WorldCom Doesn't Whip Wall Street

June 26, 2002

"There is going to be - there already is - enormous pressure on federal regulators and prosecutors to go after WorldCom." - Andrew Cohen

(CBS) Bargain hunters led U.S. stocks to stage a brief, spectacular turnaround Wednesday following a steep selloff triggered by phone group WorldCom Inc.'s accounting scandal.

Stocks had plunged in the opening minutes of trading on Wall Street on news of the second biggest U.S. long-distance telecom group's balance sheet mess. WorldCom Tuesday night fired its Chief Financial Officer Scott Sullivan and said it would restate its earnings results for the last five quarters, erasing all profits from the beginning of 2001.

The Dow Jones industrial average rose 7 points later in the session before inching back down 6.71 points to close at 9,120.11, still way above session lows. A revival in the chip and software sectors briefly pushed the Nasdaq 5.43 points higher to end up at 1,429.42. The index had tumbled more than 3 percent in early trading.

"A lot of people are surprised that the market has held up, many were looking for capitulation-type selling in the morning leading into midday, to get S&P and Nasdaq to key support technical levels at 965 and 1,420,'' said Tim Anderson, a trader at Salomon Smith Barney Inc. "But as these levels held, buyers came into the market."

The markets largely shrugged off the Federal Reserve's decision to leave interest rates unchanged, as expected. The Fed kept interest rates at 40-year lows amid a backdrop of soft economic growth and weakness on Wall Street. The central bank's decision was overshadowed by worries about the trustworthiness of corporate accounting.

President Bush Wednesday called the WorldCom reports outrageous and said the government "will fully investigate and hold people accountable." Mr. Bush said he feared the pending bankruptcy would hurt “not only shareholders but employees as well." He said the latest evidence of corporate irresponsibility has hurt the United States stock market.

Mr. Bush also said the Securities and Exchange Commission and the Justice Department would investigate.

The news follows hard on the heels of the collapse of energy trading company Enron Corp. and the conviction of auditor Arthur Andersen for obstructing a probe into Enron. That scandal spawned investor concerns over companies that enjoyed meteoric growth in the boom times of the late 1990s.

WorldCom, which switched auditors from Andersen to KPMG this year, called in the SEC after the Clinton, Mississippi-based company discovered it had booked operating expenses as capital investments, flattering cash flow.

The regulator, which was already investigating WorldCom, ordered a detailed report from the company, while The Washington Post newspaper said the Justice Department had begun a criminal probe.

“The WorldCom disclosures confirm that accounting improprieties of unprecedented magnitude have been committed in the public markets,” the SEC said in a brief statement.

WorldCom, which gets 89 percent of its revenues from the United States, promptly announced plans to axe 17,000 jobs, or more than 20 percent of its workforce, starting on Friday.

Shares in WorldCom, which peaked at more than $64 in 1999, fell as much as 76 percent in after-hours action Tuesday and remained halted on Nasdaq as the exchange requested "additional information" from both WorldCom and MCI Group.

WorldCom, whose colorful, cowboy-boot wearing former chief executive and co-founder Bernie Ebbers quit in April with an apology to shareholders, burst on to the European stage in 1997 when it trumped BT Group Plc's bid for U.S. peer MCI - leaving BT's transatlantic ambitious in tatters.

Ebbers, who had funded over 60 acquisitions with his highly valued stock over a decade, fell on his sword after WorldCom's shares collapsed and the SEC probed the company's support of his personal loans earlier this year.

“When you look at the history of WorldCom, and their acquisition trail, you have a classic wheeler-dealer. And now this is the age were wheeler-dealers get called for what they are,” said Frank Dzubeck, president of consulting firm Communications Network Architects.

Robertson Stephens promptly downgraded its WorldCom recommendation to “market underperform” from “strong buy,” saying a bankruptcy filing was “highly likely” within the next 12 months. “We regret that we must make this call when it is too late to help investors stem losses,” the brokerage said.

Other analysts said the company, whose debt is already rated as junk status, may avoid insolvency because it had blown the whistle on itself after finding that operating expenses had been misrecorded as capital expenditure, boosting its cash flow by allowing it to write off costs over a number of years.

“The new CEO is not Bernie Ebbers,” said Andrew Moffatt, head of telecoms research at ABN Amro. “The move is a clearing decks policy by the new CEO, and offers a clean break with the old management team ... Bearing in mind they have taken this action themselves, I would say they have calculated it pretty cleverly (to avoid bankruptcy).”

Much depends on whether WorldCom's secures a $5.0 billion in financing, without which it may face a cash-crunch next year. The group has $30 billion in total debt, but no debt payments are due in the next two quarters.

WorldCom said the job cuts were part of a bid to save $900 million a year. Its 2001 revenues were $35.2 billion.

It also said it would slash another 40 percent from sharply lower capital spending plans, taking its annual investment budget to $2.1 billion.

WorldCom is the latest company linked to auditing firm Andersen to face accounting problems. Andersen, whose role as the auditor of Enron helped lead to the energy trader's collapse, audited WorldCom's financial statements for 2001.

So will Andersen get the blame again? Probably not, says CBSNews.com Legal Analyst Andrew Cohen: "Don't blame Arthur Andersen for this one - the auditing firm has already gone public with the view that WorldCom simply didn't give its folks the proper information, which would have allowed Andersen to offer investors an accurate picture of what was going on inside the company.

“There is going to be - there already is - enormous pressure on federal regulators and prosecutors to go after WorldCom if there is even a close call on criminal conduct. Remember, no one yet has been prosecuted at Enron for that mess. This is much, much bigger than that. I think the government would want to take one of these opportunities to send a signal that this sort of bookkeeping can't be tolerated,” he said.

WorldCom said that accounting irregularities, which did not conform to Generally Accepted Accounting Principles, included booking $3.06 billion worth of operating expenses as capital expenses in 2001 in 2001 and $797 million in the first quarter of 2002.

“Our senior management team is shocked by these discoveries,” said John Sidgmore, WorldCom's CEO of less than two months.
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