WorldCom Faces Increasing Difficulties
It is yet another grim day in the ongoing WorldCom Inc. (OTC: WCOEQ)
Not only did a federal grand jury indict the bankrupt carrier’s former CFO Scott Sullivan today for securities fraud, but documents released by Congress yesterday show that both Sullivan and the company’s former CEO, Bernard Ebbers, received large amounts of shares in initial public stock offerings (IPOs) from Salomon Smith Barney and its predecessor firm Salomon Brothers before the shares were made available to the general public (see WorldCom's at $7.1 Billion and Counting).
The documents, which Congress subpoenaed from SSB on August 8 as part of its ongoing investigation into WorldCom’s $7-billion-plus suspected accounting fraud, show that the firm awarded Ebbers nearly 1 million IPO shares in 21 companies, including Williams Communications Group Inc., Qwest Communications International Inc. (NYSE: Q), and Juniper Networks Inc. (Nasdaq: JNPR). In addition, SSB awarded more than 30,000 shares to Sullivan and his wife Carla in nine companies, including Williams and Kraft Foods. It also gave Stiles Kellett, a current member of the WorldCom board, more than 10,000 IPO shares, and current WorldCom chairman, Bert Roberts 3,000. A WorldCom spokesperson says Roberts had disclosed the information weeks ago and that he’d lost $58,000 on the shares.
While the executives benefited during the boom years as IPO shares generally soared right after the new companies hit the market, SSB, which is the brokerage arm of Citigroup., made millions of dollars in investment banking fees from WorldCom. The Congressional probe is trying to determine whether SSB improperly awarded IPO shares in return for the lucrative investment banking business it got from the scandal-ridden carrier.
Notorious former SSB analyst Jack Grubman, who resigned from the firm on August 15, and who is under investigation for his role in helping pump up WorldCom’s stock price, stated at a Congressional hearing on July 8 that allocating IPO shares was not his job. He also said that he could not recall whether WorldCom executives were provided with special access to IPOs. The documents released yesterday, however, show that Grubman was at least aware that the shares were being awarded to Ebbers, indicating that Grubman was to receive copies of two memos listing the IPO shares to be awarded to Ebbers and several other SSB clients (see Jack Grubman Goes and Grubman's Last WorldCom Call).
In its response to the Congressional subpoena of the documents showing SSB’s IPO allocations, Citigroup stated that “we recognize that some allocations to corporate officers and directors… while lawful, were sufficiently large as to raise questions about the appearance of conflicts… [W]e are considering new measures to further improve the IPO allocation process at SSB and in the industry generally.”
The IPO share allocations aren’t WorldCom's or Scott Sullivan’s only headache right now. The former CFO, who was arrested earlier this month in connection with the alleged WorldCom accounting fraud, was indicted today on charges of conspiring to commit securities fraud and making false filings with the Securities and Exchange Commission (SEC) (see Ex-WorldCom Execs Charged With Fraud).
According to a report in the Wall Street Journal today citing people close to the case, the indictment came after Sullivan resisted a plea bargain deal that would have required him to admit to charges that could carry a long prison term.
Former WorldCom accounting executive Buford Yates was also indicted on the same charges that are facing Sullivan; two other accounting executives, Betty Vinson and Troy Normand, have been named as unindicted co-conspirators to the alleged massive accounting fraud at WorldCom. Former WorldCom controller David Myers, who has been charged with Sullivan for the fraud, was not indicted today. Myers is reportedly trying to strike a deal with investigators.
A spokesperson for WorldCom would not comment on the news of the indictment, other than to say that WorldCom is fully cooperating with the investigative authorities.
— Eugénie Larson, Reporter, Light Reading