WorldCom Inc. teetered yesterday toward what would be the largest bankruptcy in U.S. history after shocking Wall Street -- and the White House -- with yet another corporate scandal: $3.8 billion in expenses hidden from investors.
U.S. stocks plunged -- but recovered by day's end -- after the disclosure by the long-distance and Internet services company, the latest revelation of how business ethics were trashed during the technology boom of the late 1990s.
President Bush called WorldCom's revelation of billions in disguised expenses "outrageous" and "egregious," and said he could understand why jittery investors have come to doubt "the balance sheet of corporate America."
"We've had too many cases of people abusing their responsibilities, and people just need to know that the SEC [Securities and Exchange Commission] is on it," Bush said. The agency was investigating WorldCom before the announcement late Tuesday by the Clinton, Miss.-based company.
SEC Chairman Harvey L. Pitt said late yesterday that his agency had filed fraud charges against WorldCom in U.S. District Court in New York. He said the filing was intended in part to prevent the company from destroying documents or making payouts to WorldCom executives past or present while the SEC continues investigating.
Pitt said the action against WorldCom was "an attempt to restore the understandably lost credibility that people have in what they are hearing and reading." He did not elaborate.
Congressional leaders chimed in, talking about jail for any lawbreakers and asking where regulators had been.
Senate Democrats said the WorldCom revelation underscores the need for the legislation to create the new accounting oversight board and change accounting standards. The Senate Banking Committee last week approved the bill, which is sponsored by the committee chairman, Maryland Democrat Paul S. Sarbanes, and opposed by the Bush administration and Republican leaders in the House of Representatives.
Daschle scheduled Senate debate on the legislation as the first order of business after the Fourth of July recess.
The House voted overwhelmingly yesterday 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 Republican Rep. Michael G. Oxley of Ohio, chairman of the House Financial Services Committee.
Meanwhile, Federal Communications Commission Chairman Michael Powell said his agency was "closely monitoring the situation and doing everything possible" to safeguard the nation's telecommunications.
In disclosing the accounting scandal, WorldCom said it plans to start laying off 17,000 workers -- about 20 percent of its global work force -- tomorrow. The company also fired chief financial officer Scott Sullivan on Tuesday night.
Analysts warned that WorldCom, owner of the MCI long-distance business and UUNet Inc., one of the world's biggest Internet "backbone" networks, could declare bankruptcy within a week, joining Enron as one of the most spectacular failures of the "New Economy."
In a taped Webcast last night, WorldCom Chief Executive John Sidgmore made no mention of a possible bankruptcy filing but called the accounting disclosure "a shock" and "an undeniable setback" for the beleaguered company that he's run for less than two months. Sidgmore said he met Tuesday with WorldCom's key lenders in New York and that the company would continue on a plan to cut costs and become leaner.
"This has been a very tough week for WorldCom, there's no doubt about it," said Sidgmore, who replaced ousted WorldCom founder Bernie Ebbers in April.
With more than $100 billion in assets reported at the end of March, a WorldCom bankruptcy would be twice as large as Enron's record-setting slide into Chapter 11 last fall and four times as big as Global Crossing Ltd.'s in January.
Alec P. Ostrow, a partner in bankruptcy law firm Salomon, Green & Ostrow in New York, said WorldCom likely spent yesterday preparing a bankruptcy filing that could be used to fend off anxious bankers.
"What they've done is probably grounds for one or more of their lenders to call their loans" and demand immediate payment, leaving the company without money to operate, said Ostrow. "In order to avoid an immediate shutdown, leaving lots of customers in the lurch, they'd have to file for bankruptcy," he said.
WorldCom disclosed late Tuesday that more than $3 billion of expenses in 2001 and $797 million in the first three months of 2002 were recorded as capital expenses, and thus not reflected in the earnings calculation for those periods.
Had those costs been included, rather than the $1.5 billion profit reported for the five quarters, WorldCom would have been forced to show that it lost millions of dollars, the company acknowledged. As a result, WorldCom said it would restate earnings for all of 2001 and the first quarter of 2002.
Arthur Andersen LLP served as WorldCom's accountant during the period in question. The accounting firm, once one of the world's largest, was convicted earlier this month for the destruction of documents related to its work for Enron.
