Week in Review
WorldCom Files for Record Bankruptcy
WorldCom Inc., the nation’s second-largest long-distance company, filed for bankruptcy protection, brought down by massive debt, a shortage of cash and an accounting scandal that rocked investor confidence.
The Clinton, Miss.-based telecommunications giant listed $104 billion in assets in its filing for reorganization under federal bankruptcy laws, making it the largest such case in history. The filing was not expected to disrupt customers’ service.
WorldCom built itself into a telecommunications giant through some 75 acquisitions but along the way amassed $32 billion in debt.
The company’s financial troubles stretch across the U.S. economy, from about 20 million residential and corporate customers to the large and small pension funds that put nearly $30 billion into WorldCom bonds that now are almost worthless.
Federal prosecutors reportedly are moving quickly to bring charges against former company officers involving their roles in an accounting scheme that allegedly overstated revenue.
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Former Adelphia Execs Charged With Fraud
Federal authorities arrested five former executives of Adelphia Communications Corp., including the founder and two of his sons, and charged them with defrauding investors out of billions of dollars.
The Justice Department and the Securities and Exchange Commission each filed complaints against John J. Rigas, who started Adelphia half a century ago, two sons and two other former company executives in U.S. District Court in Manhattan. The SEC also charged in a civil action that Adelphia broke securities laws and failed to cooperate with its investigation.
Rigas, 78, and sons Michael, 48, and Timothy, 46, were arrested and handcuffed by U.S. Postal Service inspectors in Manhattan and charged with wire fraud.
The complaints allege that Adelphia laid out $13 million to build a golf course on John Rigas’ land, paid for Manhattan apartments used by Rigas family members, covered hundreds of millions of dollars of the family’s stock losses, and provided company airplanes for a Rigas African safari and other trips without reimbursing the firm--all without disclosing the transactions to outside board members or investors.
Adelphia said in a statement that it supports the action taken against its former executives but is “disappointed” that the SEC is seeking civil penalties against the company.
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Markets Give Investors
a Break From Sell-Off
Major blue-chip stock indexes posed modest gains last week, giving investors a welcome respite from the relentless selling that has gripped Wall Street this summer.
The rebound featured a spectacular midweek rally that saw the Dow Jones industrial average notch its biggest one-day percentage gain since October 1987.
Investors were cheered by congressional approval of a bill tightening government oversight of corporate behavior and the spectacle of Adelphia Communications Corp. executives being taken to jail in handcuffs after their arrest on fraud charges.
But technology and telecom stocks remained trouble spots. Despite rallies Wednesday and Friday, the Nasdaq composite index finished solidly in the red for the week--stretching its losing streak to four weeks. Worries about corporate profits and accounting concerns were a drag on tech shares, while mere survival continues to be an issue for many telecom companies.
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Congress Approves Business Reform Bill
Congress overwhelmingly approved a sweeping business reform bill, and lawmakers pledged to consider more measures aimed at punishing those who commit corporate crimes and restoring confidence in the economy.
President Bush called the congressional action a “victory for America’s shareholders and employees.”
His signature on the bill would usher in the most significant strengthening of business regulation since the Depression era.
The legislation will create an independent board to oversee the accounting industry, require corporate officers to attest to the accuracy of their company’s financial statements and limit the consulting that accounting firms can do for companies they audit.
It also will ban personal loans from companies to their executives and mandates new rules to prevent conflicts of interest among Wall Street analysts.
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Banks Aided Enron, Senate Panel Says
Citigroup Inc., J.P. Morgan Chase & Co. and other Wall Street investment banks helped prop up Enron Corp. for years by arranging more than $8 billion in complex financing transactions that boosted the energy company’s stock price and hid debt, according to research by a Senate committee.
In 2000 alone, the controversial funding deals helped Enron reduce its reported debt by about 40% and inflate its operating cash flow by 50%, investigators found.
The Senate permanent committee on investigations has been focusing on the banks’ efforts to help Enron raise more than $8 billion over six years by arranging prepaid contracts with special-purpose entities based offshore.
The banks, testifying before the panel, vigorously defended their actions, claiming that the deals they set up were legal and widely used by other companies.
Nonetheless, shares of the banks plunged during the week, hit by investors’ growing fear that the institutions could face legal liability over their dealings with Enron.
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AOL Time Warner Discloses SEC Inquiry
AOL Time Warner Inc. acknowledged that the Securities and Exchange Commission had launched a “fact-finding inquiry” into the accounting treatment of some advertising transactions at its America Online unit in 2000 and 2001.
Chief Executive Richard D. Parsons disclosed the investigation during a conference call to discuss the media giant’s second-quarter earnings, which were slightly better than expected, with revenue up 10%.
Parsons said the transactions were reviewed by Ernst & Young, the company’s auditor, which concluded that they complied with accounting standards and were properly disclosed to investors. Parsons said the company would cooperate fully with the SEC.
The SEC, through a spokesman, declined to comment.
The investigation comes at a bad time for AOL Time Warner and Parsons, who took over as CEO in May. Parsons is trying to repair the company’s credibility with investors, who have seen the share price plunge 65% this year. The poor performance has cost the jobs of former Chief Executive Gerald Levin and Chief Operating Officer Robert W. Pittman.
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Tentative OK for PacBell Long-Distance Service
SBC Pacific Bell, the state’s largest local phone company, won tentative approval to sell long-distance service in California, a move that would radically alter the state’s massive telecommunications market and strike another blow to crippled long-distance companies such as WorldCom Inc.
But the landmark ruling by an administrative law judge contained a host of conditions on how SBC PacBell can enter the long-distance business, noting in harsh language the company’s anti-competitive behavior in selling high-speed Internet services.
SBC PacBell praised the ruling and said it would work with the Public Utilities Commission to address the judge’s criticisms.
But consumer advocates and rival phone companies questioned whether the commission should endorse the move.
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For a preview of this week’s business and economic news, please see Monday’s Business section.
