WorldCom --> World Con
WorldCom Says It Hid Expenses, Inflating Cash Flow $3.8 Billion Wed Jun 26, 3:18 PM ET
By SIMON ROMERO and ALEX BERENSON The New York Times
After falling as low as 9 cents in pre-market trading on Instinet today, trading in shares of WorldCom, the nation's second-largest long-distance carrier, was halted this morning on the Nasdaq Stock Market. The developments came after the company revealed last night that it had overstated its cash flow by more than $3.8 billion during the last five quarters.
On Tuesday, WorldCom fell 8 cents, or 8.8 percent, to 83 cents and plunged as low as 26 cents in after-hours trading. The problems at WorldCom weighed heavily on the stock market today, dragging each of the major indexes down.
By early afternoon major market averages had recovered slightly from their morning lows, but were still down on the day.
Shortly before 1 p.m. the Dow Jones industrial average was down 94.01, or 1 percent, to 9,030.25. The Standard & Poors 500 index was off 10.98, or 1.1 percent, to 965.05. And the Nasdaq composite index had lost 16.55, or 1.2 percent, to 1407.57.
Trading in Worldcom Inc. shares remained suspended on the Nasdaq stock market.
WorldCom, which had a peak value of $115.3 billion in June 1999 when its shares reached a high of $62, is now worth less than $1 billion.
Analysts cited the Worldcom accounting scandal and its related financial fallout as another reason why policymakers at the Federal Reserve ( news - web sites) Board are not likely to alter its monetary policy stance at a meeting that concludes this afternoon. An announcement from the Fed is expected around 2:15 p.m. today.
President Bush ( news - web sites), speaking with reporters in Kananaskis, Alberta, Canada, on the opening day of a summit of wealthy nations, called the reported problems at WorldCom outrageous and said that the federal government "will fully investigate and hold people accountable."
"There is some concern about the validity of the balance sheet of corporate America and I can understand why," the president said during a photo opportunity with British Prime Minister Tony Blair ( news - web sites).
"We've had too many cases of people abusing their responsibilities and people just need to know that the SEC is on it, our government is on it, and Arthur Andersen has been prosecuted. We will pursue, within our laws, those who are irresponsible."
The problems at WorldCom, discovered during an internal audit, throws into doubt the survival of WorldCom and MCI, the long-distance company it acquired in 1998. The company, which was already the subject of a federal investigation into its accounting practices, has been struggling to refinance $30 billion in debt. Its credit was relegated to junk-bond status last month, and even before last night's announcement, the stock price was down more than 94 percent so far this year.
Some analysts now see a bankruptcy filing as a strong possibility, which would follow the pattern of Enron, Global Crossing and other companies laid low by accounting scandals since last fall. In an effort to avoid that fate, WorldCom said last night that it would cut 17,000 employees, or one-fifth of its work force. Analysts had been expecting a job cut of that magnitude for several weeks.
Instead of the profit of $1.4 billion the company reported in 2001 and $130 million in this year's first quarter, WorldCom now says it lost money during those periods, although it did not say how much.
In disclosing the bookkeeping problem, WorldCom said it had fired its chief financial officer, Scott D. Sullivan, the executive widely credited with helping orchestrate the financial strategy during the mid-to-late 1990's that enabled WorldCom to rise from a second-tier telecommunications company to a world giant through a series of acquisitions that included the $30 billion purchase of MCI in 1998.
Mr. Sullivan had been the executive closest to Bernard J. Ebbers, the company's longtime chief executive, who abruptly resigned in April, owing WorldCom more than $366 million for loans and loan guarantees the company had made to him.
WorldCom's board said it had fired Mr. Sullivan after discovering a strategy in which operating costs like basic network maintenance had been booked as capital investments, an accounting gimmick that enabled WorldCom to hide expenses, inflate its cash flow and report profits instead of losses. Until last month, WorldCom's auditor had been Arthur Andersen, the accounting firm that also audited the books of Enron and Global Crossing.
Arthur Andersen issued a statement last night saying that WorldCom's chief financial officer had not told the firm about the accounting techniques now being called into question. "Our work for WorldCom complied with S.E.C. and professional standards at all times," the statement said.