Andersen blamed WorldCom for the inaccuracies and said its work was in compliance with SEC standards: "It is of great concern that important information about line costs was withheld from Andersen auditors by the chief financial officer of WorldCom," a company statement said.
But accounting experts disagreed. Bob Bertucelli, director of the tax institute at Long Island University in New York, said there's no way such an accounting error should have gotten past Andersen's audit. "The auditor is responsible for everything that goes on, whether it's discussed with the auditing firm or not," Bertucelli said. "It should have been found. It's a clear-cut violation of generally accepted accounting principles."
On Wall Street, the Dow Jones industrial average fell more than 200 points, skidding below 9,000 for the first time since Oct. 10, before recovering to post a slim loss for the day. The Nasdaq composite index traded below its post-Sept. 11 closing low before rebounding to a small gain.
Officials at the Nasdaq market halted trading in the two stocks used to represent WorldCom's business. WorldCom Group, which consists of the operations that provide data and telephone services to big businesses, last traded at 83 cents, down from a 52-week high of $16.06. MCI Group, which tracks the consumer long-distance unit, last traded at $1.68, down from as high as $17.33 in the past year.
WorldCom's disclosure also had an impact in the Baltimore area. Shares of Digex Corp. of Laurel closed yesterday at 26 cents, down 20 cents, or 43 percent. Digex, a corporate Internet provider, is majority-owned by WorldCom Inc. This year Digex trimmed its work force to 1,293 employees from 1,455 a year earlier and lost $50.4 million in the first quarter, worse than its $44.2 million loss a year earlier.
But fiber-optic equipment maker Ciena Corp. wasn't hit hard. WorldCom is one of the Linthicum-based company's 80 customers, but it has been a very small one over the past two years, and the revenue Ciena gets from WorldCom is insignificant, said Denny Bilter, the company's senior director of marketing.
"What's happening with them today has little impact on us," Bilter said yesterday.
WorldCom's sudden fall comes at a time when the nation is dealing with a rash of scandals at publicly traded companies that have shaken the nation's faith in corporate America and prompted a flood of shareholder lawsuits.
Enron Corp. collapsed last year amid revelations it hid hundreds of millions of dollars in losses through accounting practices. Scandals have followed at other big-name companies, including Tyco International Ltd., Global Crossing, and Adelphia Communications, which filed for bankruptcy Tuesday.
"Investors keep asking: 'Who's next?'" said Robert Mewshaw, president of Van Sant & Mewshaw, a Lutherville money-management company. "When [corporate] profit numbers get to be as unreliable as the economic numbers put out by a Third World country, investors generally lose confidence" in the system.
WorldCom's stock, one of the better performers of the late 1990s, has stumbled since then over concerns about the company's $32 billion in debt, slowing revenues and the SEC investigation. Also drawing scrutiny and investor displeasure were $408 million in loans WorldCom had given to former CEO Bernard Ebbers. Efforts to reach Ebbers and Sullivan were unsuccessful.
While WorldCom stockholders have been burned by the scandal, the company's bondholders have been charred, experts said.
WorldCom bondholders lost $7.6 billion overnight as the telecommunications company's debt issues fell as low as 12 cents on the dollar yesterday from as much as 78 cents Tuesday. WorldCom's debt, which had an original face value of $28 billion, was worth just over $4 billion yesterday.
Some experts are looking beyond the numbers and wonder if the WorldCom debacle is more than another accounting scandal. They wonder if the shock waves could further weaken a tepid economy.
One possible example is the struggling telecommunications equipment sector, said Joseph C. Cirelli, a financial consultant with Salomon Smith Barney in Baltimore. With its current crisis, "This could be terrible news for the [telecom] equipment companies, and for the overall resumption of corporate [spending]," Cirelli said.
And it could be the same for the overall economy, where consumer spending has been the sole force behind a still-weak rebound. For the rebound to continue -- and to avoid any backsliding into another downturn -- businesses have to start spending again, Cirelli said. "The consumer has carried us out of the downturn," he said. "But there are signs the consumer is starting to get tapped out."