Some Look Askance at Winnick's $25M Offer
October 14, 2002
Is Gary Winnick, chairman of beleaguered telecom Global Crossing, trying to save his own hide by making a public pledge of $25 million to those among his employees who lost large sums of their 401(k)s plan during the recent telecom bust? Or, is he, as he recently told Congress, trying to set a precedent in corporate moral responsibility?
Winnick recently offered to contribute $25 million to help counteract losses sustained by current and former employees in their retirement plans. There is currently a class-action suit against the company by employees who saw their retirement savings fade away. Winnick is also facing an inquiry surrounding circumstances of his sale of $124 million worth of Global Crossing stock. Winnick reportedly reaped a total of $734 million from the stock.
Winnick launched Global Crossing in 1997 as part of a wave of new companies that were formed in the late 1990s following 1996 telecom legislation. Under Winnick's leadership, the company built an underwater fiber-optics phone network connecting five continents. The company expected to benefit from a projected rise in Internet traffic, but it never saw the kind of demand it was anticipating.
In January the company filed for bankruptcy protection.
Given the state of Global Crossing, Winnick's so-called act of generosity would suggest he has never been one to lead a moral corporate crusade. Regardless of its motives, the offer is highly unusual and has many in the mutual fund and defined-contribution industries talking.
"I think the $25 million is unprecedented, considering that somebody would kind of just pony that up without anybody making them do it," said Lowell Smith, president of Pittsburgh-based 401(k) consulting firm Service Provider Solution. Smith, a former program analyst at the U.S. Department of Labor in its investigative unit, said that the offer is unusual because of the way it was presented.
Smith said that in the past, most of the so-called "asset restored" offers were done as a direct result of an investigation or when a company entered into a voluntary compliance agreement with the DOL. Other events to spur such offers have been when a consent order has been entered into a court of law, or when a lawsuit was settled out of court, Smith said.
The offer may have legal ramifications for both Winnick and the company, as well. "This could be used as evidence for people to say, Oh, you did do something wrong.' Obviously, his lawyers didn't tell him to do this. That's my guess," Smith said. "But one thing it has done, which may be tactical, is [to show] good faith and makes it less likely the lawsuit will affect him personally."
"I don't know that we have any comment at this time," Scott Tagliarino, a spokesman for Winnick said, adding that he would prefer to talk about the issues when he communicates with a planned administrator and that they would try to issue a statement late last week, following press time.
"Gary Winnick, chairman of Global Crossing, personally pledged $25 million to employees who lost their contributions to Global Crossing's 401(k) retirement plan, Global Crossing said in a statement. "Global Crossing will work with Mr. Winnick to more fully understand his pledge."
Winnick told members of Congress on Oct. 1 that he pledged the money so that the employees of the company don't go unnoticed. He urged other executives in the telecom industry to follow his lead. He was speaking during a hearing of the House Committee on Energy and Commerce's Subcommittee on Oversight and Investigations.
$5,000 a Head
The $25 million works out to roughly $5,000 per eligible employee, although the actual amount divvied up is likely to be based on what each employee had contributed to the fund.
The $25 million figure represents the money Global Crossing employees contributed to the funds since the acquisition of phone company Frontier Communica-tions Corp. in Sept. 1999, according to the Winnick camp. That's when the company prompted a majority of its workers to buy company stock, according to published reports. Representatives for the employees say the figure is far greater and that the $25 million is insufficient.
"Clearly, Global Crossing was involved in a variety of financial transactions that are extremely dubious, and there's all sorts of information in the press about the fact that people inside Global Crossing knew that bad things were coming before those bad things were reflected in the stock price," said Marc Machiz, a partner with Washington law firm Cohen, Milstein, Hausfeld & Toll. Machiz is the former chief ERISA lawyer for the DOL and is currently an attorney representing plaintiffs in lawsuits against Williams Cos. and Dynergy.
"Certainly, the cases that can be made against the people that are in charge of running the company and ultimately in charge of running the employee benefit plans appears to be pretty strong," Machiz said.
"I think that he may be setting a precedent if it works," Smith said. "In other words, if it stems off the lawsuits and the government actions, then you will probably see more of it. If it really doesn't affect lawsuits by participants, more than the government coming after them, then I really don't think you'll see this, as something a lot of people will do. In the long run, I don't think this will be what a lot of people will do."
However, Machiz isn't as optimistic that it will work, or that the fat cats of the corporate scandals will have any sort of moral obligation to fork over some of their ill-gotten gains. "It is unusual for people to offer money without asking for anything in return. In special circumstances there may be public relations reasons to depart form that general rule," he said.