TOP STORIES--JULY 28-AUG. 2

Stock Market Falters but Has Gain for Week

What started out as an upbeat week on Wall Street quickly turned sour as a series of disappointing economic reports threatened the U.S. economic recovery and sparked a sell-off in the stock market.

Despite slumping Thursday and Friday, the Dow Jones industrial average managed to eke out a gain of less than 1% for the week, giving it back-to-back weekly advances for the first time since March. But the Nasdaq composite index finished the week with a loss of 1.1% as tech stocks continued to stumble.

The sell-off raised questions about the durability of the market’s recent rebound, which had seen stock prices bounce back dramatically from the multiyear lows they reached last month.

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Bush Signs Accounting Reform Legislation

President Bush signed accounting reform legislation into law as corporate executives, auditors, lawyers and Wall Street analysts braced for a significant change in the way they do business.

Bush stressed the punitive aspects of the most far-reaching business reforms since the Depression--measures that appeared all but dead a few months ago. “No more easy money for corporate criminals, just hard time,” he said.

Although the prospect of tough prison sentences for white-collar criminals has captured the spotlight, experts say the law’s most sweeping changes concern corporate governance.

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2 Former WorldCom Executives Arrested

Continuing their high-profile crackdown on corporate corruption, federal authorities arrested two former executives of WorldCom Inc., the phone company that rocked Wall Street last month by admitting massive accounting irregularities and then filing the nation’s largest bankruptcy case.

Former Chief Financial Officer Scott D. Sullivan and former Controller David F. Myers surrendered to FBI agents in New York and were charged with seven criminal counts of fraud, conspiracy and submitting false statements to the Securities and Exchange Commission. They are accused of hiding $3.9 billion in expenses in 2001 and 2002 to make WorldCom appear profitable.

Authorities did not take action against the company or its high-profile and controversial former chairman, Bernard J. Ebbers. But Atty. Gen. John Ashcroft and other law enforcement officials characterized the investigation as fast-moving and aggressive.

Speaking on condition of anonymity, Justice Department officials said several other WorldCom executives are under investigation for possible criminal wrongdoing and could face charges.

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Bertelsmann CEO Quits Amid Rift With Board

Thomas Middelhoff resigned as chairman and chief executive of Bertelsmann after a showdown with the company’s supervisory board over the direction of the German media giant.

The board opposed Middelhoff’s long-standing plan to take Bertelsmann public. They also rejected Middelhoff’s proposal for Bertelsmann’s founding family to dilute its 75% stake in the Bertelsmann Foundation, which holds a majority of Bertelsmann’s stock.

Middelhoff was the latest media baron to lose his job as the world’s largest entertainment conglomerates come under increasing shareholder scrutiny.

AOL Time Warner Inc. Chief Operating Officer Robert W. Pittman and Vivendi Universal Chief Executive Jean-Marie Messier resigned under pressure last month.

Middelhoff’s departure put the fate of song-swapping service Napster in doubt. He had made two investments in the Redwood City-based Internet firm for a combined $85 million and agreed to buy Napster’s assets for $8 million more through a bankruptcy auction scheduled for this month.

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U.S. Opens Investigation of Accounting at AOL

The Justice Department opened a preliminary criminal investigation against AOL Time Warner Inc. amid allegations that its Internet unit fudged revenue numbers.

The media giant staunchly defended its practices and portrayed itself as a victim of the recent spate of corporate scandals, which have made regulators more aggressive in cracking down on accounting gimmicks and investor fraud.

The company announced July 24 that the Securities and Exchange Commission had launched a “fact-finding inquiry” into questions raised by a Washington Post article that said the company used “unconventional” accounting practices to increase its advertising revenue by about $270 million from July 2000 to March 2002.

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Boston Bank Agrees to Buy Family Savings

Boston Bank of Commerce agreed to acquire Family Savings Bank of South Los Angeles in a deal that would create the nation’s largest black-owned bank.

Boston Bank last year purchased Founders National Bank, another African American-owned bank in Los Angeles.

Terms of the deal were not disclosed, but people familiar with the deal, speaking on condition of anonymity, said Boston Bank agreed to pay $12 million for Family Savings, topping an $11-million offer by FBOP, an Illinois-based bank.

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GE to Treat Stock Options as Expense

General Electric Co. said it would count employee stock options against earnings for the first time, giving momentum to the backlash against the perk that made many executives rich during the stock market bubble.

GE, the nation’s most valuable company, said it would start treating options as a cost this quarter to bolster the integrity of its accounting, and some analysts said GE’s stature could prompt waves of other companies to follow suit.

Coca-Cola Co. last month became the first major company to count options as a normal business expense in reaction to the corporate bookkeeping scandals. A few others adopted the practice, including Amazon.com Inc., but most companies balked at the idea, saying it would significantly reduce their profits. With GE expensing options, however, “the dam should break” in terms of other companies matching the move, said Robert Friedman, an analyst at Standard & Poor’s Corp.

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Qwest Misreports $1.16 Billion in Sales

Qwest Communications International Inc. admitted misreporting at least $1.16 billion in revenue and said it may take months to restate its financial reports.

The improper bookkeeping, which will force restatement of financial results for 2000 and 2001, heightened fears that the Denver-based telecommunications company may be felled by its $26-billion debt.

Richard Notebaert, who replaced longtime Chief Executive Joseph Nacchio in June, said the company improperly accounted for sales of telecommunications capacity on its fiber-optic network from 1999 through 2001 and also made mistakes recording equipment sales and accounting for certain expenses.

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IBM to Acquire Unit of Pricewaterhouse

IBM Corp. agreed to buy the consulting arm of PricewaterhouseCoopers for $3.5 billion in cash and stock in a bid to dominate the lucrative technology service business.

PwC Consulting would join IBM’s Global Services unit, which has surpassed Big Blue’s storied computer hardware division as its most lucrative venture.

The acquisition also would cement IBM’s position as the world’s largest technology services company, with annual revenue of $40 billion.

Buying the unit also gives IBM management consultants, broadening its services beyond those of most competitors.