WorldCom Pins Fault for Errors on Ex-CFO
As WorldCom Inc. acknowledged that its financial woes could go deeper than previously disclosed, the company in a report made public Monday attempted to blame its bookkeeping lapses squarely on former Chief Financial Officer Scott D. Sullivan.
In the report to the Securities and Exchange Commission, which last week accused WorldCom of civil fraud for allegedly hiding $3.9 billion in expenses, WorldCom said its own auditors discovered the irregularities in May and fired Sullivan on June 25 after conducting an internal audit.
Sullivan declined through his attorney to comment.
The report failed to satisfy the SEC, which blasted the report as a chronology rather than the explanation the agency had ordered.
“WorldCom’s statement is wholly inadequate and incomplete,” SEC Chairman Harvey L. Pitt said. “It demonstrates a lack of commitment to full disclosure to investors and less than full cooperation with the SEC.”
WorldCom executives said they were “very surprised” by Pitt’s comments.
“Our response was entirely in line with the SEC’s request and is in fact a summary of what we know at this point,” WorldCom spokesman Brad Burns said.
The company has hired Bill McLucas, former director of enforcement at the SEC, to “get a full account of who knew what when, and what led us to this point,” Burns said. McLucas is due to report his findings within three months, and the results of his investigation are expected to be turned over to the SEC.
WorldCom’s SEC statement focused blame on former CFO Sullivan and its former controller, David F. Myers, who resigned the same day Sullivan was fired.
“The clear import of the statement is to point at people who have been terminated or left the company,” said Jacob S. Frenkel, a Washington lawyer and former SEC enforcement officer.
Although the SEC complaint filed last week does not name specific individuals, it does include “senior management” of the company during 2001 and the first quarter of 2002. If so, the case also could enmesh Bernard J. Ebbers, the former WorldCom chief executive who was ousted in April.
According to the company’s statement, current CEO John W. Sidgmore was not told of the irregularities until June 20, weeks after they were discovered.
Also on Monday, the Bush administration said it may suspend hundreds of millions of dollars in government contracts awarded to WorldCom if it determines that the phone giant no longer meets federal ethics standards.
The review, similar to one the federal government conducted in the wake of the Enron Corp. financial scandal, would affect the Internet and long-distance phone service WorldCom provides to more than 60 federal agencies.
At the same time, politicians and groups that received campaign donations from WorldCom rushed to distance themselves from the company. The National Republican Senatorial Committee said it was returning a $100,000 contribution from the company. The Democratic Senatorial Campaign Committee plans to donate to an unspecified charity $50,750 it received from WorldCom during the last five quarters, when the accounting irregularities occurred. And Rep. Ronnie Shows (D-Miss.), in whose district the company is based, plans to give $6,000 in company donations to a relief fund for laid-off WorldCom workers.
President Bush pledged to hold corporate wrongdoers accountable and “bring some of these folks to justice.”
Meanwhile, bad financial news for the once-highflying telecommunications company continued to roll in. The company, which earlier confined the accounting irregularities to 2001 and the first quarter of 2002, said it would expand its internal audit of financial statements to as far back as 1999, raising the possibility that the company’s accounting problems are deeper than initially revealed.
“Typically, the first revelation is not the last,” said Richard Breeden, former SEC chairman and a corporate turnaround specialist based in Greenwich, Conn.
WorldCom’s stock also is likely to be delisted from the Nasdaq Stock Market on Friday, the company said. Its shares plummeted Monday, the first day the stock traded on the market after its $3.9-billion restatement last week, losing 77 cents to close at 6 cents.
As the possibility of bankruptcy loomed, WorldCom lenders declared the company in default for loans totaling $2.65 billion. The move is typical among lenders that expect a client to seek Bankruptcy Court protection and who wish to preserve the option of immediately collecting the entire loan, said bankruptcy attorney Richard Levin at Skadden, Arps, Slate Meagher & Flom in Los Angeles.
WorldCom has $29 billion in long-term debt and $2.65 billion in short-term debt. WorldCom doesn’t have any payments due on its debt until January, company executives said.
The situation, however, would change dramatically if the lenders demand early repayment of the $2.65 billion now in default.
WorldCom’s prospect for finding new lenders faded to nil when Standard & Poor’s Corp., a leading credit-rating company, downgraded WorldCom’s long-term debt rating Monday for the second time in two business days. The new ranking is CC, the second-lowest mark for debt not yet in default.
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Staff writers Edwin Chen in Cleveland, James Granelli in Los Angeles and Richard Simon and Jube Shiver in Washington contributed to this report.
