 
accounting, we could not reestablish those records that were 
separate for these assets that, in fact, were sold.
    Mr. Greenwood. So then it seems to me to follow that what 
you did conclude was that capacity swaps were made not for 
purposes of--consistent with the business plan, but simply to 
demonstrate revenue. Is that what you found?
    Mr. Shaffer. No, Mr. Chairman. What we found was that we 
actually did sell capacity, and we purchased capacity. Our 
problem with the accounting was we weren't holding a separate 
inventory of the capacity we were selling, but we actually--
they were separate capacity deals, and we received and we gave 
capacity.
    On the accounting treatment, which is my main focus right 
now, trying to get the accounts straight, the accounting 
treatment requires that they are very clearly--if I go back, I 
have to find the ledger that says these assets are held for 
sale. Couldn't find that ledger. And without that bright line 
test----
    Mr. Greenwood. So what do you conclude was the purpose for 
these transactions?
    Mr. Shaffer. I have not----
    Mr. Greenwood. Why were these transactions undertaken?
    Mr. Shaffer. These transactions----
    Mr. Greenwood. Why were they undertaken in the times that 
they were--timeframes in which they were undertaken?
    Mr. Shaffer. My purpose to date has been to review and 
focus on the accounting treatment of the transactions. There 
are other groups which continue to review other areas and other 
subjects around these transactions, and that----
    Mr. Greenwood. Well, isn't it--doesn't it pique your 
curiosity--has it not piqued your curiosity, as you have 
decided very meticulously that this transaction and this 
transaction and this transaction did not meet the definition of 
dissimilar, that they are similar? Has it piqued your curiosity 
as to why those transactions would have been conducted?
    Mr. Shaffer. It has definitely piqued my curiosity.
    Mr. Greenwood. Have you found ways to satisfy your 
curiosity?
    Mr. Shaffer. We are in the process of doing that, as I 
said, by----
    Mr. Greenwood. Have you begun that process?
    Mr. Shaffer. That process is underway.
    Mr. Greenwood. What have you learned so far?
    Mr. Shaffer. I am sorry?
    Mr. Greenwood. What have you learned so far with regard to 
the motivations behind the transactions that have proven to be 
similar, not dissimilar, and, therefore, cannot be considered--
accounted for in the same way? What have you learned so far 
about----
    Mr. Shaffer. Well, the conclusion we have reached so far is 
that the accounting treatment, based on APB 29, which is 
dissimilarity, cannot be satisfied. So from an accounting point 
of view, we are reversing that revenue from our books.
    Mr. Greenwood. I understand that. But you are not----
    Mr. Shaffer. And on the other----
    Mr. Greenwood. [continuing] responding to my question.
    Mr. Shaffer. I am sorry.
    Mr. Greenwood. The question is: as you look--as you take 
certain transactions and move from them category A to category 
B, you say you know what, these are not--don't meet the 
definition of dissimilar. In fact, they are similar 
transactions. Okay?
    As you have looked at those ones that you say we cannot 
count this, we are going to restate because of this, what can 
you possibly conclude would have been the motivation for 
engaging in and transacting a capacity exchange that was 
similar? What would be the business purpose of doing that?
    Mr. Shaffer. I think there are two things to remember here. 
One is that at the time the transactions were originally 
recorded, it would appear that the outside audit firm, Arthur 
Andersen, reviewing policy and practices, considered these 
transactions not to be--not to fail the accounting test, and, 
therefore, did have a business purpose. I am now----
    Mr. Greenwood. Have you looked at them? Have you said, ``I 
have got to take this transaction and move it over here?'' Have 
you said to any of your compadres at the company, ``Could 
somebody show me the business purpose for this transaction?''
    Mr. Shaffer. That is being discussed and reviewed.
    Mr. Greenwood. Have you been involved in any of those 
discussions or reviews?
    Mr. Shaffer. And I have been concentrating on the 
accounting issues, but----
    Mr. Greenwood. Have you been involved in any of those 
discussions or reviews?
    Mr. Shaffer. I have not to date, but when they have----
    Mr. Greenwood. Do you know anything about those discussions 
or reviews?
    Mr. Shaffer. I am sorry?
