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. Last Updated: 07/27/2016

WorldCom Bomb 'One More Nail in Coffin'

NEW YORK -- This week's $3.3 billion accounting bomb from WorldCom Inc. has some investors wondering if the No. 2 U.S. long-distance telephone carrier can survive any more surprises as it struggles under bankruptcy protection to stay alive.

"Each one of these is another nail in the coffin," telecommunications industry analyst Jeff Kagan said.

Several bankers, analysts and lawyers said they are not yet writing WorldCom's obituary -- although they are keeping their pens handy.

"It's too early to tell," said Brad Gevurtz, managing director, telecom group investment banking division of McDonald Investments. "We're all waiting for the next shoe to fall."

Late Thursday, WorldCom said it discovered an additional $3.3 billion in errors, bringing the total in its accounting scandal to more than $7 billion.

WorldCom, which filed for Chapter 11 Bankruptcy protection last month, also said it may have to write off $50.6 billion of goodwill and other intangible assets.

WorldCom became the biggest bankruptcy case when it filed last month, topping Enron Corp. on the list of companies under suspicion of cooking their books and bilking shareholders.

The Securities and Exchange Commission is suing the company for fraud, and its former chief financial officer and controller are facing criminal fraud charges.

The new accounting irregularities came to light as KPMG, Enron's auditors, continued combing the company's financial records dating back to 1999.

Several bankers and bankruptcy attorneys said the new revelations won't greatly affect current cash flow and will not in themselves affect the bankruptcy proceedings, which focus on current and future activities, leaving the past to the SEC and the U.S. Justice Department.

The restatement of goodwill -- the amount it paid for acquisitions above their intrinsic value -- is also not likely to push the company into default.

"It's not like they lost $50 billion cash," Gevurtz said. "They overpaid with over-inflated stock."

"But it certainly creates even more uncertainty," said attorney Jason Gold, of Wyly Rein & Fielding.

For now, the company has secured enough money from bankers to continue operating while its accounting is sorted out. A clear picture has arisen of just how large its business is.

"There's still a business there," said Irena Goldstein, attorney for LeBoeuf Lamb Greene & MacRae, which is serving as special council to Enron in its bankruptcy proceedings. "It's just not worth what many people thought it was worth."

It's a waiting game until the audit is complete and a report is issued by former U.S. Attorney General Richard Thornburgh, who was appointed examiner to investigate allegations of fraud, dishonesty and mismanagement by former and current management.

"You've got to wait until the numbers work themselves out, and it could take months to figure this whole thing out," said Thomas Morabito, McDonald's senior telecom analyst.

Still, the wait could hurt the company as customers are wooed by rivals.

"They're certainly in danger of losing their customers, Morabito said. "I think the biggest beneficiaries of this would be AT&T and Sprint."