Summary: KC Star
investigative reporter Dan Margolies and telecom reporter Jason Gertzen
dramatically point out how corrupt/dishonest Sprint
executives were in their financial dealings (558,000 allowances?) before being
ousted. In reality there were very few differences between Ken Lay and
Bill Esrey/Ron LeMay. None ever felt they had done anything wrong despite
hurting thousands of people.
http://www.kansascity.com/mld/kansascity/business/14948858.htm?template=contentModules/printstory.jsp
Posted on Sun, Jul. 02, 2006
Depositions reveal story of ouster at Sprint
Testimony in a suit against the company gives new insight on two former top
executives’ tax trouble and a leadership crisis.
By JASON GERTZEN and DAN MARGOLIES
The Kansas City Star
“We, then
and to this day, don’t think we did anything wrong.”
William T. Esrey, former Sprint CEO, in An April 13 deposition.
In July 2002, two Sprint Corp. board members traveled to the mountain resort
town of Eagle, Colo., to meet with the company’s longtime chairman and chief
executive.
Their mission: Tell William T. Esrey it was time to step down.
“He was not pleased,” Stewart Turley, a former Sprint director who joined fellow
board member Irvine O. Hockaday Jr. on the journey, recalled in a recent sworn
deposition.
The dramatic meeting in Eagle marked a tipping point in the board’s support for
Esrey, who along with the company’s chief operating officer, Ronald T. LeMay,
was facing mounting financial pressure related to an Internal Revenue Service
inquiry into personal tax shelters devised by the company’s corporate auditor.
The IRS had challenged the two executives’ use of tax shelters to shield some
$287 million in taxable income resulting from their exercise of Sprint stock
options in 1999 and 2000, a time when the company was pursuing its ultimately
rejected merger with WorldCom.
The IRS investigation, which recent court documents indicate is continuing,
threatened both executives with financial ruin if the tax shelters were
disallowed. Even so, Sprint’s board continued to support them until what one
board member called Esrey’s “line in the sand” demand for more pay in early
2002.
“My compensation for working was almost nothing,” Esrey said in April deposition
testimony in a pending lawsuit against Sprint.
At the time, Esrey was paid $1.1 million in salary and given a $919,937 bonus.
The demand for more pay left key board members questioning whether Esrey’s
concern for his precarious financial situation had begun to influence his
decision-making, perhaps to the detriment of the company.
The trip to Eagle came shortly thereafter.
These and other fresh details about the ouster of Esrey and LeMay emerge from
thousands of pages of sworn deposition testimony taken in recent months in the
pending lawsuit. In the suit, disgruntled shareholders have challenged the
fairness of Sprint’s 2004 recombination of tracking stocks that represented the
value of its wireline and wireless operations.
An examination of those depositions sheds new light on a tumultuous period in
the company’s history. The period culminated in a leadership crisis that gripped
the Kansas City area’s largest corporate employer for nearly a year and led to a
corporate governance reform effort under new CEO Gary Forsee.
Even today, the fallout from the leadership crisis continues to affect the
company, now known as Sprint Nextel Corp. Top executives and board members have
spent extensive amounts of time defending the suit. If the company loses the
case, Sprint could be forced to pay billions of dollars in damages, according to
calculations by the plaintiffs’ experts.
Plaintiffs’ attorneys offered copies of the depositions to The Kansas City Star
after they were submitted to attorneys for defendants in the case for review,
clarification and — at times — redaction of what they deemed confidential
information under a protective order in the case.
“We only gave you the parts not designated confidential,” Jay Eisenhofer, one of
the plaintiffs’ attorneys, said in a phone interview with The Star. “Why that
wasn’t done here, I have no idea.”
Current and former Sprint officials and attorneys for Esrey and LeMay declined
repeated requests for comment. They contend that the plaintiffs’ attorneys
violated the protective order by releasing the depositions.
As for Esrey, he remains dismayed by the turn of events more than three years
after his departure. Indeed, he disputes that the products that led to his and
LeMay’s ouster were properly characterized as tax shelters.
“We, then and to this day, don’t think we did anything wrong,” Esrey said in an
April 13 deposition given in Santa Barbara, Calif.