    Mr. Greenwood. Do you know anything about those discussions 
and reviews? Have you heard anything about whether or not there 
was a legitimate business plan to support these transactions?
    Mr. Shaffer. I have no readout of that information at this 
time.
    Mr. Greenwood. Haven't heard anything? No----
    Mr. Shaffer. It is not----
    Mr. Greenwood. [continuing] water cooler chat about that?
    Mr. Shaffer. I don't recall having those discussions. My 
discussions, as I say, have been directed entirely to the 
accounting treatment. I think it is very important that we get 
that issue settled with the SEC. I think it is a gating factor 
to go forward.
    Mr. Greenwood. So who is investigating? Who is looking at 
these transactions? You understand why I am asking you these 
questions, don't you? The reason I am asking you these 
questions is because I believe that these transactions were not 
done pursuant to any business plan. I believe that these 
transactions were done in order to book revenue. And that is my 
concern about Qwest. That is my concern about Global Crossing.
    And I have been--I am in search of the business plan that--
to which--pursuant to which these transactions were made. And 
when you tell me that they are similar transactions, it leads 
me to believe that maybe my suspicions are correct.
    And I see Mr. Nacchio is chomping at the bit, so would you 
like to respond?
    Mr. Nacchio. Mr. Chairman, I am chomping at the bit. I am 
chomping at the bit to try to illuminate your question, because 
I have been listening to this conversation. I believe--and I 
don't mean to put words in your mouth, so please correct me--
you are asking about business purpose, and Mr. Shaffer is 
talking about how our new accountant, who is not abiding by the 
Arthur Andersen advice, is asking him to--and I am not there 
now, so give me some latitude--is asking him to follow a 
certain new set of rules to determine similarity or 
dissimilarity.
    I think, frankly, I hear you talking by each other. When we 
look at that map, and you can ask me any route, I will tell you 
the business purpose, I will tell you what budget it was in, 
and I will tell you what board meeting we reviewed it.
    We were building a global network, and we were building a 
network in the U.S. that had the highest characteristics of 
reliability. We wanted physical diversity. We wanted power and 
space diversity. We wanted to terminate our own traffic to 
international points that we were passing to other carriers. We 
had very big and important clients requiring global 
requirements.
    So the business purposes were clear. I have no position, 
since I have left, on what they are learning about the 
bookkeeping or the accounting. But I didn't want to mislead, 
because I still have a strong feeling for this company. We had 
business purposes. Had someone brought to me any transaction--
as I said in my opening statement--simply to book revenues, and 
it did not match where we were trying to go globally, or what 
we were trying to do domestically, we would have killed it.
    And I don't want to speak for other people on this panel, 
but I believe my senior officers who were doing that day to day 
would have done the same.
    Now, in terms of accounting and in terms of crossing Ts, 
dotting Is, new rules, new FASB rules, what comes out of the 
emerging industry task force, I will have to leave that to Mr. 
Shaffer since I left.
    I hope that was helpful.
    Mr. Greenwood. Thank you, Mr. Nacchio.
    So, Mr. Shaffer, back to you, would you please explain for 
the committee how this investigation, as to the business 
purposes of these transactions being conducted, by whom, and 
when we would expect the results?
    Mr. Shaffer. Mr. Chairman, in spite of the elucidation that 
Mr. Nacchio have given us, it seems I am still having a 
difficult time making my role clear here. I was not in a 
position to discuss any of these transactions with the people 
who did the transactions.
    Second, I am purely focused at this point in time on 
cleaning up, changing, revising, documenting the accounting 
treatment. There are groups that are working in other areas of 
this review, and if and when they find something that needs to 
be reported out, I will be part of the group that they report 
it to. And if there are decisions that have to be made on the 
basis of that information, I will be part of the group that 
makes the decisions.
    As of today, the progress that we have made--and I consider 
it quite substantial progress--we have taken a look at the IRU 
transactions. We have restated two-thirds of them. I have a 
time table of finishing the last group within weeks. We feel 
that we, in fact, are making good progress here, and we are 
getting things done.
