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WorldCom executives summoned as officials urge reform

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CIOL Bureau
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Jessica Hall

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PHILADELPHIA: Two congressional committees turned up the heat on WorldCom

Inc. on Thursday, subpoenaing executives and demanding corporate records as US

officials vowed to tighten accounting regulations and President Bush said he was

worried about the economic fallout of the recent wave of financial scandals.

The House Financial Services Committee summoned WorldCom chief executive John

Sidgmore and former boss Bernie Ebbers for a July 8 hearing. The company,

second-largest US long-distance operator, faces bankruptcy after being charged

with fraud for improperly booking $3.85 billion in ordinary expenses, a move

that allowed it to post $1.38 billion in net income in 2001, instead of a loss.

The panel also subpoenaed WorldCom's recently fired financial director, Scott

Sullivan, and Salomon Smith Barney telecommunications analyst Jack Grubman, who

long trumpeted WorldCom to investors before cutting his rating a day before the

Clinton, Mississippi company disclosed the scandal.

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"This at least on the surface appears to be a total breakdown of the

ethics of some members of the corporation," said Michael Oxley, chairman of

the House Financial Services Committee after signing the subpoenas.

Meanwhile, the House Energy and Commerce Committee, which has been

investigating collapsed energy trader Enron Corp., sent a letter to WorldCom

seeking a slew of records, including the company's recent internal audit that

discovered the accounting errors and audit committee minutes dating back to

1997.

US president George W. Bush demanded a full investigation into a scandal that

rivals the collapse of bankrupt energy trader Enron Corp. and casts further

doubt on auditor Andersen, which was convicted for obstructing an Enron probe

and vetted WorldCom's books until being fired this year.

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"I'm concerned about the economic impact of the fact that there are some

corporate leaders who have not upheld their responsibility," Bush told

reporters ahead of a meeting with Russian President Vladimir Putin during a

summit in Canada of the Group of Eight nations.

Bush said he was worried about the economic consequences of accounting

scandals at US corporations, and urged executives to "fully disclose all

assets and liabilities and ... treat your shareholders and employees with

respect." WorldCom's disclosure late Tuesday has pushed it to the brink of

bankruptcy as the company struggles with $30 billion in debt and how to overcome

its inability to secure $5 billion in much-needed new funds after the accounting

bombshell.

The company looked for financial advisers, and one industry source said

WorldCom hired the investment bank Blackstone Group, a top restructuring

adviser, and Weil Gotshal & Manges, a leading bankruptcy law firm. A

WorldCom spokesman did not return several calls seeking comment.

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Hedge funds specializing in distressed debt snapped up bonds of the

beleaguered company, in a bet they will be a good investment provided no more

bad news or evidence of wrongdoing emerges.

Officials urge reform



Improper accounting and the havoc it wreaked on global markets and investor
confidence grabbed the attention of the Group of Eight leading industrialized

nations at the Canadian mountain retreat of Kananaskis.

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"It's a preoccupation of all the leaders that this is creating at this

time a lack of confidence in the markets," Canadian Prime Minister Jean

Chretien said. US officials echoed the president's outrage about WorldCom and

said corporate leaders should be prosecuted to the full extent of the law. US

Treasury Secretary Paul O'Neill said regulations in some ways needed to be

strengthened.

O'Neill said the US Securities and Exchange Commission, which on Wednesday

filed charges against WorldCom for allegedly manipulating earnings, should be

given the right to freeze the assets of officials implicated in scandals such as

WorldCom.

"In cases like this, the SEC even would be able to go in and freeze

accounts and freeze assets, so while some of these things are being litigated

the money doesn't run away and it can be redistributed to employees and

shareholders," he said. White House economic adviser Lawrence Lindsey said

the administration is backing a $250 million increase in funding for the SEC,

the US agency charged with protecting investors and maintaining the integrity of

the securities markets.

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"We have to follow up on a lot of these abuses and clean them up and the

president has come up with tougher corporate governance standards," Lindsey

said in a CNBC interview.

More probes expected



The SEC alleged WorldCom hid expenses to artificially inflate earnings to
meet Wall Street expectations, a gimmick that hid $1.22 billion in losses

WorldCom would have otherwise posted for 2001 and this year's first quarter.

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Grubman, a longtime WorldCom cheerleader, on Monday finally cut his rating on

the company's shares to ‘underperform’ from ‘neutral.’ By that point,

the stock had fallen to around $1, from a peak of $64 in 1999. During the bull

market, Grubman became one of the highest-paid analysts on Wall Street and had

the ear of telecom industry executives during the merger boom of the late 1990s.

"He rated the WorldCom stock regularly and prior to news on Monday he

downgraded it," said Peggy Peterson, a spokeswoman for the House panel.

"We're interested to find out why and what he knows about the

company." Salomon stood by Grubman. "Jack continues to be an important

analyst at our firm," a Salomon spokeswoman said. "Of course, we will

fully cooperate with any inquiries, as is our practice."

On Wednesday, Grubman was harassed by television cameras and said he was no

expert on bankruptcy.

(With additional reporting by Jeremy Pelofsky and Greg Cresci)

(C)Reuters Limited.

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