Part 15 (1/2)

Less than a week later, on January 28, 2002, Global Crossing declared bankruptcy, wiping out a market value of 54 billion at its peak just two years earlier It wasn't a complete surprise tofor pennies and its enor to be serviced-but it was sad nonetheless

Sad for investors, of course, since any of theot in after 2000 lost their shi+rts, while Gary Winnick and his rotating band of CEOs sold stock worth in the hundreds of millions Gary alone cashed in over 700 million over the course of four years, second only to Phil Anschutz-who pocketed 19 billion on Qwest-as the industry's cha was particularly tragic in that the pro more than hype And even those of us who had questioned the hype had not questioned it enough It was this century's equivalent of the railroad industry booht use all of those undersea cables one day But not anytiic in that the pro more than hype And even those of us who had questioned the hype had not questioned it enough It was this century's equivalent of the railroad industry booht use all of those undersea cables one day But not anytime soon

Global's collapse came in the shadow of Enron's sudden meltdown the previous December, which had taken the entire financial world by surprise-the auditors, the regulators, and the Street Now everyone was scraure out who had left the barn door open and how Suddenly, swaps, which had been used by many of the companies in trouble, became public enemy number one Both the FBI and the SEC opened probes into Global's nuh I was pretty sure of that

It was pathetic-both to watch and to be a part of At the beginning of March 2002, I held CSFB's annual telecom conference, this ti at the heart of the financial world, we instead opted for distraction, taking everyone to Universal's Islands of Adventure One night, we reserved the Marvel Super Hero Island for the exclusive use of conference attendees Maybe, we hoped, one of those superheroes would save us froe of our industry

As I strapped myself into the Incredible Hulk Roller Coaster, I couldn't help thinking that I preferred the real thing to the virtual virtual roller coaster we'd all been riding for the past few years In a real roller coaster, there was gravity; ent up came back down, and we ended the ride where we'd started On the teleco further than anyone believed possible-and then we'd plu into a chas for the past few years In a real roller coaster, there was gravity; ent up came back down, and we ended the ride where we'd started On the teleco further than anyone believed possible-and then we'd plu into a chasm

Still, as tame as the Universal ride seean Kulick, e fund and was now a client of mine, was there She rode the coaster so uts out If that wasn't a sign of the tih the 11 et was less than half the prior year's, we didn't ski on in the sector, it's a how luxe the event was We were a Wall Street investment bank, after all We hired Kevin Zraly, the internationally acclaimed riter and founder of the Windows on the World Wine School, to host a special wine tasting one evening

The ned, and frustrated That is, except for the value investors, who, like vultures, picked through the skimpy meat left on the bones of so worth keeping

The next week, on March 11, WorldCoation into its accounting practices This was not exactly a shock, given that every poster child for the go-go 1990s had crashed, , and WorldCo drop fro remained Hold, as it had been for the past year and a half

In a highly unusual ation; it also published it in full on its Web site, listing all 24 of the SEC's queries The SEC request sought infor virtually every elenized revenue and detailed inforer reserves It also asked forhow information was provided to Wall Street analysts and how analyst forecasts were tracked To ht to that cozy relationshi+p between the company and Jack Grubators also asked a lot of questions about an enormous loan of nearly 400 million that the company had made to Bernie Ebbers By this point, we all believed that Bernie hadn't sold any shares of WorldCo to use it as collateral to buy other assets ranging froest ranches in Canada As WorldCoin calls froainst his then-valuable stock and now, as the stock declined even further, required more collateral

Basically, Bernie was a very rich man-but only on paper He'd bet every last chip on WorldCom, unlike Gary Winnick, Phil Anschutz, Joe Nacchio, and ood I was shocked, however, to learn that the board had apparently approved lending him such vast suroup, the parent company of Salo of his assetsback in 19992 At that time, WorldCom's board had faced two very unpalatable choices: one, let Bernie sell massive amounts of stock into the open market, which most definitely would push the stock down further and convince the doubters that even Bernie had lost faith; or two, bail him out So the board did exactly that It paid off his Bank of America loan and replaced it with a nearly 400 enerosity” was highly unprecedented I had heard about so of 2002, when the news broke that he was actually 400 million in the hole, I realized how deathly serious the situation was The guy had been averaging over 12 million a year in salary and bonus and owned, at WorldCom's peak, stock worth over 14 billion Wasn't it just two years ago that he'd exhorted everyone at my conference to play Who Wants to Be a Millionaire Who Wants to Be a Millionaire by buying his stock? by buying his stock?

