Double crossing?

National | Global Crossing collapses amid fraud charges, the SEC hatches a helpful hoax, and JVC sees new life for VCRs

Issue: "The Mormon Olympics," Feb. 16, 2002

Global Crossing was one of futurist George Gilder's favorite companies. In his book Telecosm, he called the company "a pure telecosm play" that "artfully exploits the defining abundance of the era" in building a global fiber-optic network that could break the power of bloated phone companies and intrusive government regulators. What Mr. Gilder describes is founder Gary Winnick's dream to wrap the world in fiber optics. Global Crossing spent nearly $15 billion over the last five years to build the most modern and extensive network on the planet. Yet the company collapsed under $12.4 billion in debt-and the Bermuda-based firm has filed for bankruptcy protection. Global Crossing announced that independent examiners would look into charges that the company inflated its revenue statements. It also agreed to cooperate with federal investigators. Yet company officials still defend their fiber-optic vision. "In the last six months, it's almost a perfect storm kind of environment. Everything crashed at once," said Dan Cohrs, Global Crossing's chief financial officer. Roy Olofson, Global Crossing's former vice president of finance, had warned of misleading accounting techniques before he was laid off. His former employer says the charges were baseless and claims the ex-executive wanted to be paid to keep quiet about his allegations. Regardless of what auditors find, a company once valued at $55 billion will probably leave stockholders with worthless shares. Even in scandal, however, Mr. Gilder remains loyal to his convictions. In a Wall Street Journal piece about accounting scandals last month, he called Global Crossing's network "the most efficient global build out in telecom history." Scam simulator
Could McWhortle Enterprises be the next hot stock? Over at McWhortle.com, there's a pitch for a startup that makes a "Bio-Hazard Alert Detector," a battery-powered gizmo that beeps when it detects a bioterrorist attack. The site boasts testimonials from a "Fortune 100" CEO and a "major investment banking firm." McWhortle invites people to "Invest Now" before the coming stock offering. After a few clicks, the scam is revealed: McWhortle Enterprises is an Internet hoax commissioned by the Securities and Exchange Commission to teach potential suckers a valuable lesson. To push the hoax, regulators issued a phony press release over PRNewswire, which sends corporate announcements to journalists and the Internet. "The SEC has advised us that they have 'pre-approved' our IPO because the nation needs a product like this on the market as quickly as possible to protect Americans from terrorism," says the fictional CEO, "Thomas J. McWhortle," in the release. McWhortle.com is one of three "teaser" sites set up by the SEC to startle naïve investors. The agency reports that it received 150,000 visits over the three days after the McWhortle press release was issued. Those who kept clicking around the site were told that "If you responded to an investment idea like this ... you could get scammed!" Such minor deceptions are a response to the ongoing problem of stock scams that continues even in bear markets. Con artists often use spam e-mail, chat rooms, and message boards to lure victims. Observers say such scams are common enough to strain the efforts of investigators. "D" for desperation?
The VCR might not be obsolete after all. A new format called D-VHS does what DVDs can't: record and playback high-definition television signals. JVC sells the first D-VHS VCR for about $2,000, with tapes costing about $12 each. The market here is obviously not the average couch potato but home theater buffs, of the sort that have been early adopters of high-definition television. Industry insiders say high-definition quality won't be available on DVD for at least five years. So several Hollywood studios plan to release D-VHS versions of popular films-including the Terminator movies, Die Hard, X-Men, and U-571. Right now, high-definition television viewers don't have much to watch that uses their special equipment. So far only a few cable channels and a handful of network TV shows are broadcast in HDTV. The entire TV industry is supposed to switch over one day, but analog signals will be standard for the immediate future. D-VHS raises a big question about TV viewers: Do they consider better resolution worth the expense? The old Laserdisc format languished through the 1980s and 1990s. Meanwhile, the Super VHS format is still available, but few are willing to pay more for a high-quality picture. Some in Hollywood are already skeptical about D-VHS's chances.

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