Financial World Reels From WorldCom Fiasco

NEW YORK -- The U.S. Securities and Exchange Commission filed fraud charges against WorldCom and President George W. Bush vowed to "hold people accountable" for the bookkeeping scandal at the company, the nation's second-largest long-distance provider and a major carrier of Internet traffic.

As the stock market shuddered in response to Tuesday night's disclosure that WorldCom had falsely reported profits for the last five quarters, the Nasdaq exchange suspended trading of shares in WorldCom and the tracking stock of its MCI unit. And as the value of WorldCom's corporate bonds plummeted, it became clear that the debt-ridden company would now face tougher negotiations with its bank lenders, making a bankruptcy filing more likely.

Meanwhile, the Justice Department and a House committee opened investigations of the company's accounting methods, and the SEC said it would expand its own investigation, which it began in March.

As the company's work force braced for a wave of pink slips -- WorldCom plans to cut 17,000 of its 85,000 employees beginning Friday -- some consumer and corporate customers of WorldCom's MCI long-distance unit were already looking for alternative carriers.

Few telecommunications companies looked like havens, though, as WorldCom's bad news helped batter stocks of other carriers in this country and overseas, companies that have already been struggling to emerge from the communications industry's long recession.

"The industry is reeling from this black mark," Jose Collazo, chief executive of Infonet said.

It was as if months of accounting scandals, which have already engulfed Enron, Global Crossing and Adelphia Communications, among others, as well as the auditing firm Arthur Andersen, had finally hit critical mass with the disclosure late Tuesday that WorldCom had masked losses by overstating its financial results by $3.8 billion -- one of the largest cases of false corporate bookkeeping yet.

Bush, speaking Wednesday on the opening day of an eight-nation economic meeting in Kananaskis, Alberta, called the WorldCom revelation "outrageous" and vowed, "We will fully investigate and hold people accountable for misleading not only shareholders but employees as well."

In an apparent show of the administration's resolve, a few hours later the chairman of the SEC, Harvey Pitt, told reporters in Manhattan that the commission had taken the unusual step of filing civil fraud charges against WorldCom. He said part of the aim was to prevent the destruction of documents by WorldCom while the SEC continued its investigation.

In its court filing, the SEC said WorldCom violated antifraud and reporting provisions of federal securities laws by creating an accounting scheme intended to manipulate earnings to meet Wall Street's expectations and to support the company's stock price. Under this scheme, the SEC said, WorldCom improperly booked so-called line costs, or the fees WorldCom paid to other communications companies to use their networks, as capital investments, which had the effect of masking losses.

The accounting strategy, which the SEC said was put in place in early 2001 as the slowing economy resulted in a decline in WorldCom's profits, may have been blessed by executives other than Scott Sullivan, the chief financial officer who was fired this week, and David Myers, the controller, who resigned, according to the commission's complaint.

"In a scheme directed and approved by its senior management, WorldCom disguised its true operating performance by using undisclosed and improper accounting that materially overstated its income," the SEC said in its complaint.

The House Energy and Commerce Committee, which has looked into business practices at Enron, Global Crossing and ImClone, will now turn its attention to WorldCom, according to its chairman, Billy Tauzin, Republican of Louisiana.

"This was not a simple bookkeeping mistake," Tauzin said Wednesday. "Clearly, it was an orchestrated effort to mislead investors and regulators, and I am determined to get to the bottom of it."

John Sidgmore, WorldCom's chief executive, who disclosed the WorldCom bookkeeping problem Tuesday night and announced that Sullivan had been fired, put a statement on the company's web site, saying in part, "This has been a very tough week for WorldCom, there's no doubt about it."

Sidgmore spent much of the day yesterday in discussions with WorldCom's large customers and some of its employees, but it could not be determined whether he had held further talks with the company's bankers, with whom he had met in New York on Tuesday.

WorldCom's future hinges on negotiating additional loans with its banks, led by Bank of America and including JP Morgan Chase and Citigroup. The company had been planning to tap a multibillion-dollar credit line this week. But now that does not seem feasible.

Without additional loans, analysts said, WorldCom has about $2.5 billion of available cash, which the company will probably consume within three months.