> Dialing for Dollars: Before Telecom Industry Sank, Insiders Sold Billions
> in Stock --- As They Cashed Out Shares, Many Executives Touted Sector's
> Growth Potential --- Mr. Galluccio's New Winery
> All told, it is one the largest transfers of wealth from investors -- big
> and small -- in American history. Hundreds of telecom executives, almost
> uniformly bullish, sold at least some portion of their stock and made
> hundreds of millions of dollars, while many investors took huge,
> unprecedented losses. It dwarfs the much more highly publicized Internet
> boom and bust. And the economic and personal damage in jobs lost and
> bankruptcies is far worse.
>
> By Dennis K. Berman
> 12 August 2002
> The Wall Street Journal
>
> These days, Vincent Galluccio spends most afternoons at the wheel of a
> tractor, overseeing his $5.2 million Long Island vineyard, Galluccio
> Family Winery. Just two years ago, Mr. Galluccio was one of thousands of
> executives overseeing a different product: telecommunications.
> Mr. Galluccio, 57 years old, was a top European executive of Metromedia
> Fiber Networks Inc., a high-flying White Plains, N.Y., telecom-network
> builder. As Metromedia's value soared to its peak of $31 billion, Mr.
> Galluccio began selling small amounts of shares. Leaving the company in
> 2000, he liquidated all of his holdings, for a total of about $27 million.
> He used the proceeds to buy the 160-acre winery known for its Chardonnays.
>
> Metromedia has since landed in less idyllic territory: In May, it filed
> for Chapter 11 bankruptcy protection and the Securities and Exchange
> Commission is examining the accounting practices the company used after
> Mr. Galluccio's departure. Mr. Galluccio is unapologetic about his haul,
> having worked 18-hour days for three straight years. "My father taught me
> that when you play poker and win a hand, put half in your pocket and walk
> away from the table," he says.
> The telecommunications industry, once a safe stock haven for "widows and
> orphans," became a gigantic poker game during the late 1990s, a
> competitive, high-growth business drawing billions of dollars of fresh
> capital. Supported by bullish Wall Street analysts and investment banks
> eager to reap big stock-offering fees, industry executives helped the pot
> grow bigger and bigger with talk of telecom's endless growth
> possibilities. Then, by the hundreds, they folded their hands at what
> turns out to have been the peak.
> Starting in 1997, telecom insiders directly cashed out over $14.2 billion
> in shares, a Wall Street Journal/Thomson Financial analysis shows. Add in
> shares sold by venture capitalists, executives' trusts and private
> investment vehicles, and the number soars to roughly $18 billion.
> Some of the sales by telecom insiders have been truly massive. Qwest
> Communications International Inc. founder Philip Anschutz sold nearly $2
> billion of shares, and former chief executive Joseph Nacchio sold about
> $250 million. Global Crossing Ltd. founder Gary Winnick sold $734 million
> in shares on a $20 million investment. Global Crossing entered Chapter 11
> proceedings in January and reached an agreement to be sold on Friday.
> A spokeswoman for Mr. Winnick said that all of his trades followed
> applicable rules and were reviewed by company attorneys at the time. A
> representative for Mr. Nacchio said all of his sales were in compliance
> with trading regulations. A spokesman for Mr. Anschutz said that the
> executive had put $1 billion of his own money into Qwest and declined to
> comment further.
> WorldCom Inc. Chief Executive John Sidgmore, who predicted nearly endless
> growth for the industry as head of UUNET, the Internet backbone purchased
> by WorldCom in 1996, sold a total of $87 million in WorldCom stock.
> WorldCom filed for Chapter 11 bankruptcy protection earlier this summer
> and was slapped with civil charges by the SEC after reporting the biggest
> corporate accounting fraud in history.
> "The point of my presentations always was the Internet infrastructure and
> the capacity of our network was growing 10 times" annually between 1994
> and 1997, Mr. Sidgmore says. He added that the overwhelming portion of his
> sales were of holdings that were originally UUNet shares, not newly issued
> WorldCom shares. "The only thing I've sold since 1999 were transfers into
> trust funds for nieces and nephews," he says.
> But the insider selling went far beyond the Winnicks and Sidgmores of the
> industry. The selling also reaped huge profits for hundreds of relatively
> unknown telecom executives such as Mr. Galluccio. Their fortunes are
> indicators of just how much the telecom bubble expanded, enriching
> executives at companies with the most limited track records. Today, of the
> 305 companies canvassed in the Journal survey, 38 have total insider sales
> since 1997 greater than their current market capitalizations.
