Report Reveals More WorldCom Problems

Byline: Christopher Stern

A new report by WorldCom Inc.'s bankruptcy examiner found conflicts of interest in the telecommunications giant's relationship with its investment banker Salomon Smith Barney and says that another outside advisor, KPMG Peat Markwick LLP, created a questionable corporate structure that could leave the company vulnerable to hundreds of millions of dollars in state tax claims.

The report is the third and final installment filed with the New York bankruptcy court examiner by Richard L. Thornburgh, the former U.S. attorney general who was appointed by a federal bankruptcy judge to review the facts and circumstances that led to WorldCom's collapse in July 2002.

The first installment was highly critical of the company's senior management and board of directors. The second report found that WorldCom had a breakdown in internal financial controls which eventually lead to $11 billion in improper accounting.

The new 500-page report details alleged conflicts of interest between WorldCom founder and former chief executive Bernard J. Ebbers and Salomon Smith Barney. Between mid-1996 and early 2002, WorldCom paid Salomon more than $100 million in fees, according to the report. During the same time, Salomon allowed Ebbers to buy huge stakes in several companies before shares were sold on the open market. The deals allowed Ebbers to reap a personal profit of $12 million, according to the report.

In one instance, Ebbers was allowed to buy 200,000 shares in McLeod Inc., another telecommunications company. Ebbers invested $4 million and realized a roughly $2 million profit when he sold the shares four months later.

In the case of KPMG, the report states that the firm was brought in to advise WorldCom on its corporate structure about the same time that WorldCom closed its merger with Washington-based MCI Inc.

According to the report, KPMG recommended a corporate structure aimed at reducing taxes that "was highly aggressive and seriously vulnerable to state challenge."

"Our corporate tax work for WorldCom was performed appropriately, in accordance with professional standards and all rules and regulations, and we firmly stand behind it," said KPMG spokesman George Ledwith.

At the heart of KPMG's plan for WorldCom was the creation of subsidiaries that would pay royalties to WorldCom. The arrangement helped WorldCom avoid state taxes because royalty payments are taxed at much lower rates, if at all.

However, the report finds fault for the justification for the royalty payments forwarded by KPMG. According to the report, the subsidiaries owed the royalties for intangible assets such as "the foresight of top management." The value of that foresight was estimated by WorldCom to be worth "the vast majority of the more than $20 billion in royalties that the subsidiaries accrued to WorldCom from Jan. 1, 1998 through 2001," the report states.

In a statement released this morning, WorldCom General Counsel Stacia Kelly said, "MCI appreciates the Examiner's efforts to help create a comprehensive public record of what happened in the past at WorldCom. We are thoroughly reviewing Mr. Thornburgh's final report and are inviting him to present his findings to our Board of Directors as part of our ongoing efforts to ensure that what happened in the past will never happen again."

COPYRIGHT 2004 Washingtonpost Newsweek Interactive
COPYRIGHT 2004 Gale Group