    Mr. Greenwood. All right. Let me turn back to Mr. Mohebbi 
and ask you to look at page--at Tab 72. This is an e-mail from 
you to Mr. Joe Dalton dated September 28, Friday, September 28, 
2001, at 9:54 p.m. Do you see that?
    Mr. Mohebbi. That is correct.
    Mr. Greenwood. Okay.
    Mr. Mohebbi. Just to a number of people, including Mr. 
Dalton.
    Mr. Greenwood. Correct. And it says, ``Team, as I am 
sitting here in the office at 10 p.m. Friday night, I need your 
help. We have issues with almost all deals we have on the 
table. We are committing to buy tons of capacity, eating away 
my capital expenditure''--you write ``cap ex''--``and, in 
return, I am getting very little recognizable revenues. This 
must change and change this weekend.''
    ``We also have completely given up pushing back at anything 
and anybody that comes up with yet another opinion to interpret 
things differently. I need you guys to mobilize. Since we have 
committed''--and then skip down. Here is the list, Cable & 
Wireless--``since we have committed to pay them $49 million, 
let us at least pick circuit combinations that will allow us to 
book more.''
    So now this is, of course--you are running down on the end 
of the quarter. It is September 28. It is Friday night at 10 
p.m.
    Mr. Mohebbi. That is correct.
    Mr. Greenwood. Probably not going to be able to do much on 
Saturday or Sunday before the quarter ends. It looks like you 
are trying to figure out how to meet numbers at the end there, 
and it also talks about committing to buy tons of capacity, 
eating away at your cap ex and getting very little recognizable 
revenues. Could you explain what--how we should interpret this 
document?
    Mr. Mohebbi. I would be happy to. Part of what I do, Mr. 
Chairman, is to encourage, to push, to make sure that our 
people do the best they can do in terms of making their 
targets. Everyone has a goal, a target, and as we went through 
in previous e-mails, sometimes people think targets are 
impossible, and part of my job is to encourage them to do their 
best.
    This is certainly one of those instances where I believe I 
was briefed, and the way that I generally was briefed is the 
number of transactions that were on the table, what were 
involved in the particular transactions, which meant what was 
it that we were buying, and generally when you are buying there 
is capital expenditures involved, and what we are selling.
    And I believe that the subcommittee has gone through this 
whole issue of buying and selling, and that there is leverage 
with people that you are buying from at the time that you are 
buying from them. And that has just been part of the industry, 
mainly because other people had choices. We had choices. So 
certainly you want to take advantage of any leverage in a 
competitive market that you may have.
    So in this particular case, as I was looking at the summary 
of transactions, as it was provided to me, I was not happy with 
the balance, I would say, in terms of these particular 
transactions. And as you can see, I am providing some feedback 
to these people in terms of what I thought would be what they 
needed to do in these particular transactions.
    I wanted them to look at working with these particular 
customers. I wanted them to work within themselves to try to 
see what were the best transactions that they could work on for 
Qwest.
    Mr. Greenwood. The question is: how do you think that the 
team would respond to that? I mean, again, the problem that we 
are concerned with here, to try to make it very simple, is that 
the team, seeing you unhappy, might be engaged in swaps--the 
dirty word--to meet the numbers to make you happy, and to lead 
the investors, including the investors who were employees of 
the company, into believing that, in fact, things were better 
than they were, when, in fact, what they were seeing was the 
result of your spurring people on to book revenues by virtually 
whatever means is necessary?
    Mr. Mohebbi. I think it is a good question, and I think 
that is why it is important sometimes to have the person to go 
with the message, because it gives you the full picture. What I 
was doing--and I did--is to make sure that our people did the 
best that they could do for Qwest.
    If you look--these are a number of transactions. These are 
complex transactions. And we were buying, certainly, capacity, 
and we were buying it from particular companies. And I wanted 
to make sure that they leveraged that particular position that 
they had, because that is the best position that you had.
    This is the time that I have needs, in terms of capacity 
that I need to build a network, and if I can't use that 
particular position as I am negotiating on things that other 
people need--and we were competing with other people vigorously 
to try to win those particular deals--then when is it that you 
can be competitive?
    Now, there is an important issue that you brought up, and 
that is, didn't you think that the people may just take you 
literally and do things that--maybe something that I didn't 
want to do? And, certainly, I think, again, that--people who 
worked with me. These are people that I have e-mailed to that 
had worked with me. They know the type of person that I am.
