SEC sues WorldCom for fraud
By Marcy Gordon
Associated Press Business Writer
WASHINGTON — The government filed civil fraud charges against WorldCom Inc. as President Bush denounced the company for disguising nearly $4 billion in expenses from the investing public, which Bush said has grown justifiably skeptical of corporate balance sheets.
Bush's comments yesterday, calling WorldCom's conduct "outrageous," underscored the administration's concerns over a burgeoning crisis of confidence in corporate America's behavior.
Bush said he knows many Americans are concerned "about the validity of the balance sheet of corporate America and I can understand why."
Already-battered stocks plunged on the news that WorldCom, the nation's second-largest long-distance telephone carrier, had improperly booked expenses to help boost its cash flow and profits in one of the biggest accounting scandals ever. The market managed to close narrowly mixed yesterday, aided by computer-generated buying late in the day.
A few hours after Bush spoke at an eight-nation economic summit in the Canadian Rockies, the Securities and Exchange Commission filed civil fraud charges against WorldCom in federal court in New York City.
"In a scheme directed and approved by its senior management, WorldCom disguised its true operating performance by using undisclosed and improper accounting" that made the company appear more profitable than it was, The Washington Post quoted the suit as saying.
SEC Chairman Harvey Pitt said the charges were aimed at preventing the destruction of documents by WorldCom and payouts to company executives while the SEC continued investigating.
WorldCom chief executive John Sidgmore called the accounting disclosure "a shock" and "an undeniable setback."
WorldCom could supplant the Enron collapse as the nation's biggest corporate scandal. The huge energy-trading company, which had been Bush's most generous corporate benefactor, collapsed in December.
Enron and WorldCom had the same auditor: Arthur Andersen LLP, convicted earlier this month on a felony charge of obstruction of justice for destroying and doctoring Enron audit documents last year.
Andersen blames the WorldCom debacle on the company, saying its auditing work was in compliance with accounting standards.
Bush called for more corporate accountability and said the recent string of accounting scandals has contributed to sagging stock prices.
"We will fully investigate and hold people accountable for misleading not only shareholders but employees as well," he said.
Bush announced the SEC's civil investigation and appeared to leave open the possibility of a criminal inquiry by the Justice Department as well. "The matter is under review," department spokesman Bryan Sierra said later.
On Capitol Hill, Senate Majority Leader Tom Daschle, D-S.D., said there must be "aggressive enforcement of the law. And if laws were broken, somebody needs to go to jail."
Daschle scheduled Senate debate on legislation to tighten oversight of the accounting industry as the first order of business after the Fourth of July recess.
Rep. Billy Tauzin, R-La., chairman of the House Energy and Commerce Committee, announced that his staff had begun an investigation into WorldCom's massive restatement of earnings and losses. He suggested the case was "eerily similar to the accounting hocus-pocus that occurred at Enron."
The House voted overwhelmingly to authorize a 77 percent boost in the SEC's budget, raising it to $776 million — substantially more than the Bush administration had requested — for the fiscal year beginning Oct. 1. "It is absolutely vital for the SEC to have the necessary resources to protect investors," said Rep. Michael Oxley, R-Ohio, chairman of the House Financial Services Committee.
Opening a Senate hearing on corporate responsibility, Sen. Byron Dorgan, D-N.D., called the WorldCom development the latest example that "there is arrogance, there is greed and dishonesty and it is appalling."
"Where was the SEC? ... Why didn't they do their job?" asked Dorgan.
Pitt, responding to lawmakers' criticism, said, "I will not stoop to the level of those who seek to attack the diligent agency for political revenge."
Federal Communications Commission Chairman Michael Powell said his agency was "closely monitoring the situation and doing everything possible" to safeguard the nation's telecommunications network.