I also was taken aback by Bernie's apparent stupidity Rather than selling sos, he had doubled up, and more, on his WorldCom bet This poor schmo had quite literally bet the ranch on WorldCo to climb and had also locked himself into illiquid assets, so he had no downside protection if the ative press stories followed, fro the collapse of the telecom industry to a New York Ti the indignity of poor Bernie having had to sell his 118-foot yacht, piece on executives in trouble, featuring the indignity of poor Bernie having had to sell his 118-foot yacht, Aquasition Aquasition3 Bernie lost a yacht Tens of thousands of his e And, if Bernie defaulted, WorldCom shareholders would pay the price for his and his board's bad decisions All he'd have to do would be to declare bankruptcy Then he could start over-not as amilk either Bernie lost a yacht Tens of thousands of his e And, if Bernie defaulted, WorldCom shareholders would pay the price for his and his board's bad decisions All he'd have to do would be to declare bankruptcy Then he could start over-not as amilk either

The day after the SEC inquiry was announced, Saloist, Tobias Levkovich, removed WorldCom from SSB's ”Focus List” of stocks to buy Yes, it had been on that list throughout all of the earnings s And why not? Its top analyst, Jack Grubman, still had it as a ”1” or Buy But now even Levkovich, no teleco the uncertain outco more and more vulnerability on the part of the investeneral Eliot Spitzer turned up the heat on his probes of the conflicts of interest between research and banking He made public some of the e-et, referring to a stock Blodget had reco,” and others he referred to as ”POS,” for ”pieces of shi+t” He also announced that he was expanding his probe to other banks Spitzer didn't naan Stanley, and Salomon Smith Barney And indeed, on April 29, Business Week Business Week reported that Jack Grubation of analysts, along with SSB reported that Jack Grubation of analysts, along with SSB4 To try to steal soulators' thunder, banks such as Merrill and CSFB hustled to announce their own refor tied to specific invest research depart depart to see these fir questionable about the way they did business

On April 19, 2002, WorldCo financial targets that were much worse than expected With the Bernie loan debacle and the SEC investigation, it was enough to make me decide that the company's survival was in real question So three days later, quite belatedly I ad from Hold to Sell-the second Sell of et price dramatically, from 9 to 2 I wrote: ”[The] only exit is takeout by [a Baby Bell] but we believe [the Bells] are highly unlikely to take on 30B of debt, negative revenue growth and inevitable loss of share and pricing power”

I wasn't the only person to lower the booo to a Sell Goldraded the stock And, finally, so did Jack Grub a pretty scary ith the announce two notches froation and the debt problee in EBITDA Guid [sic] Too Much to Ignore,” was telling even in its title God knows he'd ignored all the other bad news couess this was really too ly, Jack still had followers: WorldCom's stock fell by a third on the news, froly, Jack still had followers: WorldCom's stock fell by a third on the news, from 598 to 401 per share

On April 25, WorldCorowth And then, on April 30, the once-unthinkable news broke that Bernie Ebbers-Jack's starned under pressure fro the boot for WorldCom's horrendous performance, but his financial difficulties had compounded with each doard tick of the stock to the point that he was virtually insolvent I guess the board finally concluded that it's hard to carry out your fiduciary duties to the shareholders when you owe theht about that before they loaned himore, the former CEO of MFS subsidiary UUNet, who had joined WorldCo CEO

