U.S. SEC files fraud lawsuit against WorldCom

By Deepa Babington

NEW YORK: The market's top regulator filed a civil lawsuit on Wednesday charging WorldCom Inc. with fraud, reacting with unprecedented speed to the telecom giant's disclosure that it hid almost $4 billion in expenses.

The U.S. Securities and Exchange Commission, trying to deflect criticism of its handling of recent scandals, also sought an order to prevent the No. 2 long-distance telephone and data services company from selling off assets, destroying documents and making hefty payouts to senior officers.

"What happened at WorldCom -- and we do not yet know all that has happened at WorldCom -- is an outrage," SEC Chairman Pitt told business luminaries at a dinner hosted by the New York Economic Club. "What we also know we're looking at isn't a mistake, it's a fraud."

The SEC ordered WorldCom to file under oath a detailed report of the circumstances surrounding its restatement before the market opens on Monday, invoking such authority for only the third time in the agency's history.

The agency is under intense pressure to crack down on accounting scandals and corporate abuses as investor confidence in financial reporting reaches fresh lows with each new revelation.

Pitt, who has frequently been attacked for his ties to the accounting industry and fought off calls to resign, repeatedly mentioned how his quick response to the WorldCom scandal underscored the SEC's active role in uncovering fraud.

During the speech, he portrayed himself as a strict regulator exasperated by the string of accounting scandals from Enron Corp. to Tyco International that have rocked the markets in recent months.

At one point he even quoted a line from the movie "Network," saying that his message this evening was that "I'm mad as hell and I'm not going to take it anymore."

"In my 10 months as SEC chair, the Commission has laid out and has actively implemented creative and effective solutions to the problems I inherited," Pitt told reporters earlier in the evening, in response to the criticisms that have dogged him since he took office. "I will not stoop to the level of those who seek to attack a diligent agency for political advantage."

Earlier on Wednesday, Senate Majority Leader Tom Daschle charged that Pitt, a former lawyer to the top accounting firms, had a "cozy relationship with the industry" that was keeping him from doing his job.

The SEC, which is liaising with the Department of Justice and U.S. attorneys, is also looking to make sure that perpetrators of financial crime are punished with jail time, Pitt said.

The Justice Department has said Clinton, Mississippi-based WorldCom is under review. Earlier this month, its investigation of Enron led to the conviction of accounting firm Andersen, which also audited WorldCom's books. At the New York gathering, Pitt also signaled his intention to speed up reforms for financial reporting and the accounting profession.

Hoping to revive investor confidence in the tarnished accounting industry, the SEC last week outlined its plans for an oversight body to keep a check on accountants -- the Public Accountability Board. Pitt issued the proposal for 60 days of public comment and had hoped to have the PAB up and running by the year-end, but on Wednesday he accelerated his timeframe, saying this was too critical an issue to wait on.

"My hope now is that we can begin implementing our proposals as shortly after the close of the comment period as is possible ...in the event there is no legislation," he said. Echoing comments he made to a group of financial writers less than two weeks ago, Pitt called the Financial Accounting Standards Board -- the nation's accounting rule-setter -- "flawed." Some of the extremely detailed rules it had crafted ran into hundreds of paragraphs and pages, he said.

In response to top executives who have professed ignorance of billion-dollar irregularities at their companies, Pitt said chief executives and financial officers of the 1,000 largest companies would have to personally certify the accuracy of financial statements from Aug. 15 -- about the time the next quarterly reports flood in.

Pitt also renewed his call for additional resources for his agency, notorious for working off a tight budget. He said he had talked to the head of the Office of Management and Budget on Wednesday about additional resources for his over-worked agency, on top of the 100 employees already requested after Enron's collapse.

(Additional reporting by Claire Soares in Washington)

(C) Reuters Ltd.