New revelations
Among other things, the pending lawsuit contends that Esrey’s and LeMay’s tax
problems influenced them to manage financial results to favor Sprint’s FON
tracking stock over its PCS tracking stock. Esrey, LeMay and other top Sprint
executives held substantially more FON than PCS stock.
“They hurt the PCS shareholders for years by manipulating the financial results
and capital structure of PCS in a way to benefit the FON stock and
shareholders,” Eisenhofer said.
Sprint vehemently disputes that contention. In court documents, the company
argues that the recombination was driven by Sprint’s decision to bundle its
services and to simplify accounting issues.
In the more than three years since the ouster of Esrey and LeMay, Sprint has
offered scant details about the circumstances surrounding their removal. But the
lawsuit’s depositions and other documents have begun to flesh out the picture.
One thing that the documents make clear is that Esrey increasingly clashed with
Turley, a former chief executive of Eckerd Corp. who headed the Sprint board’s
compensation committee. Ultimately, Turley, along with Hockaday, led the ouster
effort.
“It got pretty tense, obviously, towards the end,” Lou Smith, a former chief
executive of the Ewing Marion Kauffman Foundation and a Sprint board member from
1999 to 2005, said in his deposition.
The depositions hint at lingering tensions. When asked about his relationship
with Hockaday, a former neighbor in Mission Hills, Esrey readily admitted they
were friends. When asked the same question about Turley, Esrey responded, “I … I
don’t care to get into that. I know Stewart Turley.”
Other details that emerge in the depositions:
•In 1999, 2000 and 2001, LeMay earned a total of $196 million and sheltered $195
million from taxes, according to the testimony of Linda Koch Lorimer, a senior
official at Yale University and a Sprint board member. Lorimer said LeMay
arranged to have nothing withheld from his income taxes during those three years
by claiming no fewer than 558,000 withholding allowances, which include
exemptions.
To arrive at that many allowances, tax experts say, LeMay would have needed a
huge number of deductions or credits. Although it’s not known how LeMay arrived
at that number, it’s possible they corresponded to the losses he anticipated
claiming through his tax shelter, the experts say.
Likewise, Esrey in his deposition acknowledged that he might have taken tens of
thousands of allowances.
•Esrey and LeMay insisted in their testimony that the board knew in advance of
their plans to buy tax-planning packages from Ernst & Young, Sprint’s auditor.
But other board members said they did not learn of them until much later. Some
said they found out only after Esrey and LeMay disclosed to them that the IRS
had questioned the validity of the tax shelters.
•Esrey proposed some kind of merger or acquisition deal involving telephone
company Qwest Communications Inc., according to Turley’s deposition testimony.
The board, however, rejected the proposal, dubbed project “Bugle.”
“It involved Bill in a way that we didn’t think was appropriate,” he said.
Turley referred to an apparently related transaction that would have provided a
personal windfall for Esrey of about $20 million.
An attorney for Esrey did not respond when questioned by e-mail about Turley’s
statements concerning the proposed transaction with Qwest.
Qwest spokesman Nick Sweers also declined comment.
•More than four years after the IRS began scrutinizing Esrey’s and LeMay’s tax
shelters, their audits are continuing.
Sprint Nextel’s current chief operating officer and its top executive in Kansas
City, Len Lauer, who also bought the Ernst & Young tax shelters, said in an
April deposition that he had settled at least one tax shelter issue and was
considering a proposed settlement of another.
Governance crisis
The management shake-up at Sprint stunned the Kansas City business community and
the telecommunications industry.
Esrey, a Harvard business school graduate, had transformed United Telecom, a
low-profile local telephone company, into the hard-charging Sprint, a growing
long-distance and wireless business with a national presence. He had enjoyed
solid support from board members, who lauded his bold vision.
But depositions portray those same board members gradually growing disenchanted
with Esrey. Parts of Sprint’s business were struggling, and the company had
acknowledged missteps that led to billions of dollars in write-offs.
Board members increasingly began to question Esrey’s judgment after learning of
the questionable tax shelter, and after Esrey essentially asked the company to
bail him out — a request some directors called greedy during board
deliberations.
“I was not going to approve any increase of this type,” Smith said in his
deposition.
Turley said he did not question Esrey’s credibility or his ability as a CEO.
