Global Crossing was established in 1997. Global Crossing envisioned a global network that linked five continents with undersea fiber optic cables. This idea was highly evaluated by Wall Street investors. They offered $40 billion in equity financing and $10 million in debt financing for GC to execute its business plan as GC had no assets. The demands for high speed data service was lower than capacity of suppliers. GC's profit dropped. This led GC could not pay the interest on its debt and GC was forced to declare its bankruptcy in 2002.
During its performance, GC made some big mistakes. First, GC's chairman and stock analyst bullish GC's shares to mislead investors. Capitalizing on his endorsement, the stock analyst advised investors buy GC's stock and pushed GC's stock price higher than normal. Second, GC's top executives buy their stock with a measurable quantity in a short time as they knew GC would be bankrupt. All financial reports were inflated to keep GC stock price safe in the market. Third, GC used capacity swap. Revenue would be calculated to GC but no expense would arise. Regardless GC was lost and bankrupt, its top executives still profited from company stock.
GC completes its restricting and emerges from bankruptcy after Singapore Technologies Telemedia invested with two third stakes in business. GC faces a lawsuit of plaintiff (investors, creditors) for above wrongdoing. There are stakeholders involved in the case study are shareholders, employees: Investors lost about 54b, 14,000 employees lost US$ 401,000. In conclusion, the wrong doing person need to be punish by giving back the "unethical money" to corporation in order to solve this problem.
New BOD will be establishing for the second step as well. Asking audit from outside operation can make clear picture to shareholder, investor and employees about financial fingers. In addition to prevent that issue in the future, the operation needs to have strong strategy will good behavior chairman for the example, and the training ethical issue must take place at the first step for beginning business.
Key Learning for this case – There is a new idea of the global broadband network that would link continents with undersea fiber-optic cables. This proposal is no exception because of unclear picture for profitable in the future. – GC needs around $2.7 billion to do this project. But Wall Street valued and gives GC & 40 billion in equity financing and debt financing for investment in order to gave the stock a "strong buy" rating.
GC create a "seller's market will has great profit. If "buyer's market" they lose money. GC will investment on paper, its fiber-optic telecommunications net work connected 200 cities in 27 countries. They lose 2.4 billions and bankruptcy on 2007. – In the telecommunications stock analyst, Jack Grubman "bullish" GC stock and maintain them. Then he advises Winnick to hire GC CEO in order to negotiate mergers with U.S.West, Inc and Frontier Corporation. He does unusual role of stock analyst for giving not impartial advice to investor and shareholder. So, there is a question of his bonuses from GC or not?
For concerns about insider trading, there is evident that top officials at GC using inside information to get benefit by selling the share before bankruptcy The capacity swaps show that, both corporation boost their revenue up and overstate their profit in order to pull their stock price higher. So, they tend to mislead shareholders and potential investors about the financial health. Emerging ethical issues and ethical perspective The demand for broadband drops, the company ran into loss and as pressure for more profit to keep investors, they had practiced some ethical issues such as: Stock analysts gave false information on company stock price. Although stock price plummeted due to reduced revenues, stock analyst still advice shareholders to buy more stock. Stock analyst also influence on key business and management decision.
Insider trading: Executives use confidential information to sell stock for personal earnings before the company declares bankruptcy. – Pressure for profit also led top executives to make false accounting report (financial reports did not comply with general accepted accounting standard), Global Crossing sold the use rights of fiber-optic networks at end of the quarter to record more revenue in order to record more profit. This is a cheating & misleading actions toward investors on their financial report
Conflict of interest for the role of Chairman of the Defense Policy Board and advisor to Global Crossing In addition, there is some ethical perspective in this case as follow: – From the view of an egoist, actions and decisions of the top executives, managers of Global Crossing had done was to maximize their personal interest. Jack Grubman, the telecom stock analyst who had influenced Global Crossing's stock price as well as influenced investors in buying Global Crossing's stock. He even helped Global Crossing in making key business and management decisions allegedly with the purposes of being rewarded with bonuses.
As an egoist, people may ignore the vast benefits of others. Egoistic people "do the act that promotes the greatest good for oneself" and this is true for the case of Chairman Gary Winnick and other top executives who had decided to sell company stocks to earn millions of income dollars event in the event that they had seen the revenue forecasting fall of $300 million. They even ignored the severe penalties for insider trading which may include both civil and criminal punishment. The enlightened egoism can also be found in the case that is action of the Vice President of Finance, Roy Olofson, who had whistle-blew Global Crossing's improper accounting report in which the report did not comply with the general accepted accounting principles.
Revenues were manipulated at an increase while cost underreported with the aims of reportedly profitable in order to attract more investors. Roy Olofson had stood up to protect investors. He placed the interests, the well-being of others in precedence of his own interests. On the contrary, Leo Hindery, CEO from March to October 2000 is a typical example of egoism, he had requested his claims precedent over other creditors and the claims were unpaid severance benefits, house rental. He had ignored the bigger losses from investors who had offered finances to give birth to Global Crossing. In summary, Global Crossing is an egoistic organization.
Case issue: Assumption and Nuisance Assumptions: – The telecommunication stock analyst: Grubman- telecommunication stock analyst paid about $20 million per year- stated wrong considerations, predictions to mislead investors. Basing on his reputation and power in telecom industry, he gave negative effects to this industry. When he lowered his price target for GC stock in May 2001 from 70$ to 30$, he also labeled the stock a " core holding" and maintained his "buy" recommendation . He frequently communicated with Winnick and advised Winnick. He also help to negotiate mergers with U.S.West, Inc. and Frontier Corporation. There were questions for his income as well as his dubious distributions for telecommunication companies such as Global Crossing.
Insider trading: By knowing information about the fall of Global Crossing company in near future, Winnick and GC executives tried to sell a large amount of his shares to the other investors. This way brought them a big profit instead of a big loss. Although their responsibility is managing the development of company, they tried to escape safely from the failure of company. – The capacity swaps: Global Crossing and Qwest swapped their network capacity to increase their revenues and overstated their profits, sending their stock price higher. This only created virtual asset for both sides, real economic value was not created in this transaction. They wanted to hide their actual losses in order to keep the investors.