> All told, it is one the largest transfers of wealth from investors -- big
> and small -- in American history. Hundreds of telecom executives, almost
> uniformly bullish, sold at least some portion of their stock and made
> hundreds of millions of dollars, while many investors took huge,
> unprecedented losses. It dwarfs the much more highly publicized Internet
> boom and bust. And the economic and personal damage in jobs lost and
> bankruptcies is far worse.
> With over 60 bankruptcies to date, it's now clear that the sector sank
> under too much capacity and debt. Telecoms have now shed half a million
> jobs and about $2 trillion in market capitalization.
> At JDS Uniphase Corp., a maker of fiber-optic components, insiders
> unloaded nearly $1.2 billion of shares over the past five years. The
> company is now valued at $3.5 billion. Insiders at Foundry Networks Inc.,
> a San Jose, Calif., maker of switches for data networks, have sold close
> to $700 million in shares since 1997. The company is now valued at about
> $1 billion. Even at now-defunct wireless-data provider Metricom Inc., San
> Jose, Calif., where yearly revenues never exceeded $18.5 million, insiders
> managed to sell off more than $35 million.
> To be sure, in most cases, the selling was perfectly legal -- and was duly
> reported in filings with the SEC. Insiders have every right to sell their
> shares and turn a profit. If part of their compensation comes through
> stocks and options, they have full sway to diversify their portfolios. And
> unlike many established companies, the new telecom players faced a
> higher-risk proposition: The stock didn't pay dividends because there
> often weren't any profits. Executives point out that regular shareholders
> are free to sell whenever they wish. Most say they sold only a small
> percentage of their overall holdings into the market, and nearly all were
> prevented from selling stock within the "lock-up period," or 180 days
> after their companies' public offerings.
> But with much of the industry in utter collapse, investors are puzzled and
> angry that they didn't understand how short-lived the boom would be. If
> telecom was supposed to be the backbone of a decades-long Digital Age, why
> were so many executives selling at the same time that they were predicting
> further growth? If timing is everything, was there something the insiders
> knew about the state of the industry that the general population of
> shareholders didn't?
> Scores of shareholder lawsuits have flooded the courts, charging telecom
> executives with making misleading statements and selling their shares
> while prices were still high. No telecom executive has yet been charged
> with or convicted of insider trading, and such prosecutions only rarely
> stick. To be convicted of insider trading, prosecutors must prove that
> insiders used material, nonpublic information to sell for their personal
> gain.
> That doesn't mean investors aren't feeling burned. "It's very frustrating
> as an investor," says Trent E. May, a former manager at Invesco Funds,
> whose portfolios suffered because of heavy investments in telecom and
> technology stocks. Executives "came public with these great stories about
> how they were doing so well, and then they come back to the market and
> sell 50% of their personal shares."
> The crash and personal profiteering of the telecom industry have become a
> platform for the surge of corporate reforms sweeping through Congress and
> private-sector stock regulators. The response? Expensing options,
> restricting grants, limiting selling periods, pushing up the deadlines for
> insiders to disclose their sales and hauling executives off to jail in
> handcuffs before TV cameras. These all may play a role in calming investor
> anger.
> But for now, few executives are publicly repentant about timing their
> sales so well while outside shareholders took a bath. Randall Kruep,
> former senior vice president at Redback Networks Inc., a six-year-old
> company that went public in May 1999, says he "would have gotten out
> faster if I could have," and now wishes he could have sold double the $100
> million he sold in share transactions during 1999 and 2000. Tight trading
> "windows," which limit when insiders can sell their shares, prevented Mr.
> Kruep from doing additional selling, he says. The company's shares crested
> at a split-adjusted $191.03 in March 2000. The shares now sell at $1.07.
> Now the chief executive of Procket Networks Inc., Mr. Kruep says he knew
> early on that the industry could not continue at its torrid pace.
> Executives who believed that the growth would continue, "didn't want to
> believe the truth. They didn't want to look a gift horse in the mouth."