WorldCom replaced Arthur Andersen with KPMG last month and said last night that it had asked KPMG to undertake a comprehensive audit of the company's financial statements for 2001 and 2002.
"Our senior management team is shocked by these discoveries," said John W. Sidgmore, who became WorldCom's chief executive after Mr. Ebbers left in April. "I want to assure our customers and employees that the company remains viable and committed to a long-term future."
But it remains to be seen how WorldCom's customers will react to the disclosure of the massive accounting irregularities. In addition to providing millions of consumers with long-distance service through its MCI unit, WorldCom sells sophisticated data communications services to many of the world's largest companies.
In addition to dismissing Mr. Sullivan, WorldCom's board said it had accepted the resignation of David Myers as senior vice president and financial controller. The company said it had notified the Securities and Exchange Commission ( news - web sites), which had already been investigating the company's accounting. WorldCom also said it was hiring William R. McLucas, the former chief of the enforcement division of the S.E.C., to conduct an independent investigation.
Mr. Sullivan was unavailable for comment.
The S.E.C. said in a statement released early today that the disclosures confirmed "accounting improprieties of unprecedented magnitude."
The statement, by Christi Harlan, director of public affairs, said the commission was ordering the company to file, under oath, "a detailed report of the circumstances and specifics of these matters."
The agency also said the events "further demonstrate the need for comprehensive market regulatory reforms that the administration, the Congress and the S.E.C. have been advocating and implementing."
The company said last night that it had informed its main bank lenders of the bookkeeping problems. It is currently in tense negotiations with its banks, a group led by Citigroup, Bank of America and J. P. Morgan Chase, about restructuring lines of credit worth about $5 billion.
Last night's disclosure is expected to add to the problems of telecommunications companies to arrange financing as the industry's long slump continues.
"This is horrible for the industry," said Susan Kalla, senior telecommunications analyst at Friedman, Billings & Ramsey. "If we can't hang our hat on historical numbers, why should we believe in the present figures?"
The size of Worldcom's restatement surprised even hardened short- sellers investors who profit when stocks fall and generally view corporate America with skepticism. "I'm kind of shaken by that," said James Chanos, a short-seller who played a major role in unearthing Enron's overstated profits and hidden debt. "I'm about as cynical as they come. It's pretty amazing."
Particularly disturbing, Mr. Chanos said, is that WorldCom had manipulated its cash flow statements, not just its reported earnings. Investors used to believe that cash flow was a more reliable indicator of a company's financial health because the number could not be manipulated as easily as earnings, but that assumption now appears to be wrong. WorldCom now joins a list that includes Dynegy, Adelphia Communications and Tyco International as companies that have apparently used financial gimmicks to inflate their cash flow.
"The one touchstone that investors had was that you couldn't fudge cash flow numbers, but apparently you can," Mr. Chanos said. "Like any system, it can be gamed if enough people are looking at something, an unscrupulous management will find a way to game it."
WorldCom's news rattled investors in other companies. In after-hours trading, technology and telecom stocks and broad market indexes plunged after word of the accounting problem, first reported by the financial news cable network CNBC. Stocks had already fallen in regular trading yesterday. The Nasdaq 100 index, composed mainly of big technology stocks, fell almost 3 percent in after-hours trading, while the Standard & Poor's 500 index of major companies dropped more than 1.5 percent.
David Tice, another short-seller, said WorldCom's rise and fall was emblematic of larger problems in Wall Street and corporate America.
When WorldCom's stock was rising, Mr. Tice said, investors cheered its acquisition binge and paid little attention to how the company generated its profits. That attitude, he said, encouraged the company to stretch accounting rules and take ever-bigger risks in an effort to keep its stock rising.
During the late 1990's, "the executives, the money managers, the auditors, the C.F.O.'s, the C.E.O.'s, the ones that got ahead were the most reckless, the least ethical," Mr. Tice said.
"The most reckless guys were the ones that ended up having the most power and the highest market valuations," he said.
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WorldCom Could Be Biggest Collapse
Thu Jun 27,12:54 PM ET
By JOHN PORRETTO, AP Business Writer
JACKSON, Miss. (AP) - With his company facing federal fraud charges and a potential bankruptcy that would be the biggest in U.S. history, WorldCom chief executive John Sidgmore vowed to continue cutting costs following the revelation that the company hid $3.8 billion in expenses from investors.
