Tech Insider: A global government crossing

"Tech Insider" appears occasionally on, looking at how business gets done in the federal technology market. Learn from the inside players in government and industry how deals are made. The ripples of one of the largest bankruptcies in U.S. history are spreading through the federal government as Global Crossing, the telecommunications giant that filed for Chapter 11 protection on Jan. 28, waits to find out whether it has won a coveted Defense Department contract worth more than $400 million.

The Defense Information Systems Agency (DISA) had planned to announce an award by Friday, Jan. 25, for management of the Defense Research and Engineering Network (DREN), a high-speed network connecting more than 5,000 scientists and engineers at Defense labs, universities and industrial facilities around the country. That announcement never came, and the following Monday, Global Crossing filed for Chapter 11. Many observers argue that if the company had won the sought-after contract, Global Crossing might never have declared bankruptcy.

Founded in 1997, Global Crossing is incorporated and headquartered in Hamilton, Bermuda. The firm skyrocketed to prominence by building a massive undersea fiber optic network connecting 27 countries and more than 200 cities in the Americas, Europe and Asia. At its peak, in 1999, Global Crossing's stock was worth $64.25 per share.

The company's directors and stable of lobbyists are a cross section of powerful Washington insiders. Former Defense Secretary William Cohen joined the board of directors of Global Crossing and its subsidiary, Asia Global Crossing, last April, four months after leaving his post at the Pentagon.

In 1998, the firm secured the lobbying services of Norman Brownstein, one of the nation's most influential attorneys and an adviser to political notables in both major parties. Brownstein also served on the board of directors of Global Crossing until November.

In 1999, as Global Crossing planned to lay a trans-Pacific fiber optic cable and sought approval from the Federal Communications Commission, the company paid more than $2.5 million for lobbying services to Anne Bingaman, head of the Justice Department's anti-trust division from 1993 until 1996 and the wife of Senate Deputy Democratic Whip Jeff Bingaman of New Mexico.

Global Crossing chairman Gary Winnick, a former junk bond salesman, curried the favor of elected officials in both major parties. During the 2000 elections, his company contributed $2.9 million to political parties and candidates, according to the Center for Responsive Politics, besting bankrupt energy trading giant Enron's $2.4 million in contributions that year. In 1998, Global Crossing split $3.6 million almost evenly among Democrats and Republicans.

Telecom analysts say the high-profile company developed a reputation in the market for exploiting accounting loopholes to improve its financial standing in the eyes of investors and banks. Over the past year, analysts downgraded the firm's investment value and Global Crossing's stock price dropped precipitously. Shares closed Friday at 7 cents.

Winning the DREN contract would have constituted an endorsement of Global Crossing by the government, telecom industry executives say, and likely would have staved off the company's creditors and eased the burden of its more than $12 billion debt.

In addition to Global Crossing's financial woes, industry officials and at least one member of Congress have raised national security concerns about the company's pending sale to a Chinese multinational firm, Hutchison-Whampoa, headed by Li Ka-shing, a top Chinese capitalist with strong ties to the government in Beijing. Li Ka-shing plans to buy a controlling interest in the now defunct Global Crossing, and Rep. Dana Rohrabacher, R.-Calif., has moved to stall the sale by requesting a regulatory review. Rohrabacher fears that the Chinese government could tap into the company's vast network if Global Crossing is sold to Hutchison-Whampoa.

National security concerns also have been raised about Global Crossing's seat on the National Security Telecommunications Advisory Committee, a high-profile board of chief executives from the nation's top technology firms, including Dell Computer Corp., Lockheed Martin and Raytheon. These companies consult with the president and senior Defense and administration officials on critical infrastructure protection.

Despite Global Crossing's financial insolvency and dual investigations by the Securities and Exchange Commission and the FBI into the firm's accounting practices, Paul Kayatta, head of Global Crossing's government sales unit, says the firm is "very much still in the competition" for the DREN contract. The government isn't prohibited from doing business with a bankrupt contractor, but given the company's uncertain future, Global Crossing faces a steep uphill battle.

