Global Crossing had 'inside track' on Defense contract, CEO says

Bankrupt telecommunications company Global Crossing had an "inside track" in its bid for a lucrative contract to run a high-speed network for the Defense Department, company Chief Executive Officer John Legere told Government Executive Thursday.

Speaking after his testimony before the House Financial Services Subcommittee on Oversight and Investigations, Legere noted his firm is still in the running for the $400 million contract. Global Crossing won a competition for the contract last July, but the Defense Information Systems Agency later canceled the competition after four losing companies protested that Global Crossing didn't meet security and technical requirements spelled out in the request for bids.

In August, a new competition began with a new set of requirements. Global Crossing's rivals say DISA relaxed the new requirements so that the defunct company now stands an even better chance of winning. DISA officials deny that charge.

Legere didn't elaborate on what kind of inside track Global Crossing initially had. AT&T, Qwest Communications, WorldCom and Sprint all formally protested the award last July, but the General Accounting Office never investigated their claims because Defense canceled the contract and started the process over again. Former and current Global Crossing executives have said that their competitors protested for fear of losing any share of the federal market.

DISA was expected to make a second award announcement on the contract Jan. 25, but it has postponed its decision twice. In the interim, Global Crossing filed for Chapter 11 bankruptcy protection. DISA now has until April 18 to choose a winner, or the companies are free to withdraw their bids.

Controversy over the contract has engulfed Global Crossing for months and only added to the firm's woes Thursday as Legere and the company's chief financial officer, Dan Cohrs, took a drubbing from subcommittee members who demanded they explain the company's accounting practices, which are currently the subject of investigations by the Securities and Exchange Commission and the FBI.

Chairwoman Sue Kelly, R.-N.Y., called Global Crossing "a financial time bomb" and honed in on the company's practice of leasing space known as indefeasible rights of use (IRUs) on its fiber optic network to other telecom companies and then booking those leases as revenue.

In a practice commonly called "roundtripping" or "hollow swaps," telecom firms sometimes exchange equal IRUs and count the transactions as income, even though the swaps accrue no real money for either side. Global Crossing reportedly engaged in such practices.

Global Crossing executives, as well as representatives from Qwest, WorldCom and Cable & Wireless PLC, all testified that their companies have engaged in sales and purchases of IRUs, but that such transactions are legitimate and always properly accounted for. Qwest and WorldCom, which both hold contracts with the General Services Administration, are also under SEC scrutiny of their accounting methods.

Cohrs said Global Crossing tallied IRU sales and purchases using a model designed by Arthur Andersen, the auditing firm that the Justice Department has indicted on obstruction charges for shredding documents related to the accounting work it performed for Enron Corp. Cohrs said Global Crossing still retains Andersen as both an auditor and a consultant. An internal review board has recommended that Andersen separate those two practices to maintain the auditing division's impartiality.

Asked whether Defense officials examining Global Crossing's accounting practices and its sale of IRUs have expressed any concern over what they might have found, Legere said the company has to prove its economic wherewithal, but that he didn't know whether Defense officials are now satisfied with the information they've received.

Defense officials didn't respond to inquiries about their review of Global Crossing's financial records.