Sidgmore, in a taped Webcast on Wednesday evening, called the expense revelations "a shock" and "an undeniable setback" for the telecommunications ( news - external web site) giant that owns the nation's No. 2 long distance provider MCI.
But Sidgmore said he was moving forward with plans to make the company leaner and simpler, a process that will involve laying off as many as 17,000 people beginning Friday.
He said the sale of certain assets and other cost-cutting measures would be forthcoming, but he didn't mention something that some industry observers believe is inevitable because of the new troubles — a bankruptcy filing.
"We're going to continue to make the kinds of aggressive changes that are required to strengthen this company," said Sidgmore, who replaced ousted WorldCom founder Bernie Ebbers in April and immediately began evaluating the company's assets.
One of those changes was the firing of former chief financial officer Scott Sullivan, who appears to be at the center of Tuesday's accounting disclosure by WorldCom. The news sent stocks plunging and prompted President Bush ( news - web sites) to vow to "hold people accountable."
Securities and Exchange Commission ( news - web sites) Chairman Harvey Pitt said late Wednesday the agency had filed fraud charges against WorldCom in federal district court in New York. He said the filing was intended in part to prevent the company from destroying documents or making payouts to WorldCom executives past or present while the SEC investigates. He did not elaborate further.
Pitt said the action against WorldCom was "an attempt to restore the understandably lost credibility that people have in what they are hearing and reading."
Analysts warned that WorldCom, owner of the MCI long-distance business and one of the world's biggest Internet "backbone" networks, could declare bankruptcy within a week, joining Enron as one of the most spectacular failures of the "New Economy."
With more than $100 billion in assets reported at the end of March, a WorldCom bankruptcy would be twice as large as Enron's record-setting slide into Chapter 11 last fall and four times as big as Global Crossing's in January.
Alec P. Ostrow, a partner in the bankruptcy law firm of Salomon, Green & Ostrow in New York, said WorldCom likely spent Wednesday preparing a bankruptcy filing that could be used to fend off anxious bankers.
"What they've done is probably grounds for one or more of their lenders to call their loans" and demand immediate payment, leaving the company without money to operate, said Ostrow. "In order to avoid an immediate shutdown, leaving lots of customers in the lurch, they'd have to file for bankruptcy," he said.
WorldCom disclosed late Tuesday that more than $3 billion of expenses in 2001 and $797 million in the first three months of 2002 were recorded as capital expenses, and thus not reflected in the earnings calculation for those periods.
Had those costs been included, rather than the $1.5 billion profit reported for the five quarters, WorldCom would have been forced to show that it lost millions of dollars, the company acknowledged. As a result, WorldCom said it would restate earnings for all of 2001 and the first quarter of 2002.
Arthur Andersen served as WorldCom's accountant during the period in question. The accounting firm, once one of the world's largest, was convicted earlier this month for the destruction of documents related to its work for Enron. Andersen blamed WorldCom for the inaccuracies and said its work was in compliance with SEC standards: "It is of great concern that important information about line costs was withheld from Andersen auditors by the chief financial officer of WorldCom."
But accounting experts disagreed. Bob Bertucelli, director of the tax institute at Long Island University in New York, said there's no way that such an accounting error should have gotten past Andersen's audit.
"The auditor is responsible for everything that goes on, whether it's discussed with the auditing firm or not," Bertucelli said. "It should have been found. It's a clear cut violation of generally accepted accounting principles."
At Wednesday's opening on Wall Street, the Dow Jones industrial average fell more than 140 points, slipping below 9,000 for the first time since Oct. 10, before recovering to post only a slim loss for the day. The Nasdaq composite index traded below its post-Sept. 11 closing low before rebounding to a small gain.
Officials at the Nasdaq market halted trading in the two stocks used to represent WorldCom's business. WorldCom Group, which consists of the operations that provide data and telephone services to big businesses, last traded at 83 cents, down from a 52-week high of $16.06. MCI Group, which tracks the consumer long-distance unit, last traded at $1.68, down from as high as $17.33 in the past year.
WorldCom's sudden fall comes at a time when the nation is dealing with a rash of scandals at publicly traded companies that have shaken the nation's faith in corporate America and prompted a flood of shareholder lawsuits.
