WorldCom Restatements Top $9B
Late today, WorldCom said in a statement it would restate more than $9 billion in earnings, up from the $7.68 billion it has already said it will restate (see WorldCom: $9 Billion And Counting, and WorldCom to Restate $2 Billion More?). It also acknowledged that it is in discussions with the Securities and Exchange Commission (SEC). Several news outlets reported today that the company is working on a settlement of the fraud charges.
Yesterday, a court-appointed examiner released a damaging report revealing a barrage of additional fraudulent accounting tricks played by the bankrupt carrier. Special examiner Richard Thornburgh, a former U.S. attorney general, released a 118-page report detailing more than $1 billion in loans to former CEO Bernard Ebbers, and additional misstated earnings.
A settlement of the fraud charges would require the approval of Judge Jed Rakoff, who is in charge of the SEC’s case against the carrier. WorldCom would probably have to pay a multimillion-dollar fine and agree in a consent decree never to violate securities laws again. The SEC is also expected to settle charges against several low- to mid-level executives at the company, according to several news reports.
“I wouldn’t want to dare guess how much they’re going to owe the SEC,” Network Conceptions LLC analyst Farooq Hussain says.
WorldCom would not comment on whether or not they’re nearing a settlement, or what such a settlement would entail. But it did release a statement today that said it's in "discussions" with the SEC.
Following so close on the heels of the Thornburgh report, which stated that WorldCom took “extraordinary and illegal steps” to manipulate its financial records, many observers were outraged by the reports of an SEC settlement today.
“It’s outrageous!” says Peter Cohan, an analyst with Peter S. Cohan & Associates says. “I can’t see why they would settle… They should be making examples of these people so that anyone else thinking about doing something like this will think twice.”
The Thornburgh report concluded that the board of directors, the audit committee, the company’s system and internal controls, as well as the external auditor, Arthur Andersen LLP, were all to blame for the fraud.
The report also criticizes the relationship between WorldCom and its investment banker, Salomon Smith Barney , and especially former Salomon analyst star, Jack Grubman, who continued to issue ravereviews of the company even as its stock plummeted. Grubman also apparently told the company in advance what questions he would ask on earnings calls and attended at least four WorldCom board meetings as a financial advisor to the company (see Grubman Gets Some New Suits and Jack Grubman Goes).
“Now, I want someone to take action,” says Craig Johnson, an independent analyst based in Portland, Ore. “The more that people can publicly get spanked, the better it is for the market… We need to see a couple of the big boys do the perp-walk… If you can’t put them in jail, at least take away their toys.”
In response to the report, WorldCom said yesterday that it has implemented a program to restore confidence in the company, including doubling its internal auditing staff, creating two new operational CFO positions, and hiring a new corporate comptroller (see WorldCom Seeks Integrity Boost).
“We take these reports very seriously and, accordingly, the company has already taken forceful steps to strengthen and stabilize its corporate governance, management, and internal controls,” WorldCom president and CEO John Sidgmore said in a company statement. “WorldCom’s management and Board are determined to ensure that what happened here in the past cannot recur.”
“It’s just very hard to see that that would at this time restore credibility for the company,” says Hussain. “This is criminal activity. It’s very hard to restore credibility as long as it’s still the same company.”
Earlier this month, before the Thornburgh report came out, Network Conceptions published a report stating that it doesn’t expect WorldCom to make it out of chapter 11. Hussain says he’s convinced the carrier won’t be able to make it. “We believe that WorldCom is significantly challenged in re-emerging from bankruptcy,” the report states.
— Eugénie Larson, Reporter, Light Reading