> Brian Smith, chief executive of Austin, Texas, equipment-maker Crossroads
> Systems Inc., calls the amount of telecom insider sales "pretty small"
> given the overall size of the economy. In 1999, Crossroads went public,
> and in October of that year Mr. Smith began a regular share-selling
> program that has since brought in more than $50 million, according to
> Thomson Financial. That's nearly three times the company's current market
> capitalization. Mr. Smith says financial advisers suggested he start
> selling shares as a way to diversify his holdings. As for Crossroads'
> valuation, "it was consistent with what others were getting valued at,"
> Mr. Smith says. "It didn't seem out of ordinary for the time. It seems out
> of the ordinary now."
> Mr. Smith recalls a whirlwind period following the IPO, when the stock was
> often advancing as much as $25 a day. Around that time, he says, the
> company's sales looked like they were going to grow 25% a quarter. Those
> expectations didn't pan out. Nine months after what was once the
> fifth-most-successful IPO in history, demand for the company's products
> began to slow. At the time, Mr. Smith called it a "bump in the road."
> At JDS Uniphase, Chief Financial Officer Tony Muller was struggling to
> keep up with at least 20% growth between 2000 and the second half of 2001.
> The company scrambled to meet demand by opening new plants and snapping up
> competitors. "That was the world as we saw it," says Mr. Muller. But when
> the bottom fell out of the market, "Our customers were wrong and we were
> wrong."
> Mr. Muller, meanwhile, was consistently selling his own shares -- tens of
> millions of dollars' worth over the past five years. Mr. Muller says he
> consciously sold no more than 10% of his holdings, for fear of giving
> investors the impression that he wasn't committed to the company. In fact,
> Mr. Muller adds, he could have cashed, "a very big number." How big? "I
> don't want it to appear in print."
> Mr. Muller's longevity trumps that of his former colleague, Mary Zita
> Cobb, a longtime JDS executive who was instrumental in a 2001 $18 billion
> merger with SDL Inc., another maker of fiber-optic components. The value
> of the merger has since been largely written off, but Ms. Cobb hasn't been
> around to see it. She left the company soon after the deal closed, and is
> now circumnavigating the world on a sailboat, according to other JDS
> executives. Between 1999 and 2001, she sold stock valued at more than $100
> million. Ms. Cobb couldn't be reached for comment.
> Former Redback Networks chief executive Dennis Barsema was bullish on the
> growth prospects of his company during March 2000, telling a television
> interviewer that the company was at the "very beginning stages of a market
> that is going to grow very, very fast."
> That prediction held for the next nine months, when Redback quarterly
> sales grew by four times to nearly $115 million. But the bottom would
> later fall out, as Redback sales tumbled to $40 million during the first
> two quarters of 2002.
> Eventually leaving Redback for another start-up, Mr. Barsema sold $125
> million in company shares, according to Thomson Financial. Mr. Barsema
> said that his entire net worth was tied up in the company, and he needed
> to diversify. "I don't think anyone knew we were in a bubble until we were
> on the other side of it," he says.
> The hype was especially loud at four-year-old Sycamore Networks of
> Chelmsford, Mass. By all accounts, the company built a well-respected
> group of products used to manage what are called the "next generation" of
> telecommunications networks.
> As company executives described it, Sycamore's fate was tied directly to
> that of the Internet. Locked together, the future of both seemed limitless
> when the company took its shares public in the fall of 1999. Sycamore was
> valued at $14.4 billion after its first day of trading. By January 2000,
> Fortune magazine said the company had the best chance of becoming a "big
> boy."
> Even after the dot-com bubble popped a few months later, Sycamore
> executives were publicly bullish on their market opportunities. One top
> sales executive noted in a June 2000 press release that "next generation
> networks will continue to grow bigger and faster than anything we've seen
> before."
> Just three months earlier, a group of seven top executives sold $257
> million of stock, at around $144 a share. Three have since left the
> company. One, sales executive Ryker Young, recently moved to Oklahoma. He
> says he is "sitting on the sidelines" following an illness. Mr. Young
> declined to comment further about his stock sales, which totaled more than
> $65 million, according to Thomson Financial.
> Deshpande Gururaj, Sycamore's chairman and chief executive, has sold about
> $136 million since the IPO, or 4.5% of his total. A representative for Mr.
> Gururaj said he wasn't available for comment. Though Sycamore shares are
> now trading at below $3, Mr. Gururaj recently told a Boston technology
> conference that he believes in the long-term prospects for telecom.
