- WASHINGTON (Reuters) - Lawmakers
probing WorldCom Inc.'s WCOME.O $3.85 billion accounting debacle called
on Monday for prison time for those responsible, while former executives
refused to testify to a congressional committee.
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- Former Chief Executive Bernard Ebbers and former Chief
Financial Officer Scott Sullivan, who were in charge when the company mishandled
its accounts, invoked their constitutional right against self-incrimination.
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- Rep. Michael Oxley, chairman of the House Financial Services
Committee that held the hearing, said it appeared that senior executives
at the nation's No. 2 long-distance carrier had hidden expenses of almost
$4 billion, disguising its true performance to keep earnings in line with
analysts' estimates.
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- "And make no mistake, the consequences to this sort
of criminal activity, should it be proved, should be severe, and that may
mean time in federal prison," the Ohio Republican said in opening
a hearing into WorldCom's decline.
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- (Corrects specific wrongdoing in fifth paragraph.)
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- The Securities and Exchange Commission has already sued
the Clinton, Mississippi-based company, alleging that it improperly booked
expenses as capital spending for five quarters starting in 2001, hiding
losses of $1.22 billion.
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- The scandal engulfing WorldCom, also carrier of half
of the world's Internet traffic, has overshadowed the collapse of Enron
Corp. ENRNQ.PK last year and joins scandals at other former high-fliers
like Global Crossing Ltd. GBLXQ.PK and Tyco International Ltd. TYC.N
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- President Bush will present a plan on Tuesday aimed at
reassuring investors rocked by the wave of corporate scandals that threatens
to turn his pro-business reputation into a liability.
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- EBBERS OUSTER
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- Ebbers was ousted in April, bowing to pressure over the
company's huge debts and big personal loans. Sullivan was fired for his
handling of WorldCom's books on June 25, the day the company went public
with the scandal.
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- Internal auditor Cynthia Cooper began uncovering the
accounting problems in May. The committee has scratched her appearance
to avoid disrupting the Justice Department's probe of WorldCom.
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- The former WorldCom CEO professed his innocence in declining
to testify, and said he looked forward to explaining his actions in the
right setting. "I believe that no one will conclude that I engaged
in any criminal or fraudulent conduct during my tenure at WorldCom,"
Ebbers said.
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- Sullivan defended to WorldCom his booking of the expenses
in the days leading up to his dismissal.
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- "Based upon the advice of counsel I respectfully
will not answer questions based upon my Fifth-Amendment right to the United
States Constitution," Sullivan told the committee.
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- WorldCom is currently struggling to negotiate new credit
lines to avoid bankruptcy.
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- Newly installed WorldCom CEO John Sidgmore apologized
for the debacle and promised to try to save the company.
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- "While our reputation has suffered a tremendous
blow, ours is a great company that the new management team will do everything
in our power to save," his written testimony said.
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- "Although we have significant cash on hand, we are
in close communications with our lenders to secure replacement lines of
credit," Sidgmore said. "WorldCom is a key component of our nation's
economy and communications infrastructure," he said.
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- WorldCom has said it is probing its financial statements
from 1999 and 2000 for further accounting problems.
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- Lawmakers, veterans of hearings into Enron and its auditor
Andersen, appeared resigned to further corporate wrongdoing.
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- "Earnings manipulation has become all too common
a practice among our publicly traded companies," said New York Rep.
John LaFalce, the ranking Democrat on the committee.
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- ANDERSEN CONNECTION
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- WorldCom's auditor was also Andersen, which audited Enron's
books and was recently convicted of obstructing the federal probe into
that energy-trading company.
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- Melvin Dick, who oversaw Andersen's audit of WorldCom's
books, said neither he nor his team had "any inkling" that the
firm had moved routine maintenance costs to capital spending accounts in
violation of standard accounting practice.
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- WorldCom also indicated there were no significant unusual
book entries when Andersen asked, Dick testified.
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- Andersen had used auditing software to study WorldCom's
financial statements line by line, "which did not trigger any indication
that there was a need for additional work," Dick told lawmakers in
written testimony.
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- Dick, who now works as chief financial officer at clothing
retailer Coldwater Creek CWTR.O , also questioned how Cooper discovered
the problem, saying: "I would be very interested to know how and when
they discovered these entries."
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- Salomon Smith Barney telecom analyst Jack Grubman, who
downgraded WorldCom's stock just before the accounting debacle became public,
testified that he had no inside information about WorldCom's woes.
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- Grubman, who championed WorldCom stock for years and
enjoyed access to occasional board meetings, downgraded WorldCom from "neutral"
to "underperform" just before the company's accounting woes became
public.
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- "I regret that I was wrong in rating WorldCom highly
for too long ... I surely would have downgraded the company much earlier
had I known the truth about its financial performance," Grubman said
in written testimony.
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