Jessica Hall
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.
"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.
"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.
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.
"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.
"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.
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.