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Beast of the Month - June 2002
Gerald Levin (AOL Time Warner), C. Michael Armstrong (AT&T), John Rigas (Adelphia), Gary Winnick (Global Crossing) & Bernie Ebbers (WorldCom), Telecom Titans Gone Bad
John Lydon (aka Johnny Rotten) of The Sex Pistols, "Anarchy in the UK"
Former Assistant HUD Secretary Catherine Austin Fitts
Ah, the smell of scandal is in the air. Maybe it's merely a batch of bad May flowers, but whatever it is, the stench is overwhelming. Whether it be the twin Shrub scandals of Enrongate and Osamagate, the Catholic Church sex scandal, the dubious accounting practices of Arthur Andersen, the fraudulent peddling of bad stocks by Merrill Lynch or merely the bankruptcy of Kmart, The Konformist smells a rat.
Still, there is one group of scandals that hasn't received the collective attention it deserves: the meltdown grouped with outright theft coming from the telecom industry. That such a gigantic mess could happen to an industry that only two years ago looked to have it made is a stunning surprise. And that such a excessive mixture of smug arrogance, naked greed and blatant fraud led to this mess, it is clear that the meltdown couldn't happen to a more deserving gang of swine.
In 1996, both parties in Congress overwhelmingly passed the Telecommunications Act, and the FCC under both Klinton's William Kennard and Dubya's Michael Powell has overtly backed the telecom industry as it became a gang of fattened monoliths. Which was, of course, the point of the legislation: rather than "deregulate" telecommunications to provide actual competition, it was done to allow gigantic oligopolies to form and amass wealth in a still fixed pool. But something happened along the way to becoming the Masters of the Universe: the telecom heads became drunk with their own power and overextended in both infrastructure investment and shady business practices, and now they all must pay the piper. And that is why the top line of Telecom Titans Gone Bad have been recognized as The Konformist Beast of the Month.
Let's start with John Rigas, who was the CEO (that is, until last month) and founder of Adelphia Communications, the sixth-largest cable company in the US. In his capacity as Adelphia CEO, he had engaged in a prudish "morality" campaign to block from his cable systems the airing of the Playboy and Spice channel, as well as public access shows such as Talking Blue, Colin's Sleazy Friends and The Dr. Susan Block Show. (In the case of public access, he was openly mocking the law in his crusade, as he had no right to censor channels owned by the public through his services.) But, just as Charles Keating had battled Larry Flynt while running a swindling Lincoln Savings & Loan, Rigas had used Adelphia as his family's personal bank, using korporate assets in "off-balance-sheet" personal loans of over $2 billion (and over $3 billion total for his entire family.) Two federal grand juries are investigating the manner. Meanwhile, Adelphia has defaulted on its own obligations of a $44.7 million interest and dividend payments. The stock's value has dropped to 20 cents a share (down from a peak of $87 in May 1999) and was delisted from Nasdaq on June 3. While Adelphia is (relatively speaking, at least) a small-fry in the telecom field, the level of Rigas' economic thievery is so outrageous that he deserves special recognition for his plundering.
Of course, Gary Winnick of Global Crossing holds his own in this regard. Under his control, the fiber-optic giant once worth $50 billion had $12.4 billion in debt when it filed for bankruptcy in January, the fourth-largest ever. Much of this $50 billion appears to be thanks to "creative" accounting approved by it's respectable auditing firm Arthur Andersen (the fine folks who okayed Enron's skanky deals.) At its prime, Global Crossing invested heavily in hitters from both sides of the political aisle, including current DNC Chairman Terrence McAuliffe and former President George Herbert Walker Bush. Before the bankruptcy, Chairman and founder Winnick sold $734 million in stock. The FBI and SEC are investigating his transaction, as some suspect this may perhaps qualify as insider trading. Winnick also gave multi-million dollar golden parachutes to his executive partners-in-crime.
This leads us to Bernie Ebbers, the founder (and also until recent CEO) of WorldCom, which, after swallowing MCI in a hostile takeover back in 1998, became the nation's second largest long-distance company. Unfortunately, WorldCom went on an even larger spending spree than Adelphia or Global Crossing (sixty acquisitions total), and now has $30 billion in debt. It's debt has been downgraded to junk status, while its has plunged from its $60.50 peak in July, 1999 to under $2 a share. The SEC, of course, is investigating its accounting practices, and on April 30 Ebbers was forced to step down. Despite all this, don't feel too bad for Ebbers: hyped as the "Telecom Cowboy" at its peak, he may turn out to be the Telecom Bandit, owing WorldCom $366 million which, even at below-market rates, he may never be able (or required) to pay back. Meanwhile, WorldCom plans to layoff 16,000 workers, or 20% of its work force.
