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RealTime IT News

Waiting For the Other Shoe to Drop

Less than a week after disclosing it misreported $3.8 billion in earnings over the past five quarters, embattled telecom WorldCom Inc. faces a variety of investigations, from its own internal audit committee to the Securities and Exchange Commission (SEC) to the U.S. Congress, which promise to scrutinize the role played by high-profile former CEO Bernie Ebbers.

Monday's Wall Street Journal reported that federal investigators want to know what Ebbers role was in what promises to be the largest corporate restatement in history. Today, in a filing ordered last week by the SEC, WorldCom said it would expand its internal investigation to look into its accounting practices before the last year and a half. The company said it would probe "certain material reversals to reserve accounts during 2000 and 1999," when Ebbers led the company. Accounting firm KPMG is to assist with the audit.

Two WorldCom lenders holding credit facilities worth a total of $4.25 billion notified the company that they reserved their rights to call the loans in immediately. WorldCom said the notifications were expected, and it is in talks with the lenders to work out new loan arrangements.

Meanwhile, EDS today said it would not be materially affected by WorldCom's meltdown, despite having $12 billion in contracts with the telecom. EDS said it still expects WorldCom to account for $160 million to $175 million of revenues in the last two quarters of the year.

In October 1999, EDS signed an 11-year, $6.4 billion agreement to provide IT services to WorldCom. At the same time, the two companies inked a network-services deal, for the same duration, worth $6 billion.

Last week, the SEC leveled fraud charges against WorldCom and its top executives, while the House Financial Services Committee subpoenaed four WorldCom officials, including Ebbers and former Chief Financial Officer Scott Sullivan, to testify July 8. The Justice Department has also opened an investigation.

The possibility of Ebbers being hauled before a hostile Congressional committee would make him join Enron's Kenneth Lay and Tyco's Dennis Kozlowski as the latest CEO laid low by the accounting scandals that have engulfed corporate America.

Just two months ago, Ebbers resigned from WoldCom after the revelation that the company gave him $366 million in loans and loan guarantees in the days when WorldCom's stock was flying high.

Ebbers helped found WorldCom in 1985, brashly building the company from a mid-tier telecom to the nation's second largest in a five-year acquisitions binge highlighted by the $30 billion merger with Sprint in 1998.

According to a report in the Journal, Ebbers took to the altar of his church in Brookhaven, Miss., and declared, "You aren't going to church with a crook."

A further blow to the company came as Nasdaq informed WorldCom its shares would be delisted on July 5. The company can delay this by requesting a hearing. Trading in WorldCom shares resumed this morning, with sellers dumping the company's shares in droves and pushing its share price down to just 8 cents by mid-morning.