SEC expands charges against WorldCom

Marcy Gordon

Wednesday, Nov. 6, 2002 | 9:41 a.m.

WASHINGTON -- The government on Tuesday expanded its civil fraud charges against WorldCom and the company raised its estimate of inflated earnings to more than $9 billion in one of the most stunning accounting scandals of the past year.

The Securities and Exchange Commission announced that it had broadened the scope of its civil fraud charges, originally filed against the telecom company in June, to include an additional charge and to allege that WorldCom misled investors starting at least as early as 1999, years earlier than previously alleged.

WorldCom is in settlement talks with the SEC. The nation's second-largest long-distance carrier, which is operating under bankruptcy court protection, said it told the SEC during those discussions that, based on "very preliminary reviews" of its accounting, it expects an additional earnings restatement that could bring the total hole in its books to more than $9 billion.

An SEC official said Tuesday there were no plans to drop any of the fraud charges against the company as part of a settlement deal, which must ultimately be approved by the federal judge in Manhattan presiding over the case.

"There is no possible way that any settlement with WorldCom would involve dismissal of our fraud claims or any of our other claims against WorldCom," said Peter Bresnan, deputy chief litigation counsel in the SEC's enforcement division.

WorldCom announced $4 billion in financial misstatements in late June, shocking a market already buffeted by the revelations of accounting irregularities at Enron. That estimate was later raised by the company to around $7 billion.

The company took pains Tuesday to reassure customers that the additional restatements "have no impact on its ability to continue to provide service" or to emerge from bankruptcy protection, which it expects to do in mid-2003.

In a statement, WorldCom said it still has more than $1 billion in cash and access to untapped credit of $1.1 billion.

While the SEC has pursued civil fraud charges against WorldCom and several former top executives, the Justice Department has been conducting a criminal investigation and has recently brought criminal charges against company executives.

The company's former controller, David Myers, and its former chief financial officer, Scott Sullivan, were arrested in August. Prosecutors alleged the two directed employees to falsify balance sheets to hide more than $3.8 billion in expenses, causing WorldCom earnings to be overstated by $5 billion.

Myers pleaded guilty in federal court in Manhattan in September. Sullivan has denied any wrongdoing.

Three other WorldCom executives have pleaded guilty to similar federal charges. They are expected to provide evidence against Sullivan.

Clinton, Miss.-based WorldCom, which owns MCI Communications, is second only to AT&T in the long-distance market. It also has considerable Internet holdings.

As of July, the company already had laid off 17,000 of its 80,000 workers.

The new charge added by the SEC on Tuesday alleges civil fraud in connection with public offerings of WorldCom securities during the time of the alleged accounting violations.

The SEC also added new allegations that WorldCom violated federal laws regarding internal financial controls and record-keeping.

Thomas Ajamie, a Houston securities lawyer, said the growing size of the overstatements will hurt insiders' claims that they didn't know what was happening.

"The size of the overstatement makes it more and more difficult for the directors and executives to say they were unaware of what was occurring," Ajamie said.

On Monday, a new bankruptcy report concluded that the company took "extraordinary and illegal steps" to paint a rosy picture of its crumbling finances and committed accounting fraud that likely exceeded the more than $7 billion already disclosed to investors.

Richard Thornburgh, a former U.S. attorney general appointed by the bankruptcy court to examine WorldCom's finances, also sternly criticized the company in the report for making more than $1 billion in loans to the firm's founder and former chief executive, Bernard Ebbers.

Ebbers has not been charged with wrongdoing. Prosecutors have been collecting evidence to determine what he knew about the fraud.