The U.S. Securities and Exchange Commission (SEC) announced Tuesday that it is expanding its civil charges against WorldCom Inc. According to published reports, the commission also denied rumors that it would dismiss fraud charges against the Mississippi-based telecommunications company as part of a settlement.
The SEC said that it was amending its complaint against WorldCom, broadening its charges to include violations of securities laws going back as far as 1999 and continuing through the first three months of 2002.
The expanded complaint followed WorldCom's disclosure, on Tuesday, that it had uncovered additional book keeping irregularities that added US$1.8 billion in overstated revenue to the $7.2 billion already disclosed by the company's internal auditors.
People close to the SEC investigation indicated that the $9 billion figure could grow, as the company continues to uncover accounting techniques used to inflate its earnings that are in violation of generally accepted accounting principles (GAAP), according to published reports.
In its original complaint filed on June 26, 2002, the day after WorldCom disclosed that it would need to restate its revenue for all of 2001 and the first quarter of 2002, the SEC charged WorldCom with overstating revenue by $3.9 billion. In August, WorldCom disclosed another $3.3 billion in accounting errors in 1999. In September, reports surfaced that the company would be disclosing more accounting errors, estimated at the time to be around $2 billion.
Since the SEC's first complaint, the SEC has filed civil actions against four former members of WorldCom's accounting team: David F. Myers, the company's controller, Buford Yates Jr., WorldCom's director of general accounting, and accountants Betty L. Vinson and Troy M. Normand, according to a statement by the SEC.
WorldCom's Chief Financial Officer Scott D. Sullivan has been indicted on criminal fraud charges, and the company's former Chief Executive Officer Bernard Ebbers is under investigation for obtaining personal loans from WorldCom totalling more than $415 million.
Reports circulated on Monday that WorldCom and the SEC were close to reaching a settlement on the civil charges.
In its press release on Tuesday the company acknowledged that it was in settlement talks with the SEC. A WorldCom spokeswoman contacted Wednesday declined to comment on Tuesday's announcement or on the status of the company's ongoing talks with the SEC.
A settlement may pave the way for the company to emerge from bankruptcy protection.
The new disclosures from WorldCom, as well as the resignation on Tuesday of SEC Chairman Harvey Pitt are almost sure to postpone that settlement, according to published reports and those familiar with the case.
"This will definitely delay the settlement until the dust settles," said Jeff Kagan, an independent telecommunications analyst.
Kagan doesn't rule out future announcements either, pushing the clock on a settlement back even more.
"I think they continue to prepare us for the next (announcement)," Kagan said. "At some point, though, there won't be a next announcement, but the SEC can't settle until they're sure it's all out in the open. "Still, Kagan downplays the significance of Tuesday's announcement, noting that the magnitude of the company's financial malfeasance is large enough to deaden the impact of subsequent revelations.
"There's nothing new under the sun here. The amount is a bit bigger than it was, but it was already huge. Yesterday's announcement is nothing that will change the situation or make matters worse," Kagan said.
Looking at WorldCom's statements about cash holdings of $1 billion and aggressive efforts to role out new services, Kagan says that the company is doing a good job of positioning itself to emerge from bankruptcy.
"WorldCom is running as fast as it can to reinvent itself," Kagan said. "It's really the tale of two companies. On the one hand there's the company with the accounting problems. On the other hand is the company with a billion dollars in cash that's rolling out more services to local and business customers successfully. It's not like they're just distracted and just getting the job done. They're doing a good job."