But, he said, “I questioned his judgment in this regard in looking to the board
for relief.”
Although Esrey’s quest to save his job ultimately proved futile, he began with a
bold opening gambit.
Early in 2002, Esrey threatened to leave the company unless he got a raise,
according to Turley.
The meltdown in the tech and telecom markets during 2000 and 2001 had taken a
toll on Sprint’s shares. The company’s stock was trading far below the levels it
reached during the peak of the high-tech trading frenzy.
While Esrey earned a seven-figure salary and annual bonuses ranging from
$220,000 to $1.38 million, stock options accounted for the bulk of his
compensation. With Sprint’s share price so low, many of those options were
“under water” — worthless — in 2002.
In Esrey’s view, he had been a valuable asset to Sprint. He said he had
orchestrated a “brilliant” $5 billion refinancing package for the company in
2001, and taken other key steps to position the business for the future.
Any potential liabilities he faced from the IRS, Esrey said in his deposition,
was “a side issue to what is appropriate compensation.”
Board members saw it differently.
“I think they had financial problems at that time and that was the driving force
behind it,” Warren Batts, former CEO of Tupperware Corp., who served two decades
on Sprint’s board, said in his deposition.
Nor did Esrey receive perfect marks for running the company.
“We were concerned about how effectively strategies and plans were being
implemented,” Hockaday, former chief executive of Hallmark Cards, said in his
deposition.
At one point, Esrey said he could make more money in retirement than continuing
to work at Sprint, according to Turley. Turley subsequently had a consultant run
independent calculations that disputed Esrey’s assertion.
By mid-2002, members of the board had had enough. Worried that Esrey’s tax
problems would prove a distraction and could lead to a conflict of interest if
he were to sue Ernst & Young, they were ready to pressure Esrey to step down.
“We felt that we had more or less crossed a bridge and that it was, you know,
time to move on with a change in the company,” Turley said.
“Their personal wealth and personal well-being was in serious jeopardy,” Turley
said. “And I think as time went on, the board had a better and better
understanding of the depth of this.”
In July 2002, Hockaday and Turley were dispatched to Colorado to tell Esrey he
should take early retirement. The meeting between the men lasted no more than an
hour.
Esrey reacted with surprise and disappointment, Turley recalled. After the
meeting, Esrey phoned Hockaday and Turley and tried to change their minds. He
said a change of management would hurt the company.
After the meeting in Eagle, Esrey backpedaled on his pay demands. He told board
members that he wanted to stay with Sprint even if his pay remained the same. He
began to downplay his tax and financial problems.
Meanwhile, even as the board pushed Esrey out the door, it still considered
LeMay a leading candidate to succeed him. Ultimately, though, the board
concluded that it would be embarrassing to name a new CEO who could be forced
into personal bankruptcy by his own tax shelter problems, which were even bigger
than Esrey’s.
In December, Esrey and LeMay made a final, impassioned pitch to save their jobs.
At a two-hour dinner meeting with board members, they made an elaborate
presentation on how effectively they had managed the company in good times and
in bad.
It didn’t work. In February 2003, Sprint formally announced Esrey’s departure,
followed by an announcement in April of LeMay’s retirement. Esrey got at least
$10.5 million — and possibly millions more — in severance pay. LeMay got at
least $5.7 million — three times his salary and bonus in 2002.
“I was asked to leave, and I did,” LeMay said in his deposition.
Esrey left, too, but his unhappiness over his ouster persists.
In his deposition, Esrey said that he disagreed with the board’s concern that
the tax cases “would ultimately come out and be public, which we did not have a
problem with, because we, then, and to this day, don’t think that we did
anything wrong.
“We relied on the advice of Ernst & Young, and had no issues that we were trying
to, you know, hide or sweep under the table at all.”
Reform push
Even after pushing out Esrey and LeMay, the Sprint board’s reputation was
tattered.
In 2003, The Corporate Library ranked Sprint’s board one of the nation’s worst,
pointing to lax oversight of the company and a lack of leadership.
Forsee, who arrived from BellSouth as Sprint’s new chief executive in spring
2003, made corporate governance a top priority even as he directed strategic
maneuvers intended to stabilize the company and position it for a major merger
with Nextel Communications.
