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The WorldCom debacle: Through one director's eyes

From the living room of his luxurious 10,000-square-foot midtown Manhattan apartment, Francesco Galesi built an empire that earned him a winter villa near Jamaica's Montego Bay, a 12-bedroom oceanfront castle on Long Island and a net worth of more than $400 million that once ranked him halfway up the Forbes 400 list of America's wealthiest.

Galesi made his millions in real estate.

He lost much of it in telecommunications -- more than $70 million and counting in a frustrated 20-year effort to build a national telephone network in one of the most competitive, cutthroat and mercurial industries.

The story of this self-made son of an Italian immigrant might be just another human saga in the multibillion-dollar boom and bust of America's telecom sector were it not for Galesi's one major success.

Galesi is one of the longest-serving directors of WorldCom Inc. He is one of just four board members on the crippled company's audit committee, which signed off on years' worth of cooked books that the company now says misstated $3.9 billion in costs as revenue.

And he is the man responsible for recruiting Scott D. Sullivan, WorldCom's "whiz-kid" chief financial officer, who was fired last month for what the company called his central role in what has become one of America's biggest corporate scandals.

It remains unclear whether the WorldCom board or its audit committee knew of the misstatements at the time. But Galesi is among a handful of WorldCom directors who are defendants in a blizzard of class-action shareholder lawsuits filed in recent weeks against America's second-largest long-distance company, after its stock tanked from a high of $65 a share three years ago to just 20 cents today.

At 71, the intensely private Galesi, whose press clippings are confined mainly to gossip items about his Long Island social life and Russian princess wife, apparently still sits atop a real estate fortune that stretches from New York to Texas.

Galesi reportedly parlayed a borrowed $4 million that he invested in an abandoned U.S. Army dump in upstate New York in 1960 into a network of industrial parks worth well more than $100 million.

Galesi has not spoken publicly of WorldCom since the accounting debacle. His lawyers either have declined to comment or have not returned calls seeking his version of events that led up to it. A raft of federal investigations is underway to reconstruct them, by congressional committees and by the federal agencies that were responsible for monitoring the telephone and Internet conglomerate.

But thousands of pages of documents in federal courthouses in New York and Chicago and at the Securities and Exchange Commission in Washington open a window on WorldCom's world through the adventures of one of its earliest and presumably more influential board members -- much of the record in Galesi's own words while under oath.

The documents also provide clues to what went so wrong at WorldCom.

The story of Galesi's attempts to build his own major long-distance network even while serving on WorldCom's board is, in many ways, emblematic of the rise and fall of WorldCom. Galesi's costly and ambitious telecom ventures both parallel and intersect those of WorldCom founder Bernard J. Ebbers, who was ousted as chief executive in April when it was revealed that he owed WorldCom $408 million to cover loans he used to buy company stock.

As Ebbers gobbled up about 70 companies in just over a decade, sometimes sweeping their principals onto the board of the emerging WorldCom, the potential for conflicts of interest that could violate securities laws mounted exponentially, the documents show.

That appeared especially true for Galesi, who continued to try to create another telecom giant both before and after he sold one of his early ventures to Ebbers.

Several lawyers who specialize in telecommunications, including some who have opposed Galesi in court, said Galesi appeared to take pains to avoid using his WorldCom insider position to benefit his own companies.

To do so, they said, probably would have been illegal.

Such insider conflicts are targets of the SEC's investigation of WorldCom and a prime focus of another probe launched by Congress on Monday. And under the business reform proposals advanced by President Bush in his Wall Street speech Tuesday, there would be restrictions on who could serve on a corporate board's internal audit committee.

The performance of WorldCom's board -- and particularly its audit committee -- is among the investigators' other chief targets. On that score, Galesi's telecom track record reflects what some critics say may have contributed to WorldCom's undoing: key directors and managers -- including former basketball coach and motel owner Ebbers and real estate magnate Galesi -- who had little or no hands-on experience in an emerging industry that not even experts could reliably analyze.

