The U.S. Securities and Exchange Commission (SEC) filed a lawsuit in U.S. District Court for the Southern District of New York against WorldCom Inc. Wednesday, charging the company with fraud and asking a court to block the destruction of documents and the payment of extraordinary bonuses to executives.
The suit was filed the day after WorldCom, based in Clinton, Mississippi, announced that it would restate its financial reports for 2001 and the first quarter of 2002 after discovering accounting irregularities that totaled nearly US$4 billion. The company also fired Chief Financial Officer Scott Sullivan and accepted the resignation of David Myers, the company's senior vice president and controller. The accounting issues were the result of the company booking expenses improperly as investments, which the SEC charges was done to hide losses.
The news sent WorldCom shares tumbling in overnight trading, with markets halting trading it the stock after it dipped below $0.20 per share. Trading in the company's stock was still suspended Thursday.
In the court filing, the SEC said that WorldCom had engaged in "a scheme directed and approved by its senior management ... (that) disguised its true operating performance by using undisclosed and improper accounting that materially overstated its income."
"This improper accounting action was intended to manipulate WorldCom's earnings in the year ending 2001 and in the first quarter of 2002 to keep them in line with estimates by Wall Street analysts," the SEC wrote.
The suit seeks "the appointment of a corporate monitor to ensure WorldCom does not destroy any documents or information related to the SEC's pending investigation, and to assure no asset dissipation occurs to any affiliates, or current or former officers, directors or employees from the Company," said SEC Commissioner Harvey Pitt in a speech to the Economic Club of New York.
The SEC is also seeking monetary penalties against the company, according to the court filing.
Pitt called WorldCom's disclosures "appalling" and said that the SEC had ordered the company to file, under oath, detailed information about the matter and how it happened before the markets open on Monday.
"What we also know (is that what) we're looking at isn't a mistake, it's a fraud," Pitt said.
Pitt also repeated his calls for regulatory changes to strengthen the SEC and to help guard against future accounting scandals, such as those plaguing WorldCom, Enron Corp., Tyco International Ltd. and a host of other companies. Among those changes will be the requirement that top corporate management of the top 1,000 companies in the U.S. sign off on all financial statements starting on August 15, Pitt said. Virtually every major U.S. IT company is on this list.
Some observers expect that other companies may be harboring accounting scandals that have yet to be disclosed.
The systemic problems that have led to so much corporate malfeasance "have been festering for years," Pitt said, adding that the news about WorldCom illustrates that "our system has had serious dysfunctional aspects for quite some time."
The accounting scandals have "caused investors around the globe to lose confidence in American business, and to question its basic integrity," he said.
"Corporate America, those who serve it, and those who monitor and regulate it, must embrace meaningful reform, and act in concert to restore integrity in our corporations and their leaders," he said.
To that end, "where corporate leaders abuse the trust of investors to whom they owe fiduciary duties, we are seeking to strip them of corporate offices, salaries, bonuses and stock options," Pitt said.
WorldCom, which faces a massive debt load totalling about $30 billion, is set to begin laying off 17,000 employees on Friday. The layoffs, which were announced weeks before Wednesday's revelations, are expected to save the company $900 million per year.
On Wednesday, U.S. President George W. Bush called WorldCom's disclosure "outrageous" and promised a full investigation of the matter.