SEC Expands Fraud Case Against WorldCom

Byline: Christopher Stern

The Securities and Exchange Commission expanded its fraud case against WorldCom Inc. today, saying the improper bookkeeping at the telecommunications company stretches back to at least 1999 and the total amount of fraudulent accounting may exceed $9 billion.

The SEC amended its original charges with the consent of WorldCom, which is in settlement talks with the federal agency. Sources close to the talks say they are likely to result in an admission of responsibility for the fraud by WorldCom as well as continuing federal oversight of its business operations. Key decisions at the nation's second-largest telecommunications company are currently subject to the review of Richard C. Breeden, a corporate monitor appointed by a federal judge.

In a statement today, WorldCom said that in the course of settlement talks with the SEC, it revealed that its internal investigators had uncovered more than $9 billion in questionable accounting. Previously, the company said it had turned up a total of $7.7 billion in fraud. A source close to WorldCom said the additional fraud could be as much as $1.8 billion, bringing the total amount of improper bookkeeping to $9.5 billion. However, the source cautioned that it is not yet clear if the entire $1.8 billion was improperly booked and that the internal inquiry is still ongoing.

WorldCom has informed regulators that it improperly claimed billions of dollars of regular expenses, such as the cost of leasing telephone lines from other companies, as capital investments. The accounting change appeared to reduce WorldCom's cost of doing business, allowing it to present itself to investors as a profitable company during a period when it was losing money.

The SEC's expanded complaint, filed in U.S. District Court in New York, takes into account several developments since the SEC filed charges against WorldCom on June 26, just one day after the company first revealed the massive accounting scandal. Since then criminal charges have been filed against five WorldCom executives, four of whom have pleaded guilty.

In its original complaint, the SEC charged WorldCom with improperly accounting for $3.9 billion during 2001 and the first three months of this year. It now appears that original figure may more than double.

If WorldCom succeeds in reaching a settlement with the SEC, a deal which would need the approval of District Judge Jed S. Rakoff, it could remove a major legal burden for the company, which filed for bankruptcy protection in July.

Sources with direct knowledge of the settlement discussions--which first were reported late Monday on the New York Times Web site--said talks could conclude by the end of the month but expressed concern that a final agreement could become bogged down at the SEC, where embattled Chairman Harvey Pitt is facing calls for his resignation from key members of Congress. If Pitt does step down, it is likely that an incoming chairman would want more time to review the deal.

Some telecommunications analysts expressed surprise today that the SEC would agree to a settlement before several of the ongoing investigations into WorldCom had been wrapped up. In addition to the SEC lawsuit, Justice Department attorneys continue to interview company officials and review millions of pages of internal WorldCom documents. The company is also conducting its own internal review of the accounting scandal. In addition, congressional investigators are continuing their own investigations.

"It seems like an awfully fluid situation," said Susan Kalla, a telecommunications analyst at Friedman, Billings Ramsey Group, Inc, an Arlington-based investment and research firm. "It is amazing that the SEC would settle now when there is more digging to be done about the extent of misstatements of revenue and misallocation of resources."

Despite the other ongoing investigations, industry analysts said today that an SEC settlement could help WorldCom emerge from bankruptcy by removing uncertainty about future liability of the company. "It means investors don't have to worry about what sort of sanctions will be placed on the company," said Drake Johnstone, a telecommunications analyst with Davenport & Co.

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