    In a particular e-mail, I think maybe it was even in this 
particular e-mail, I have mentioned to them that, ``I want you 
to do your best, but you cannot cross a particular line. You 
cannot do something that is crossing a particular line.'' So I 
think that, in that particular case, I was specific, but that 
was in general what I was trying to do here.
    Mr. Greenwood. Mr. Nacchio, does this look like a business 
plan to you?
    Mr. Nacchio. I am sorry?
    Mr. Greenwood. Does this e-mail reflect business plans at 
work?
    Mr. Nacchio. This looks like communications between line 
people as they occur. I just wanted to add one thing that might 
help on your last question. It was--September 10 of this year 
is when I had already taken down the numbers and given new 
guidance to the markets. So I am not going to suggest I knew 
much about this one, because I think your staff has already 
asked me about it.
    But this is not what you would call a business plan. This 
would be an operational----
    Mr. Greenwood. The question was whether it reflected a 
business plan.
    Mr. Nacchio. There are still routes----
    Mr. Greenwood. In other words, business--if this were 
saying, ``We have customers who want to buy capacity between 
such a place and such a place, and let us engage in 
transactions so we can meet that demand, and an additional plus 
would be that we would book revenues for that.'' That looks 
like it is a reflection of a business plan as opposed to a 
desperate attempt to book revenues, any revenues, in the waning 
2 hours of a quarter.
    Mr. Nacchio. Mr. Chairman, how I read this is I am going to 
spend capital to finish building my global network. Why don't 
they buy anything from us rather than someone else?
    Mr. Greenwood. Ms. DeGette, do you have any additional 
questions?
    Ms. DeGette. Mr. Chairman, I just have one last question to 
clear up your previous questions to Mr. Shaffer.
    Mr. Shaffer, you said that your job is to take a look at 
these deals and fix the accounting treatment. And you said 
other people were investigating, within the company, how the 
deals came about, and the other issues around that. Who are 
those people within the company? So that we can talk to them as 
we go on with this investigation.
    Mr. Shaffer. There is a group of outside advisors, 
accountants and lawyers, that are assigned specific tasks. They 
are being coordinated by counsel, internal counsel.
    Ms. DeGette. And what is the name of that person?
    Mr. Shaffer. It is Mr. Rich Baer.
    Ms. DeGette. Okay.
    Mr. Shaffer. And their activities are in helping the 
company respond to the SEC investigation and the Department of 
Justice investigation. And that is what they are doing, and 
they are working at that--as far as I know, they are working at 
that quite diligently.
    Ms. DeGette. And I know you folks have been trying to be 
cooperative with this committee. To the best of his legal 
ability, will you make Mr. Baer and his team available to us 
for future investigation?
    Mr. Shaffer. Well, I thank you, Congresswoman, for the 
recognition that we have tried to be helpful. We have, and we 
will continue to be, obviously. And I see no reason that we 
couldn't make people available, if that is what is needed.
    Ms. DeGette. Including Mr. Baer, this person who is heading 
up the investigation?
    Mr. Shaffer. Well, I can check and see very quickly--it 
won't take me long--and let you know.
    Ms. DeGette. Great. Thank you very much.
    Mr. Shaffer. You are very welcome.
    Mr. Greenwood. Thank you.
    Finally, and we are just about finished here, Mr. Hellman 
had raised concerns back in October 2001 that there were few 
consequences for cutting corners. The question that I have and 
would ask any of you to respond who would like to is: have 
there, in fact, as you have gone forward and gotten into these 
investigations--have there been repercussions or reprimands or 
new policies put in place, so that there are consequences for 
cutting corners, for being engaged in some of the conduct that 
this committee has found to be so questionable? Anyone who 
wants to respond.
    Mr. Nacchio. I would like to respond for the time before I 
left. In that fourth quarter or third quarter, somewhere in 
that period of time, we did find people violating certain 
things, and we thought violating the law.
    Mr. Greenwood. Such as?