Jack, et as the public face of the bear azine, a publication that had glorified the stock market, put him on its cover Its title: ”Is Jack Grubazine, a publication that had glorified the stock market, put him on its cover Its title: ”Is Jack Grubman the Worst analyst Ever?” Street people didn't read Money Money for the most part-it was ai-eared by the time it had made the rounds of our offices It essentially bla on his every utterance,” it said ”When he spoke, stocks moved” for the most part-it was ai-eared by the time it had made the rounds of our offices It essentially bla on his every utterance,” it said ”When he spoke, stocks moved”

Jack wasn't the only telecom hero to suffer an abrupt reversal A month earlier, in March, Qwest had also co its accounting, focusing particularly on its use of swaps to bolster revenues The stock was now trading at around 9, down froh of 66 just two years earlier, with its employees' pension funds virtually wiped out Joe Nacchio, however, had cashed in stock options worth 746 million in 2001 alone and, just five months earlier, had even had his contract renewed until 2005

But suddenly, Qwest's long-supportive board had a change of heart Nacchio, too, had to go Phil Anschutz, Qwest's chairot on his private jet and flew to a private airport in New Jersey to break the news in person to Joe, who met him there6 Ever the salesman, Joe tried to convince Phil otherwise, but his charh the board could havefired for cause due to the accounting investigations, in which case he wouldn't be eligible for any severance, it let hi contract for two years Joe left rich in dollars but not reputation, his grand strategy disgraced and discredited He had done what I thought noa Baby Bell, a cash cow if ever there was one Ever the salesman, Joe tried to convince Phil otherwise, but his charh the board could havefired for cause due to the accounting investigations, in which case he wouldn't be eligible for any severance, it let hi contract for two years Joe left rich in dollars but not reputation, his grand strategy disgraced and discredited He had done what I thought noa Baby Bell, a cash cow if ever there was one

But he either couldn't or wouldn't acknowledge that he had any responsibility in the debacle Drake Teood-bye dinner for Joe and most of his top staff in a private roo to one person as there, Joethe unfairness of life He insisted that he'd tried to do as right for the coes about being betrayed and getting revenge, telling everyone that he was not going away Apparently, he saw Phil Anschutz as his Judas

A feeeks later, the US Departation into Qwest's conduct Five midlevel executives have been indicted so far, two of whouilty Not until March 15, 2005, after nearly three long years had passed, did the law touch Joe The SEC filed civil charges against hia and Robert Woodruff, foring that they orchestrated a ”massive financial fraud”7 The SEC coed that ”Qwest relied so heavily on the inition frogressive revenue and growth targets that Qwest ,' an 'addiction,' 'heroin,' and 'cocaine on steroids' Moreover, Qwest's reliance on so-called IRU 'swap' transactions to ets led some in the company to refer sarcastically to those transactions as 'sluts' (short for Sially Unrelated Transactions)”8 On June 5, 2005, Robin Szeliga agreed to plead guilty to insider trading and cooperate in the ongoing investigations Nacchio's trial is expected to begin in early 2006 Maybe I'll sit in

WorldCon The telecom and overall market implosions were in full force Investors had been wiped out, e laid off weekly at most of the major telecom companies, and alked around in a state of nu? In mid-June, I became convinced that WorldCom was not even likely to survive the su numbers Ido and I tried to couess of the real nuly, zero, though the shares were trading at almost a dollar That reflected the fact that the cohly 30 billion, exceeded our esti off bondholders, there would be no value left for shareholders and bankruptcy was iet price and reiterating our Sell rating CNBC's Maria Bartiromo, known on the Street as the ”Money Honey,” ridiculed our target price, as if a zero valuation was preposterous Right around the same ti Monday, June 24, Jack cut his rating on WorldCoain, to Underperfor at 122 per share on June 21 and closed at 91 cents on the 24th

Just after Jack's downgrade, I flew out to Kansas City to speak at a strategyfor Sprint executives WorldCo distance companies wasn't appreciably better WorldCoies had been, up until now, the envy of executives at Sprint and AT&T Even as WorldCom faltered, executives at AT&T and Sprint re how WorldCoet its costs so much lower than their own So the Sprint folks asked me to come explain how and why WorldCom consistently reported vastly lower cost ratios and thus better profit ins than Sprint They hoped et their executives fired up to compete, WorldCom style

