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Worldcom msnbc Original Source Link: (May no longer be active)
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Bush vows investigation
into WorldCom scandal
Telecom firm discovers massive alleged fraud
CNBC AND MSNBC
June 26 — WorldCom uncovered what people close to the company describe as a massive fraud, inflating a common measure of its earnings by nearly $4 billion over the last five quarters. Responding to the discovery, first revealed late Tuesday, President Bush said Wednesday that the Securities and Exchange Commission and the Justice Department would investigate and “and hold people accountable.”
WorldCom Group (WCOM)
price change
0.83 unch
BUSH SAID HE feared the pending bankruptcy would hurt “not only shareholders but employees as well.” He said the latest evidence of corporate irresponsibility has hurt the United States stock market, which tumbled Wednesday on the WorldCom news.
WorldCom, which owns the nation’s No. 2 long-distance carrier MCI, said Tuesday that almost $4 billion of expenses in 2001 and $797 million in the first quarter of 2002 were wrongly listed on company books as capital expenses, thus not reflected in its earnings results.
“Our senior management team is shocked by these discoveries,” said recently-appointed WorldCom CEO John Sidgmore in a statement. “We are committed to operating WorldCom in accordance with the highest ethical standards.”
The irregularities, which the Securities and Exchange Commission (SEC) said were of a magnitude never seen before, caused the company’s already battered share price to plummet to 9 cents in premarket trade on Instinet.
WorldCom said its chief financial officer, Scott Sullivan, was dismissed by the board of directors. The company also accepted the resignation of David Myers as senior vice president and controller.
By early Wednesday 13.6 million shares had changed hands on Instinet since 7 p.m. ET the night before, according to a trader there. Trading in WorldCom was halted on the NYSE.
The stock, which closed at 83 cents Tuesday, had traded as high as $15 at the start of the year and had touched a peak of more than $64 in June 1999.
Formed in 1985 as a second-tier long-distance carrier, WorldCom grew to become the embodiment of the go-for-broke New Economy as it drove an aggressive series of acquisitions and mergers, culminating in the $40 billion takeover of MCI in 1998.
Select a tab above to learn more about the company and the people behind it.
WorldCom Inc. operates the nation’s second largest long-distance calling business and one of the world’s biggest “backbone” networks for Internet traffic and electronic commerce.
Headquarters: Jackson, Miss.
Number of employees: 85,000
2001 sales: $35.2 billion
Primary holdings: WorldCom consists of two main units:
WorldCom Group provides data and telephone service, Web access, and computer network management to large businesses and operates one of the world’s most extensive Internet proctocal networks
MCI Group provides long distance service as well as local phone service in some states.
Other holdings: WorldCom also owns a 94 percent voting stake in Digex Inc., a Web hosting firm that had sales last year of $214 million, and a 52 percent controlling stake in Brazilian long-distance carrier Embratel Participacoes S.A..
Bernie Ebbers
Co-founder and former chief executive
A two-time college dropout, the Canadian native worked as a milkman and a bouncer before starting the Long Distance Discount Service in 1983. In 1995 the company was renamed WorldCom. His maverick management style – equal parts arrogant and folksy - and penchant for cowboy boots engendered media attention, but when WorldCom’s shares tanked in March 2002, his star began to fade. In April 2002 Ebbers resigned after an SEC probe revealed that WorldCom was supplying personal loans to officers.
Scott D. Sullivan
Chief financial officer
WorldCom's chief financial officer since 1994 is credited with concocting the financial strategy that led to the 1998 $40 billion takeover of MCI, a company three times the size of WorldCom. Sullivan was fired on June 25, 2002 after it was discovered that the company's earnings were inflated by nearly $4 billion over the last five quarters.
1983 Murray Waldron and William Rector sketch out a plan to create a discount long distance provider called LDDS.
1985 Early investor Bernard Ebbers becomes CEO of LDDS.
1989-1996 LDDS merges with or buys a series of other firms, in the process going public and changing its name to WorldCom.
1998 WorldCom merges with MCI Communications, Brooks Fiber Properties and CompuServe Corp. The $40 billion merger with MCI was the largest in history at that time.
2000 Regulators block a proposed merger with Sprint.
March 11, 2002 The SEC asks WorldCom for information relating to accounting procedures and loans to officers, including Ebbers.
April 3, 2002 WorldCom cuts 3,700 jobs.
April 22-23, 2002 Standard & Poor’s, Moody’s and Fitch all cut WorldCom’s credit ratings.
April 30, 2002 WorldCom Chief Executive Officer Bernard Ebbers resigns. Vice Chairman John Sidgmore becomes CEO.
May 9-10, 2002 Moody’s and Standard & Poor’s both cut WorldCom’s rating to junk status.
May 13, 2002 S&P 500 Index dumps WorldCom.
May 15-June 5, 2002 While negotiating with lenders, WorldCom announces cost-cutting moves, including more job cuts.
June 25, 2002 WorldCom fires its CFO after uncovering improper accounting of some $4 billion in expenses.
Here are the highlights of the accounting problems:
An internal audit found accounting for expenses not in accordance with generally accepted accounting principles. That involved $3.055 billion for 2001 and $797 million for the first quarter of 2002.
Those amounts were improperly booked as capital investment, instead of expenses, artificially inflating earnings before interest, tax, depreciation and amortization, a common measure of operating profitability.
Without the irregular accounting measures, WorldCom would have posted net losses in 2001 and the first quarter of 2002.
Financial results for 2001 and first quarter 2002 will be restated.
WorldCom is reviewing its financial guidance.
