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WorldCom charged with fraud as bankruptcy looms

WorldCom Inc was slapped with fraud charges by US regulators a day after admitting it hid almost $4 billion of costs, drawing the communications giant closer to bankruptcy in one of the biggest accounting scandals on record.

In a civil lawsuit filed in a federal court in New York, the Securities and Exchange Commission charged WorldCom with acting to manipulate its earnings to keep them in line with Wall Street's expectations. WorldCom has fired its CFO Scott Sullivan.

US President George W Bush said he was "deeply concerned" and called for a full investigation of a scandal that rivals the collapse of bankrupt energy trader Enron Corp. WorldCom's stocks and bonds caved on the news, and global markets skidded on Wednesday.

Asian stocks and the US dollar steadied on Thursday after Wall Street withstood the shock from the second largest US long distance phone and data service firm, but investors remained cautious.

The US Justice Department, which has the power to bring criminal charges, said Clinton, Mississippi-based WorldCom was under review. Its probe of Enron led to the conviction earlier this month of auditor Andersen, which had also vetted WorldCom's books. WorldCom's current auditor is KPMG.

Bankruptcy looms

The revelation of dodgy accounting could derail WorldCom's efforts to secure $5 billion in new financing and force it into bankruptcy, analysts said. A source close to WorldCom's banks said the deal is dead, leaving it with insufficient funds to cover expenses and interest payments on $30 billion in debt.

"Bankruptcy is now a distinct and near-term possibility," said CS First Boston analyst Dan Reingold.

The size of the scandal that the company disclosed Tuesday night shocked even hardened Wall Street veterans, causing people to wonder who's next.

Rival firm Sprint quickly asserted it was not under any SEC investigations, does not have any "off-balance sheet" liabilities, and that its accounting is complete and accurate.

Improper accounting also made it onto the agenda of the Group of Eight at the Canadian mountain retreat of Kananaskis.

"It's a preoccupation of all the leaders that this is creating at this time a lack of confidence in the markets, and people are not sure about the way that information is transmitted to the public," Canadian Prime Minister Jean Chretien said after the first day of the summit of leading industrialised nations.

Hidden expenses

WorldCom booked operating costs, such as fees to access other carriers' networks, as long-term capital investments, a move that allowed it to hide expenses, inflate cash flow and artificially post profits.

WorldCom, which already was under investigation by the SEC, said it discovered the accounting problem during a routine internal audit.

The SEC said in the lawsuit that WorldCom engaged in a scheme which was "directed and approved by its senior management," that allowed it to fraudulently report 2001 cash flow of $2.393 billion, rather than its actual loss of $662 million. In the first quarter of 2002, WorldCom incorrectly reported cash flow of $240 million, rather than a loss of about $557 million.

WorldCom on Tuesday night said it would restate results for the last five quarters, erasing all profits from the beginning of 2001. It also said it would review its financial forecasts.

The SEC sought an order preventing WorldCom from disposing of assets, destroying documents and making payouts to senior officers.

WorldCom fallout costs are already being tallied. Banks around the world are owed about $4.5 billion and US insurers' estimated exposure is around $5.4 billion.

Canada's Bank of Montreal joined the list of creditors late on Wednesday, saying it had less than $25 million of exposure, primarily in bonds.

The US's biggest pension fund, CalPERS, the California Public Employees' Retirement System, has an unrealised loss of about $235 million on 23 million shares of WorldCom and faces another $330 million in unrealised WorldCom bond losses.

Congress pledges action

WorldCom's accounting debacle further soured already skittish investors after such high-flying companies as Enron, telecom giant Global Crossing Ltd. and conglomerate Tyco International Ltd. crashed on opaque accounting.

Three bond rating agencies slashed WorldCom's debt ratings deeper into "junk" territory, citing the increased likelihood of default. WorldCom bonds traded as low at 11 cents on the dollar.

Trading in WorldCom Group shares, which peaked at more than $64 in 1999, was halted after losing nearly all their remaining value in pre-market trade, plunging to 9 cents a share.

WorldCom, which had forced out its former chief executive, Bernie Ebbers, in April, said it was as upset as everyone else. "We were certainly as equally outraged as the president that these events took place and we are working to try to restore public trust," said spokesman Brad Burns.

Some analysts found a silver lining.

"Because our estimated recovery values greatly exceed the current market prices of WorldCom's bonds, we strongly recommend purchasing (them) at the height of the current fear," DebtTraders analyst Matthew Breckenridge said in a Thursday client note.

New York and Hong Kong-based DebtTraders upgraded its recommendation on WorldCom paper to "strong buy", giving the bonds an attractiveness rating of 90 per cent and a safety rating of 48 per cent.

Analysts said the scandal could foreshadow deeper problems for rivals such as Qwest Communications International Inc., which also faces an accounting inquiry.

Shares of Qwest, which said it was cooperating with the SEC's probe, fell 58 per cent on the New York Stock Exchange.

Former CFO Sullivan, 40, was credited with the plan to buy MCI and orchestrated a surging stock price at WorldCom to fund more than 60 acquisitions over a decade.

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