Deja Vu All Over Again

Global Crossing's current bid for DREN is actually its second. In July, the company significantly underbid rival telecom giants AT&T, Sprint, MCI WorldCom and Qwest Communications and won the contract. A month later DISA rescinded the award amid protests to the General Accounting Office by the losing bidders that Global Crossing failed to meet security requirements spelled out in the request for bids. Protestors also charged that Global Crossing hadn't formed a base of operations in the United States to manage the contract independently of foreign-based executives, and that the company hadn't secured proper Defense security clearances for its employees. Dan Gordon, associate general counsel at GAO, says the investigative agency took no further action after the award was cancelled.

Controversy has dogged the DREN competition ever since. Last August, Global Crossing's then-Chief Executive Officer Tom Casey said in a press release that DISA's decision to cancel the first DREN award had "nothing to do with Global Crossing's bid, which was determined by the DoD to be superior to all other bidders on both technical and value criteria." Kayatta says the protesters' charges were groundless and that Global Crossing's inability to meet certain security requirements had nothing to do with cancellation of the award.

DISA released a second request for bids in October that omitted some of the technical security requirements that protestors said Global Crossing had failed to meet. A DISA spokeswoman says only "minimal changes were made to the technical requirements of the [second] DREN request for proposals." The agency declined to elaborate on those changes. Mary Moore, a Global Crossing spokeswoman, says the company has "undertaken steps" to meet the requirements of the second RFP, but declined to comment any further on the DREN contract until an award is announced. Kayatta says he "[doesn't] recall significant changes to any of the specifications" on the second request.

DISA officials have until March 4 to evaluate the bidders' new proposals and award the contract. They have refused to release any information on whether Global Crossing's bankruptcy affects the evaluation of the bids, and they won't reveal whether the company's financial stability was taken into account on its previous bid.

Flattering Figures

Meanwhile, Global Crossing's accounting practices are under scrutiny by federal regulators in the wake of accusations by Roy Olofson, the company's former vice president of finance, that executives engaged in transactions that artificially inflated the firm's revenue. Olofson laid out his charges in a letter to the company's general counsel last August. As the simultaneous investigations by the SEC and FBI ramp up, journalists continue to question whether Global Crossing has engaged in Enron-style bookkeeping. Arthur Andersen Global Crossing's accounting firm, is currently under scrutiny from congressional overseers for its role in the Enron bankruptcy.

Investigation of Global Crossing's finances probably will center on a practice in the telecom industry known as "roundtripping," in which companies buy space on one another's networks at the same prices and then count the sales as revenue. No money is actually gained or paid by either firm, so the transactions falsely bolster the companies' books. Global Crossing is believed to have engaged in roundtripping. "It was commonly understood in the market that Global Crossing was aggressive in its accounting policies," says Euan Rellie managing director of Manhattan-based Business Development Asia, a mergers and acquisitions consulting firm. Company officials "took full use of every possible accounting loophole to flatter the financial figures," he says.

Speaking on condition of anonymity, sources who've worked closely with the government and the companies battling for the DREN contract say government officials also were aware of Global Crossing's accounting style. One consultant who advised the government on the first DREN award says officials thought the company was "on a path to implosion." Government contracting officers are required to ensure that the government doesn't do business with financially unstable companies.

Global Crossing's top executives sold millions of dollars of stock during the company's downward spiral. In May, Winnick sold nearly 10 million shares indirectly held in a trust and worth $12.38 each for a gain of $123.5 million, records show. Winnick made more than $730 million off the sale of Global Crossing stock. The company's chief operating officer, David Walsh also sold more than 600,000 shares last May for a gain of $8.7 million.

As many in Congress question whether the government should step up its oversight of companies' accounting policies in light of the Enron scandal, telecom industry officials are now asking why the Defense Department didn't exercise more caution and steer clear of the sticky situation in which it now finds itself with the DREN contract.

Today, the government as a whole must do more business with young, innovative technology firms if it is to stay current, says Steven Kelman, administrator of the Office of Procurement Policy during the Clinton administration. "Yet such young firms are inherently more unstable and risky than their well-established counterparts," he said. "The government needs to walk a fine line."

As DISA officials stay silent on the progress of their evaluations, some insiders are suggesting that the agency should take its lumps and scrap the second bid process altogether.

Round 3, anyone?

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