Enron collapsed last year amid revelations it hid hundreds of millions of dollars in losses through shady accounting practices.
Scandals followed at several other big-name companies, including Tyco International Ltd., Global Crossing and Adelphia Communications, which filed for bankruptcy Tuesday.
WorldCom's stock, one of the better performers of the late 1990s, has stumbled since then over concerns about the company's $32 billion in debt, slowing revenues and the SEC investigation. Also drawing scrutiny and investor displeasure were $408 million in loans WorldCom had given to former CEO Ebbers.
Efforts to reach Ebbers and Sullivan were unsuccessful.
In an interview after his ouster in April, Ebbers defended the company's accounting practices in the wake of the SEC investigation.
"Our accounting, to the best of my knowledge, is absolutely clean," Ebbers told WLBT-TV in Jackson.
WorldCom, second to only AT&T in the long-distance market, grew from a small telephone company into one of the telecom industry's biggest players through more than 60 acquisitions over the past 15 years.
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WorldCom begins laying off 17,000 workers worldwide Fri Jun 28, 1:52 PM ET
By JOHN PORRETTO, AP Business Writer
CLINTON, Mississippi - WorldCom Inc. began laying off 17,000 workers worldwide Friday, ending a week that saw the telecommunications ( news - external web site) giant disclose a massive accounting scandal that could force it into bankruptcy.
WorldCom revealed Tuesday that its internal auditors had found that dlrs 3.8 billion was wrongly listed on its books as capital expenses in 2001 and 2002. That means WorldCom may have lost millions of dollars when it reported profits.
On Friday, the company eliminated about 1,300 jobs in Virginia, 1,000 in Texas, nearly 700 in Maryland and 500 in Colorado. In other states, the numbers ranged from a few to a few hundred. The cuts account for about 20 percent of the work force of the Clinton-based company, which operates in 65 countries.
The company employs 2,000 people in Mississippi. That number was reduced by about 100 on Friday.
"I'm going to miss the friends that I have inside, and I'm worried about what they're going to do," said Kimberly Spencer, a 31-year-old mother of two who lost her job in the accounting department at WorldCom headquarters.
Spencer, who cried as she described the somber mood of her co- workers, said she and others were frustrated and angry.
WorldCom's largest employment base — about 9,000 — is in the Washington, D.C., area, where MCI Communications had its headquarters and where chief executive John Sidgmore has his office. WorldCom bought MCI in 1998 for dlrs 30 billion.
The company also has about 5,000 sales and administration workers in the Dallas/Fort Worth metropolitan area.
Sidgmore told shareholders at WorldCom's annual meeting two weeks ago that a significant job reduction would be part of a restructuring plan. He didn't give a specific number, but the company pegged it at 17,000 on Tuesday as it revealed the accounting scandal.
Sidgmore, who replaced WorldCom founder Bernie Ebbers as CEO in April, said the downsizing would save the company dlrs 900 million a year. Besides layoffs, he said the reduction would take place through attrition, contractor terminations and discontinued operations such as its wireless resale business.
The layoffs are the second round this year for WorldCom. In April, the company said it was eliminating 3,700 U.S. jobs to better align costs with projected revenue.
WorldCom has seen its share price spiral in recent months because of concerns about debt of dlrs 30 billion, dlrs 400 million in loans to Ebbers and a general malaise in the telecom sector.
Now the No. 2 U.S. long-distance company finds itself at the heart of one of the largest accounting scandals in U.S. history. President George W. Bush ( news - web sites) has vowed to "hold people accountable," and federal regulators have filed fraud charges against the company.
In a letter sent to Bush on Thursday, Sidgmore said he understood the president's outrage but that he and others on WorldCom's management team "are equally surprised and outraged."
"Seven weeks ago, as I assumed the position of CEO of WorldCom, Bert Roberts, our chairman, and I pledged to restore trust in this great company," Sidgmore wrote. "Never did we imagine it would be put to such a test. However, part of restoring trust means being straight about problems as we discover them — and aggressively solving them. This is the only way we will rebuild our company's credibility. You have our commitment that we will continue to do this.' ___
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WorldCom: http://www.wcom.com
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