In a rare interview in 1990, the 1953 Princeton graduate tried to explain why, after amassing a fortune Forbes estimated that year at $435 million largely in real estate assets, he was so bent upon building an empire in the burgeoning yet perilous telecommunications industry.

"A person's work is his life," Galesi told the trade publication FCC Week. "A person has to work at what excites him. A life of self-indulgence doesn't excite me. Yes, I like making deals. But it's not the reason.

"Telecommunications," Galesi said, "excites me."

Galesi got plenty of excitement in the years ahead -- a trail awash in red ink, bankruptcies and at least a few regrets for a man described even by lawyers who opposed him as "gracious," "elegant," "charming," "cooperative" or, at worst, "naive."

"I think Francesco Galesi is a legit, stand-up guy who's not surrounded by the best advisors," said one lawyer familiar with the bankruptcies who asked not to be named. "He's too patrician to realize that in this business, people are going to swipe the nickels off the newsstand."

  • Galesi's first foray into telecom was named Argo Communications. It was a joint venture in the mid-1980s in the long-distance market just emerging after the court-ordered breakup of the AT&T Corp. monopoly. Argo was named for the mythic ship that Jason and his Argonauts took to wrest the Golden Fleece from a dragon."I just decided that I wanted to diversify from real estate, and I thought that would be a good business to get into," Galesi explained under oath more than a decade later.In the end, court records show, it was Galesi who appeared to have been fleeced. Argo's largest shareholder, a telephone company called Centel, stripped Argo of most of its assets to prepare it for a merger. But at the last minute, Centel's board voted against the merger, and there was so little left of Argo it had to be liquidated.Galesi sued Centel, but according to a lawyer familiar with the case, "he never got a penny," losing an investment that trade journals estimated was worth at least $20 million.Soon after, a Galesi investment in a pioneering satellite-TV company failed when its lead financier pulled out."It's very disappointing," Galesi told Business Week magazine in a 1987 interview. "I've never lost money before."But the experience taught Galesi a lesson: "From now on," he concluded, "I retain total control."It was an axiom for success in telecommunications that WorldCom founder Ebbers also was learning about the same time. And soon, the two men's paths would cross.In 1987, Galesi bought several small phone companies in Florida to form Telus Communications. This time, Galesi recalled, Telus "was wholly owned by me." Within two years, Telus became Florida's second-largest long-distance carrier.In a 1989 deal that helped establish the industry pattern of acquisitions and mergers that WorldCom used to become a global giant, Galesi fused his company with Atlanta's leading long-distance carrier, Advanced Telecommunications, to form a new regional giant. With 25% of the shares, Galesi was the largest shareholder of the newly formed ATC. And two years later, ATC was acquired by Ebbers.Ebbers eventually named the new company he built with such mergers WorldCom. Through the ATC merger, Galesi got more than 5 million shares and a permanent seat on the company's board.The same year that Ebbers bought ATC, Galesi bought the abandoned and bat-infested 55,000-square-foot Dragon's Head mansion on Long Island and began sinking in millions on renovations, renaming it Elysium -- in mythology, a place of perfect bliss.By 1999, Galesi's WorldCom stock alone would be valued at more than $300 million.As for Ebbers, he got more than Galesi's regional long-distance powerhouse: He got Galesi's original numbers man from Telus, a bright young accountant named Scott D. Sullivan. Within two years, Sullivan would become Ebbers' chief financial officer and right-hand man."Scott," Galesi was quoted as saying two years ago, "knows how to make the numbers come together."