WorldCom, which joins a growing list of companies involved in accounting scandals, said late Tuesday it had fired its Chief Financial Officer Scott Sullivan after discovering the accounting discrepancy that would cause it to restate results for 2001 and the first quarter of 2002 and report net losses.
The news also rocked Asian stocks, with Tokyo’s Nikkei index sinking more than 4 percent. Technology and telecom stocks were especially hard hit. Asia telecom bonds fell, and the dollar dropped to a seven-month low.
European shares opened with sharp losses and Wall Street appeared poised to follow suit.
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Fraud alleged at WorldCom
June 25, 2002 — CNBC’s David Faber says WorldCom has inflated its EBITDA by some $3.6 billion over its last five quarters.
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WorldCom said that accounting irregularities involving expenses misrecorded as capital expenditures had inflated its cash flow and that otherwise it would have reported a net loss for 2001 and the first quarter of 2002.
The accounting irregularities, which did not conform to generally accepted accounting principles, included transfers between internal accounts of $3.06 billion in 2001 and $797 million in the first quarter of 2002.
The SEC, which had been investigating WorldCom, said it had ordered the company to file a detailed report on the disclosures, which rocked already shaky investor confidence in U.S. accounting practices.
The revelations and restructuring came just seven weeks after co-founder Bernie Ebbers, who built the company through more than 60 acquisitions over the past decade, resigned as chief executive officer.
WorldCom also said it would cut 17,000 jobs, or more than 20 percent of its work force, starting on Friday, a cost-cutting move expected to save $900 million on an annual basis. The company said the layoffs would be primarily composed of discontinued operations, attrition and contractor terminations.
As first reported by CNBC’s David Faber, the broad outline of the fraud, as described by people familiar with it, transpired like this: Each quarter in 2001 and during the first quarter of 2002, Sullivan would allegedly transfer a similar amount of WorldCom’s ordinary costs and treat them as capital expenditure. The costs are believed to have been related to WorldCom’s network, but should not have been treated as capital expenditure.
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When spending is listed as a capital expense, a company can delay applying it against earnings and spread its effect over many years, thus keeping its profits on paper higher. Standard accounting rules are relatively clear about what kind of purchases, for instance office equipment, can be listed as capital expenses and which must be listed as operating expenses and deducted immediately from profits.
In its statement, WorldCom said that “as a result of an internal audit of the company’s capital expenditure accounting, it was determined that certain transfers from line cost expenses to capital accounts during this period were not made in accordance with generally accepted accounting principles.” WorldCom said the “amount of these transfers was $3.055 billion for 2001 and $797 million for first quarter 2002. Without these transfers, the company’s reported EBITDA (earnings before interest, taxes, depreciation and amortization) would be reduced to $6.339 billion for 2001 and $1.368 billion for first quarter 2002, and the company would have reported a net loss for 2001 and for the first quarter of 2002.”
In a story posted on its Web site late Tuesday night, The Washington Post, citing unnamed sources, said the Justice Department had begun a criminal investigation.
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Saloman analyst Jack Grubman talks
June 26, 2002 — CNBC’s Mike Huckman interviews Jack Grubman, a Saloman Smith Barney analyst who covered WorldCom and recently downgraded the stock.
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ANDERSEN DEFENDS ITS WORK
Because of its vast overstatement, WorldCom’s 43 percent profit margins were also allegedly a fiction, CNBC’s Faber reported.
WorldCom said it “promptly notified its recently engaged external auditors, KPMG LLP, and has asked KPMG to undertake a comprehensive audit of the company’s financial statements for 2001 and 2002.” WorldCom also notified Arthur Andersen LLP, which had audited the company’s financial statements for 2001 and reviewed such statements for first quarter 2002.
Andersen said Tuesday that its work for WorldCom complied with professional and SEC standards.
“The WorldCom CFO did not tell Andersen about the line cost transfers nor did he consult with Andersen about the accounting treatment,” Andersen said in a statement. The auditing firm said that WorldCom’s financial statements for 2001 should not be relied upon.
WorldCom said it will issue unaudited financial statements for 2001 and for the first quarter of 2002 as soon as practicable.
It is unknown whether former CEO Bernie Ebbers, who resigned from the company at the end of April, was aware of the fraud, CNBC reported, quoting sources.
The news could be a body blow to WorldCom, which is reeling from a low stock price, a crumbling telecoms market and an ongoing SEC investigation.
SHARES IN FREEFALL
Shares of Clinton-based WorldCom dropped sharply in after hours trading, falling 57 cents to 26 cents a share, down 68 percent from its closing price of 83 cents. Shares of WorldCom this year traded as high as $15 in January but have free fallen since over concerns about the company’s $32 billion in debt, slowing revenues and the SEC investigation.
Data provided
by CNBC on MSN Money
In March, the SEC requested documents detailing pretax charges associated with domestic and international wholesale accounts that were no longer deemed collectible.
The SEC investigation also focused on disputed customer bills and sales commissions, loans by WorldCom to officers and directors, customer service contracts and organizational charts and personnel records for former employees.
Drawing scrutiny and investor displeasure were the $408 million in loans WorldCom gave to former chief executive Bernie Ebbers, who resigned in April.
Bond ratings agencies Moody’s Investors Service, Standard & Poor’s and Fitch all cut their long-term credit ratings on WorldCom’s debt several times this year.
Shares of WorldCom on Monday closed down 25 percent after Salomon Smith Barney analyst Jack Grubman, long seen as a WorldCom supporter, downgraded his outlook on the company.
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