> Bobby Johnson Jr., founder of the profitable Foundry Networks, says he
> retains a deep belief in the promise of telecom, even after what he
> describes as "the most challenging 18 months of my 25-year career." The
> 45-year-old Mr. Johnson's holdings were once valued at more than $5
> billion. He now says that the industry was "in denial" around the time the
> company issued an earnings warning in December 2000. Mr. Johnson, who has
> sold about 25% of his holdings for about $305 million, says he thought
> there would be a small dropoff in demand, and then it would be "back to
> the races in another few months."
> Remarks Mr. Johnson made on Nov. 13, 2000, are the subject of a
> shareholder lawsuit filed in the U.S. District Court for Northern
> California. In an interview at the time, Mr. Johnson said that he was "not
> unhappy" with the company's stock price. He went on to say that "when the
> market fully values markets as well as companies, our stock price could go
> even higher." The next day, Foundry's shares jumped from $66.75 to $74.06.
> But they retreated to $13 after the company posted an earnings warning on
> Dec. 19. The lawsuit alleges that Mr. Johnson, who had a regular program
> of selling shares, possessed information about Foundry's deteriorating
> condition when selling shares in October 2000. Mr. Johnson notes that the
> suit has been dismissed twice, adding that it is "without merit."
> Foundry's shares now trade at $8.99.
> Today, Foundry sells just 20% of its products to the telecom carriers who
> were its most avid original customers. It is now marketing directly to
> corporations. Mr. Johnson backs away from the notion that Foundry hyped
> the Internet, whose growth has proved remarkable but far more modest than
> once expected. "I don't think we either inadvertently or advertently hyped
> the Internet," Mr. Johnson says. "We believed that there was a lot more
> that can be done with the Internet and can be done over time."
> Like many of his telecom peers, Mr. Johnson insists that the
> multimillion-dollar paydays haven't changed his life much. "I still work
> as many hours as I did before," he says, adding he's given away more money
> than he spends.
> Indeed, telecom executives have been generous with their largesse: Mr.
> Barsema, for instance, recently funded a new business school at Northern
> Illinois University, coming up personally with $5 million in cash after
> awarding the school a stock gift of $15 million. Mr. Smith, of Crossroads
> Systems, has funded international Baptist missionary groups. Donald Green,
> another Silicon Valley executive who made tens of millions of dollars in
> telecom stock sales, gave $10 million to help build a 1,400-seat music
> hall in California's Sonoma County, modeled after the famous Tanglewood
> site in Massachusetts.
> But even well-meaning gifts can do little to insulate telecom executives
> from public resentment. Mr. Johnson, for instance, admits that it's "not
> always pleasant to tell people you're a CEO these days." Congressional
> hearings into the telecom mess have become televised embarrassments for
> the industry's top brass. Some corporate activists are lobbying for
> telecom executives who presided over corporate bankruptcies to return
> their compensation to shareholders and employees.
> David Oros is chief executive of Aether Systems Inc., which builds
> wireless-data products for corporations. Aether's market capitalization is
> now about $116 million. Through personal sales and sales of an investment
> vehicle he majority owns, Mr. Oros sold $140 million of stock in 2000,
> according to a spokesman. He later bought a $2.5 million stone home in
> Baltimore. Neighbors later groused about Mr. Oros's home remodeling, which
> included a reflecting pond, as well as butterfly and sculpture gardens,
> according to a person who has seen the house's preliminary plans. Mr. Oros
> says he's grown frustrated by criticisms about his stock sales, which
> occurred during a secondary stock offering in 2000. "I've given more in
> charitable contributions than I've paid for the house," he says, noting
> that he lives more modestly than some other executives. Mr. Oros says he
> has kept the same salary for three years and is "proud of what we're doing
> for the city of Baltimore."
> Some investors are looking to alter the kind of compensation structures
> that richly rewarded the telecom executives of the late 1990s. Such
> changes might further restrict how much, and how often, executives can
> sell their shares.
> Carl Ferenbach, a venture-capitalist at telecom backer Berkshire Partners,
> puts some of the blame for the huge industry payouts on himself. "We never
> really seemed to ask the question about huge amounts of money going in,
> supporting people who ultimately walked away with a lot of money," Mr.
> Ferenbach says. "It clearly was out of control everywhere, and in some
> sense, all of us who didn't scream loudly are to blame."
> ---
>
