SEC Levels Fraud Charges at WorldCom

WorldCom's chances of avoiding bankruptcy grew dimmer when the company was hit with federal fraud charges that accuse WorldCom of exaggerating earnings by $3 billion in 2001 and $797 million in the first quarter of 2002.

by Brian Morrissey of internetnews.com [June 28, 2002]

The Securities and Exchange Commission (SEC), acting with speed in the face of what appears to be the largest of the accounting scandals to hit American business in the last nine months, formally charged the telecom company and its execs with cooking its books to meet Wall Street expectations and goose its stock price. The SEC said the fraud pumped up WorldCom's earnings by $3 billion in 2001 and $797 million in the first quarter of 2002.

The fraud charges, filed in a civil suit in a Manhattan federal court, came just a day after WorldCom's bombshell admission that it had overstated its cash flow by $3.8 billion over the last five quarters. The SEC had already begun an investigation into Clinton, Miss., company's accounting in February.

The SEC also ordered WorldCom to provide details of its revised financial statements by Monday, along with an explanation of how they came about.

With WorldCom's future in doubt, its customers have scrambled to find safer alternatives in an industry beset by questions about the accuracy of its financial reporting. Global Crossing retreated into Chapter 11 protection in January, amidst questions about its dealings with Enron. Former up-and-comer Qwest Communications has teetered under federal probes and high debt. The SEC is probing the company's accounting, while its chief executive, Joseph Nacchio, resigned last week.

Reacting to the plummeting confidence in U.S. businesses in the face of the spate of accounting scandals, SEC Chairman Harvey Pitt ordered the CEOs of the largest publicly traded companies to publicly state their confidence in their earnings statements.

Sprint executives this morning came out with a statement this morning that the company had no off-balance sheet liabilities or accounting problems. The telecom also touted that it is not under SEC investigation.

Giga Information Group analyst Lisa Pierce said companies looking for stability in the telecom market have few places to turn, but Sprint and AT&T would most likely be seen as having a more solid foundation.

"It's all relative," she said. "Sprint's finances have suffered the least."

WorldCom was due to begin its first moves to salvage its business today, when it is to begin laying off 17,000 of its 85,000 employees.

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