    Mr. Nacchio. Passing proprietary information to investment 
banks who were passing it to hedge fund managers. We passed it 
to the SEC. We passed it to our internal security, to the 
Department of Justice. People were fired, and I think people 
were prosecuted.
    So when we found things, we stepped up to it. We found--
when we found it, when we knew that--the company can provide 
evidence of what these cases are. So I can tell you, I didn't 
spend my whole day trying to be an ethics cop. I had a lot to 
do as a CEO. I also was not deaf to what my board was telling 
me when they told it.
    But we tried, as best we could in an economy that was 
getting tougher and tougher, but there are clear cases where we 
found information through our cyber techniques and others, that 
were passed on, not just internally in terms of reprimands, but 
dismissals, law enforcement authorities, other things.
    Mr. Greenwood. Anyone else care to respond to that?
    Mr. Shaffer. I would like to make a response, Mr. Chairman.
    Mr. Greenwood. Sure.
    Mr. Shaffer. Since Dick Notebaert's arrival and my arrival 
shortly thereafter, Dick has addressed the area of culture 
directly. We have made it very clear that Qwest is to operate 
with an open culture. People are supposed to be solicited for 
their views. Everything will be done in a transparent manner.
    And in order to put a little bit of teeth into those words, 
Dick has had probably every 15 days a company-wide review where 
people can call in and ask questions. Any questions are good. I 
myself have communicated with my finance staff, entire staff, 
in such a call also. We also have meetings. Always trying to 
instill the idea that a little bit of common sense will usually 
guide you pretty well.
    And if you have a question about it, you have to have an 
environment that allows people to ask that question, to not 
accept an answer if they don't believe it is the right answer. 
And that is the culture that is being installed right now.
    We have had disciplinary actions since my arrival at the 
company for activities that were not consistent with what we 
believe was the Qwest Code of Conduct, nor to the high 
standards that both Dick and I will insist that the company 
adheres to. So, yes, there has been, and hopefully we will not 
have to do it in the future, because hopefully we don't have a 
reason to do it. But if there is something that is wrong, we 
will address it directly, we will take corrective action, and 
it will not be long to take. It will be quick and correct.
    Mr. Greenwood. Any other responses? Mr. Hellman?
    Mr. Hellman. Yes, I would like to respond. Have there been 
consequences? In the current year, we have a new auditor. We 
have a new CEO. We have a new CFO. We have added 25 percent to 
the staffing of our internal audit department. We have a 
complete controls review underway by KPMG. We have changed the 
reporting of finance personnel to the CFO rather than to line 
management.
    We have instituted routine executive sessions of the board 
of directors. We have added additional resources, budget if you 
will, to the audit committee. We have increased disclosure and 
transparency. All of those actions have been directed by the 
board of directors.
    So while Oren was speaking about management, I wanted to 
make sure that the board had a voice. Those are consequences.
    With regard to your, Mr. Chairman, if you will, frustration 
on the process of the investigation, I sense that, and I share 
that. The investigation started in February. We were told that 
it would initially be completed in April. And the scope of the 
investigation, because of oversight by the SEC, Department of 
Justice, this committee, other committees, has expanded.
    Clearly, we have been responsive. We have been cooperative. 
We have also been focused first on the accounting issue. That 
accounting issue, as Mr. Shaffer said earlier in his testimony, 
should be complete in a couple of weeks. At that point, that 
investigation is not over. That investigation is ongoing, and 
that investigation will look to whether there was any personal 
responsibility.
    And I think that is the essence of your question, sir. We 
are not there yet. We are working on it.
    Mr. Greenwood. Thank you. Anyone else?
    I want to thank Mr. Hellman, Mr. Shaffer, Mr. Mohebbi, Mr. 
Nacchio, for being here. We have asked you a lot of difficult 
questions. It is not because we got up cranky this morning. It 
is because over the past year we have seen a lot of Americans 
lose an awful lot of money, jobs, 401(k)s. There has been an 
awful lot of pain caused by some of the conduct of corporate 
Americans.
    It is our job to understand exactly how that happened and 
probe as deeply as we can. Our staff does a spectacular job, I 
think, in getting to--into the details of the company, and we 
thank you for helping us with our investigation.
    The hearing is adjourned.
    [Whereupon, at 4:56 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]



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