  • The Telus success wasn't enough for Galesi. In court depositions related to one of Galesi's messiest telecom bankruptcies, he said that from almost the moment he sold Telus, he started building another telecom network.Never mind that this would put him in direct competition with Ebbers, on whose board Galesi soon would sit.While Ebbers was furiously building WorldCom in the South from its Mississippi base, Galesi looked to the North. In 1989, he invested $15 million in cash in a struggling suburban Chicago company called Telesphere Communications.It would prove to be a disastrous move that spoke volumes about the volatile telecom industry--and the many corporate carcasses that preceded WorldCom.Telesphere, whose business consisted of operator assistance and 900-number services, had lost about $28 million the previous year."Telesphere," Galesi said in an April 2000 deposition, "was a small, sick company on the verge of bankruptcy. And it had a terrible reputation. The vision was simply to cut expenses and put in decent management to try to improve its business and increase its business. That's all."So Galesi tapped his personal lawyer, Joseph W. Bartlett, a prominent Manhattan attorney who taught finance at Stanford University and New York University and wrote books on corporate finance. He also brought to the board former U.S. Treasury undersecretary George D. Gould, former SEC Chief Executive A. Jones Yorke and a well-known marketing executive, Harry R. Thompson.Galesi had known these men for years--from tennis matches and social bashes in the Hamptons, from the exclusive Tryall Club near Jamaica's Montego Bay, from ski trips to Vermont in the '50s, from the corporate pool of late-20th-century elite."I knew, you know, most of the leading people on Wall Street," Galesi recalled two years ago.But they weren't enough. Although his new board members seemed to be corporate pillars beyond reproach, they -- like the WorldCom board that was forming itself through acquisitions -- knew little about telecommunications.As Telesphere launched into its first merger, it began to fall apart. Galesi pledged some of his own stock in what would become WorldCom in a leveraged buyout of a Washington-area telecom company that came with so much baggage that it helped bury Telesphere.There was another dimension to Telesphere's failure, though. Galesi, who played host to several of the company's board meetings over lunch in his Manhattan apartment and took a keen interest in its operations, also brought in a management team that included key executives from his failed Argo Communications and from Telus.The process revealed both Galesi's WorldCom overlaps and the incestuous nature of what Galesi himself called "a very small industry--we all knew each other."Said one of Galesi's former managers, who later went to work for Ebbers: "At times it seemed like there were only 100 of us, and we kept moving around."Not only was Galesi competing against Ebbers' company while sitting on its board, but Galesi's CFO at Telesphere, Scott Lee Drake, also left for an investment banking firm that had both companies as clients and then went to work for Ebbers himself.Asked at a deposition about this seeming conflict of interest, Drake insisted he had no contact with Galesi while under contract to Ebbers.Telesphere continues to haunt Galesi. He is seeking to recover $3 million he lent the company in its dying days, and the company's liquidating trust is seeking about $30 million from Galesi, who faces a possible civil trial in the case this year on a claim that he controlled Telesphere and is responsible for its collapse.But not even Telesphere's demise deterred Galesi from trying to get into the market yet again. In 1997, even as the Telesphere bankruptcy swirled around him, Galesi and his companies bought a controlling interest in another troubled telecommunications company, in New Rochelle, N.Y.Amnex Inc. owned more than 10,000 pay phones in Florida, New York and New Jersey. It didn't seem to matter to Galesi that cell phones were pushing pay phones toward obsolescence. Galesi figured to expand the company--again through acquisition, merger and new management. Galesi brought in some of the same folks who had run the failed Telesphere.In all, SEC filings show, Galesi pumped more than $10 million into Amnex in the ensuing two years to fund operations and an acquisition as ill-timed as Telesphere's. Amnex filed for bankruptcy protection in May 1999; the case also remains unresolved.Under oath two years ago, Galesi reflected on the Amnex venture: "It was a troubled, very troubled company. It was probably a mistake on my part to have gotten involved with it to begin with. It was too far gone."But for Galesi, the excitement apparently was not in the bottom line. It was in the FCC Week interview 12 years ago that he gave a glimpse of what drives him--and perhaps WorldCom colleague Ebbers, who, like Galesi, appears to have lost much of what he put into the company."Just making money is gross," Galesi was quoted as saying. "I don't think about conspicuous consumption. I don't sit around thinking about becoming a billionaire."
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