Next up: C. Michael Armstrong, CEO of AT&T. Armstrong (formerly the Chairman of Hughes Electronics, heavily implicated in the Chinese Spy Scandal) took over the remnant of Ma Bell, with the ambitious goal of turning it into an even more frightening monopoly than it was before the breakup. The theory was AT&T would use its market muscle in long distance and cable - along with a slack FCC regulation of market concentration - to synergize a one-stop telecommunication empire of phone, cable, Internet and wireless. While it took over Mediaone and TCI to become the nation's largest cable company, AT&T argued in court - with the FCC backing up its ludicrous argument - that local governments had no right to require cable companies have competition in Internet access. Despite this, Armstrong's dream didn't quite work out as planned: all that swallowing up of other entities (the Mediaone-TCI takeovers totaled $97 billion in cost by themselves) left AT&T overextended, and their stock value, which peaked at $49 a share in 1999, ended May trading around $12. Armstrong is the only one of the Telecom Titans Gone Bad still on the clock (excluding Winnick at his ghost korporation Global Crossing) but that is merely temporary: if the FCC approves the planned merger of number one AT&T Broadband with number three Comcast (a very likely scenario under the toad-like Powell) the new Goliath-sized 22-million customer cable combine will spin off into its own company, with Armstrong as its Chairman. After examining the details of the merger, the deservingly respected Robert Kuttner wondered in his Business Week column if the scheme was nothing more than a crooked golden parachute for Armstrong from the mess he created at AT&T. Kuttner bluntly asked, "Should AT&T be added to the growing corporate rogues' gallery that now includes Enron, Global Crossing, and WorldCom?" He concludes by saying, "The AT&T Comcast deal is a perfect marriage of bad corporate governance and bad public policy. If such games can be played at AT&T, problems of corporate governance are endemic."
Finally, there is TTGB number five, Gerald Levin, who retired as CEO of AOL Time Warner on May 16. Officially, Levin left the helm of AOL Time Warner (he had been CEO of Time Warner since 1992) to devote more time to philosophical study and philanthropy: the real reason, according to Vanity Fair, is due to a vicious tongue lashing by Ted Turner at a board meeting, as Turner reportedly banged his fist on a table and accused Levin of destroying the company. Turner may be right: ever since the announced merging of AOL and Time Warner, the value of the combined assets has tanked from $290 billion to under $85 billion. Levin's plan was simple: meld the Time Warner entertainment empire with a cable monopoly (it is currently the number two cable company behind AT&T) and the biggest Internet provider in the world with AOL, to provide a steady stream of customers with content. Like AT&T, Levin and co. argued against open Internet access of cable lines (before the merger, AOL - which had no cable franchises - was a major proponent of open access.) And like AT&T, despite such cynical plans of monopolistic gouging of customers, the Levin blueprint has been a major bust. Last quarter, due to a gigantic write-off in the value of the company, AOL Time Warner posted a $54.2 billion quarterly loss, the largest in history. To Levin's credit, there is no evidence or allegations of Levin engaging in any dubious financial schemes that require investigation (though it seems odd to credit a korporate executive for not being a criminal.) Of course, since he legally received over $160 million in compensation for 2000 alone while his company's value began to sink, it appears he had no need for fraudulent activity.
How will it all end? Will Rigas, Winnick or Ebbers go to prison? Will Armstrong get his golden parachute? Will Levin write any half-decent poetry? And is this just the beginning, or will others soon join the list of the Telecom Titans Gone Bad? Somehow, we at The Konformist suspect that rather than being a month-long fad, this is merely the opening shot of things to come.
In any case, we salute Gerald Levin, C. Michael Armstrong, John Rigas, Gary Winnick & Bernie Ebbers as Beast of the Month. Congratulations, and keep up the great work, dudes!!!
Update : On June 16, Joseph Nacchio joined the list of TTGB, as he resigned as head of Qwest. Qwest has $26 billion in debt, and is currently under SEC investigation for its accounting practices.
On June 25, WorldCom announced the discovery of a $3.9 billion accounting "error" which overstated their earnings. The SEC has filed fraud charges against the company. By the end of June, WorldCom was trading under $1 a share and appears doomed to become the largest bankruptcy ever, even exceeding in size the collapse of Enron.
Update Part II: Looks like we spoke too soon about AOL Time Warner. In late July, a federal investigation was launched on its accounting practices.
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