Congress Subpoenas 4 in WorldCom Scandal
Two congressional committees opened broad investigations Thursday into the accounting practices at WorldCom Inc. as the company was taking the first steps to save itself from collapse.
The House Financial Services Committee subpoenaed three key company executives and an influential Wall Street analyst who touted its stock. In addition, the House Energy and Commerce Committee--which has been investigating other major financial scandals--asked WorldCom to turn over a long list of documents by July 11, including internal audits and minutes of board meetings relating to accounting practices.
The toll of the WorldCom scandal began to unfold as pension funds for millions of state employees disclosed that they lost more than $1 billion on stock and bond investments in the nation’s second-largest long-distance company. California and New York funds lost $565 million and $300 million, respectively.
WorldCom, meanwhile, hired investment banking firm Goldman Sachs to help sell some of its assets, including part of its South American operations.
Ordered to testify before Congress on July 8 were John W. Sidgmore, who became chief executive of WorldCom eight weeks ago; founder and ousted Chairman Bernard J. Ebbers; and Scott D. Sullivan, who was fired Tuesday as chief financial officer. Also subpoenaed was Salomon Smith Barney analyst Jack Grubman, a longtime supporter of WorldCom who did not downgrade the stock until March--after it had fallen nearly 90% from its 1999 peak.
The telecommunications giant, parent company of MCI, revealed late Tuesday that it improperly accounted for $3.9 billion in expenses in 2001 and the first quarter of 2002, a move that covered up about $1.2 billion in losses.
Grubman, once the highest-paid industry researcher on Wall Street, has been tied to another recent telecom meltdown: He was an advisor to Global Crossing Ltd. Chairman Gary Winnick and was involved in negotiations over corporate acquisitions.
None of those subpoenaed could be reached for comment.
Congressional investigators probably will want to know who authorized WorldCom’s accounting procedures, which other top officers knew about the practices and when they knew, said Harold Furchtgott-Roth, a former member of the Federal Communications Commission and onetime aide on the Commerce Committee.
“It’s just such a large amount of money that it’s hard to believe that a lot of people didn’t know about it, including outside stock analysts,” Furchtgott-Roth said.
One key issue is whether the members of the audit committee of WorldCom’s board of directors could have known--or failed to ask the right questions. WorldCom’s regulatory filings state that the committee is responsible for “oversight responsibilities” and “reviewed and discussed the audited financial statements with management.”
Although the committee members do not assure that the auditing of financial statements has been carried out in accordance with generally accepted auditing standards, the members could have insight into specifics of WorldCom’s alleged accounting fraud, legal experts said.
“Nothing should go on that the audit committee is not aware of,” said former U.S. Comptroller General Charles A. Bowsher. “If the chief financial officer is going to lie to you, that’s one thing. If you’re on the audit committee and you never ask questions about changes in accounting, then you haven’t performed your duty.”
As of April 22, the committee comprised four outside directors: Judith Areen, dean of the Law Center at Georgetown University; James C. Allen, an investment director and general partner of Meritage Private Equity Fund in Denver; Max E. Bobbitt, a telecommunications consultant and director of Verso Technologies Inc. in Atlanta; and Francesco Galesi, who runs a conglomerate of real estate, telecommunications and oil and gas companies.
None of the directors returned calls for comment Thursday.
Industry experts said the scale of the alleged fraud at WorldCom indicated that more than one executive at the telecommunications firm was aware of the accounting problems.
“With WorldCom, there’s no way only one person--say only the chief financial officer--was involved in this. Other people had to know,” Bowsher said. “You can’t just misplace $3.8 billion and not have someone ask questions.”
Two other federal agencies also are examining WorldCom’s accounting.
On Wednesday, the Securities and Exchange Commission filed a civil fraud suit against WorldCom that, among other things, seeks to prevent the company from destroying documents and paying lucrative severance packages to executives. The SEC also demanded--before the stock markets open Monday--a complete report detailing the company’s accounting irregularities.
In addition, the Justice Department, which can bring criminal charges against a company and its executives, is looking into the matter, officials said.
In moving to sell assets, WorldCom is hoping to pare some of its $30 billion in debt and bolster the $4 billion in cash it has on hand. Company executives said repeatedly, before Tuesday’s disclosure, that they had no intention of filing for bankruptcy protection.
But analysts said it was difficult to estimate the value of WorldCom’s assets, which include extensive long-distance capacity and local networks for corporate customers in many cities. Part of the difficulty, aside from the company’s now-unclear finances, is that WorldCom’s network cannot easily be broken off in pieces and sold. Rather, the assets are tightly integrated.
“Our ability to value that is compromised by the fact that the financials just blew up on us,” said Adam Quinton, telecommunications analyst with Merrill Lynch & Co., during a conference call Wednesday with clients. “The identifiable assets that can be separated are limited, and there’s a complete lack of tangible substance on the core business.”
In addition, the assets may be of little value because of an industrywide glut, said David Passmore, research director for Burton Group, a network analysis firm.
“The last thing the other carriers need right now is more capacity,” he said.
WorldCom’s most valuable asset, analysts said, is its customer base.
“While it’s great that WorldCom has this network, the bottom line is: How much revenue are they generating from it? How many customers use it?” said Ron Banaszek, director of TFS Telecom, a Swiss consulting and investment firm.
Trading in WorldCom shares was suspended for a second straight day.
As news of WorldCom’s troubles spreads, its rivals stand to gain.
“Sprint and AT&T; are going to be the primary beneficiaries,” said Donald Carros, a senior telecommunications analyst at the Meta Group Inc. in Stamford, Conn. “Next will be Verizon, SBC and Bell South.”
SBC said the number of calls it received from potential new customers jumped 25% in the last three days as the WorldCom news unspooled. AT&T; and Sprint also said they saw increases in calls from potential customers.
Carros, who advises large companies on their communications networks, said he was telling clients that use WorldCom to move their crucial communications to a more financially stable carrier.
The future also looks grim for the 17,000 WorldCom employees who stand to lose their jobs. With much of the telecommunications industry in financial straits, few companies are hiring. Instead, most have gone through painful cutbacks, eliminating 400,000 jobs in the last two years.
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Times staff writers Richard Simon in Washington and James S. Granelli in Los Angeles contributed to this report.