We were all about to find out exactly what that ht before my presentation, I went out to dinner at a steak and brew pub with Steve Fletcher, a foric planning at Sprint We hadn't known each other very well at MCI, but we did know a lot of folks in common We ordered beers and reminisced about MCI when it was still a scrappy startup

We had just started to talk about our kids wheninsistently I couldn't stop lance at the screen Rude, I know, but in this business everyone understood You just never kneas about to happen

But this one I could never have anticipated I glimpsed the headline and choked onto believe this”

I held my BlackBerry up to Steve's eye level I saw his pupils dilate as he read the headline that I'd just seen: ”WorldCom Restates 38 Billion; CFO Sullivan Out” WorldCo that it had overstated its financial results by almost 70 percent over the past 18 months

”Holy shi+t!” he blurted, probably just one of thousands of ”Holy shi+t's” being uttered at that exacton here?”

We had all experienced so many disappointht I had lost the ability to be shocked by anything But this one really threw me I knew that Global and Qwest seemed to have pushed the envelope on a lot of stuff, and that the collapse of Enron had put every chief executive on the defensive, but this was utterly beyond the scope of what I could fathom

First was the enor cash flow? In a co cash floas reported at 93 billion last year? It was a nu to do with this company It meant that the coer, had been zilch Why hadn't Andersen, the auditing firm, noticed almost 4 billion in errors? Why hadn't the bankers ere always ready to help WorldCo? What about internal executives? The board of directors? The SEC? And, of course, the analysts? As dazed as I was by the news, it wouldn't be long until WorldCo the restatement were only 38 billion

Then there was the Scott Sullivan factor Scott? The straightlaced, uy who always had total recall of every component of WorldCom's balance sheet and income statement? It had been an impressive quality Too impressive, perhaps

Steve and I stared at each other We instantly knew that this was the end of both a co on the part of so ic had been for naught All this strategizing and firing and hiring and relocating and repricing to try to catch up to a company that had been a complete sham was instead a cruel joke In reality, there was no way to outdo WorldCom with fiber-optic wires, co All you really needed was a CFO with a pencil and an eraser

We talked in rapid-fire bursts, the way people do when so terrible happens I felt numb inside Sure I had a Sell on the stock, and sure I'd been considerably more cautious than my co that there could be so on Why not? And why didn't anyone else? What about Jack? I wondered Did he know? Or did Scott dupe hi irony-the insider led astray by his inside connection As with so many of the questions that had arisen in the past year, I had no answers

The next , I showed up for my presentation to Sprint's executives with no idea of what to say I h the speech on autopilot, sarcastically co to tell everyone how they could becoy office in Jackson, Mississippi, where Bernie had showed ht, too, about h the WorldCos by now And then, of course, there were the investors, large and s on the stock and lost, but had been playing the whole ti was not debatable: Mark Bruneau, the consultant who had called WorldCos with fake money” in that April 2000 Fortune Fortune article, had been ined article, had been s from hell The publicity-shy Sullivan ie of every newspaper in the country and many around the world But he was not the only one to feel the heat of a furious public The next , CNBC reporter Mike Huckman conducted an old-fashi+oned stakeout in front of Jack Grubman's post Upper East Side town house near the Metropolitan Museu, he visibly blanched and tried to keep walking, but Huckressive questions

Jack ca shi+fty ”Look, could you-first of all, this is a huge invasion of privacy,” he said, trying to outpace the reporter Huck about WorldCo,” he said ”I'm no different from anyone else on Wall Street” His shoulders were hunched, his body language defensive But he still couldn't keep his da like this?” Jack whined, his voice even squeakier than usual

”I' you questions about the company that you cover Do you think WorldCom can survive?”

”Look,” he sputtered ”I have no, I have no comment I'm as shocked about this as everyone else”