Global’s Exec With the Inside Knowledge

When an economic slowdown last year threatened to produce a gap between Global Crossing Ltd.’s first-quarter sales figures and the numbers it had promised Wall Street, the ambitious telecommunications giant didn’t want to disappoint.

Global Crossing made the numbers, but now the company stands accused of using aggressive--and potentially fraudulent--accounting techniques to inflate its sales and earnings figures. Officials from the Securities and Exchange Commission and the Federal Bureau of Investigation are combing Global Crossing’s books.

At the center of the growing controversy is Joseph Perrone, the company’s executive vice president of finance and former outside auditor. Perrone has declined to be interviewed, but former colleagues say the company’s response to the cash shortfall was consistent with Perrone’s aggressive, hubristic personality.

Despite spending 31 years as an auditor and partner with the Big Five accounting firm Arthur Andersen & Co., Perrone hardly fits the mold of the conservative, buttoned-down accountant.

Former colleagues describe the short, rotund 53-year-old as a “street-smart” executive who ran his department as his personal fiefdom. He scooped up candy from workers’ desks, paid generous salaries to favored employees, and made thinly veiled threats to the vice president who questioned some of his accounting decisions.

“With Joe, it was all about personal loyalty,” said one former employee in Global Crossing’s accounting and finance group. “If you weren’t part of the club, you were out.”

By the time he joined the company in May 2000, Joe Perrone was intimately familiar with Global Crossing. At Andersen, as the accounting firm now is known, he served as global managing partner for the firm’s work with Global Crossing and directed Andersen’s work in connection with Global’s 1998 initial public offering, which raised about $400 million.

Though it is common for outside auditors to jump ship and go in-house at the companies they audit, Perrone’s move was unusual because he was so highly placed at Andersen.

It piqued the interest of SEC officials, who questioned whether Perrone’s hiring “impaired” Andersen’s independence. Ultimately, the SEC was satisfied that Andersen “met the requirements for independence,” according to Global Crossing spokeswoman Becky Yeamans.Before leaving Andersen, Perrone rose to become the firm’s partner in charge of the metro communications, media and entertainment practice. In that role, he worked with telecom heavyweights, including AT&T; Corp. and its spinoff, Lucent Technologies Inc.

But Global Crossing, an audacious upstart, was arguably sexier than industry stalwarts. Founder Gary Winnick raised $20 billion to build a worldwide undersea phone network and spent lavishly to make his vision a reality.

To lure Perrone from Andersen, Global Crossing offered him a $2.5-million signing bonus on top of a base salary of $400,000 and a target annual bonus of $400,000, according to SEC filings. Perrone also received 500,000 Global Crossing stock options, along with shares in its sister company, Asia Global Crossing Ltd., which were to vest over a three-year period. Perrone also is chief accounting officer at Asia Global Crossing.

Soon after arriving at Global Crossing’s executive offices in Beverly Hills, Perrone held a meeting with the company’s finance employees and told them “there should be no significant changes,” the former employee said. But a few months later, the accounting group was moved to Madison, N.J., where the bulk of the company’s finance team was based. One member of the Beverly Hills accounting staff was offered a job in New Jersey, but the rest were laid off with severance, the employee said.

The decision to move the group to New Jersey was “a collective leadership decision,” said company spokeswoman Tisha Kresler, adding that Global Crossing “had already moved significant business operations to the East Coast.”

Perrone had strong ties to New Jersey. He graduated from Seton Hall University in South Orange, N.J., with a degree in accounting in 1969. He was active in the school’s alumni association and sent his son, Joe, to Seton Hall as well. He also was active in the New Jersey Society of Certified Public Accountants, where he was a member of the board of trustees and was chairman of the group’s committee on accounting and auditing standards.

At Global Crossing, Perrone hired several accountants from his office at Andersen and paid them handsomely for the switch. Several junior staffers were paid salaries of $70,000 to $120,000, more than Global Crossing employees with substantially more experience and education. Kresler said Global Crossing employees “are paid appropriate salaries commensurate with their experience.”

Soon after, things began to turn sour for the telecom industry. Optimistic network operators built huge amounts of infrastructure just as a nationwide economic slowdown curtailed corporate spending for such services. That left companies such as Global Crossing with insufficient revenue to pay the massive debt they had accumulated to build their costly networks.

By the first quarter of 2001, cash was running short and time was running out. Telecom companies were boosting their earnings reports by entering into deals to swap capacity on each other’s networks using instruments called indefeasible rights of use, or IRUs. Companies, including Global Crossing, would sometimes buy an IRU and book the price as a capital expense, which could be spread over a number of years. But the income from IRUs would be booked as revenue, which would ring an immediate boost to the bottom line.

Technically, the practice is within the arcane rules that govern accounting methods, but only if the swap transactions are real and entered into for a genuine business purpose.

The practice worried Roy Olofson, Global Crossing’s vice president of finance. In meetings with Perrone, Olofson “voiced concerns” about the company’s financial practices, particularly the numbers it reported for the first quarter of 2001, according to Olofson’s attorney, Brian Lysaght. Olofson told Perrone he feared Global Crossing “had entered into last-minute swap transactions” to make sure the company’s revenue and earnings figures would meet Wall Street’s expectations, Lysaght said.

“Perrone immediately responded by implicitly threatening Mr. Olofson with termination,” according to Lysaght. “He told Mr. Olofson that ... a list would be created as to which employees would be laid off. He told Mr. Olofson to call him on June 6 to find out his status.”

Global Crossing has said that it reviewed the allegations made by Olofson and found them to be “without merit.” The company has described Olofson as a disgruntled former employee who is trying to extract a cash settlement.Perrone also may have used his position at Global Crossing to steer business to his son’s start-up company, Chicago-based Withit, which uses the Internet to stream content to large financial services companies. Global Crossing Financial Markets, a division of Global Crossing that specializes in the financial services industry, announced a deal in June to distribute Withit’s streaming media broadcast system to its clients around the world. Neither company disclosed whether any money changed hands.

Perrone was not involved in the deal, said Kresler, the Global Crossing spokeswoman. She declined to discuss the financial value of the agreement, calling it “proprietary information” that the company wouldn’t make public “for competitive reasons.” However, Global Crossing is reevaluating whether the deal should be disclosed in its annual report. It’s unclear how Global Crossing became acquainted with Withit, which analysts describe as relatively obscure.

Perrone’s son, Withit Chief Executive and founder Joe Perrone, said he couldn’t comment on the deal with Global Crossing because the product involved in the deal “has yet to be released, and I can’t talk about products that haven’t been released in the market.”