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25 Banks File Suit Against WorldCom

Courts: The financial institutions are seeking to immediately freeze $2.65 billion of the long-distance phone giant's assets.

July 13, 2002|From Times Wire Services

NEW YORK — A group of 25 banks charged in a lawsuit filed Friday that WorldCom Inc. defrauded them of nearly $2.5 billion six weeks before publicly disclosing a $3.9-billion accounting cover-up.

The banks' lawsuit, filed in State Supreme Court in Manhattan, included a request for an order to immediately freeze $2.65 billion of WorldCom assets. Justice Helen Freedman, after oral arguments, denied the request and scheduled a hearing for Tuesday.

In Washington, a spokesman for congressional investigators said other WorldCom employees knew about the accounting irregularities at the company and tried to identify the problems only to be rebuffed by the company's then-chief financial officer.

Documents supporting this conclusion were uncovered in the first of five boxes of documents that WorldCom turned over to investigators for the House Energy and Commerce Committee, said panel spokesman Ken Johnson.

"There is no question, absolutely none, that a number of middle- management people at WorldCom had a very good idea that someone was cooking the books," he said. "It's clear to us that they tried to get to the bottom of it only to be rebuffed by [Chief Financial Officer] Scott Sullivan."

Johnson declined to provide further details. Sullivan's lawyer was not immediately available for comment and a spokesman for WorldCom declined to comment.

The banks' suit against WorldCom may push the company closer to making the largest bankruptcy filing in U.S. history. The lawsuit also may be a sign that talks between WorldCom and its current lenders for new loans have collapsed.

The suit accuses WorldCom of making "false representations" when it said on May 16 that it would draw the full $2.65 billion from a revolving credit line. WorldCom announced the restatement of its finances on June 25.

WorldCom admitted that it had disguised $3.9 billion in expenses as capital expenditures so that it would appear to be more profitable. Court papers say Michael Salisbury, WorldCom's general counsel, "stated that the fraud had been perpetrated at the highest level of the company."

The banks say they would not have permitted the loans had they known of the company's true condition.

A total of 27 banks were involved in the loan. The two banks that didn't join the lawsuit are Citicorp's Citibank, which loaned $154 million, and J.P. Morgan Chase & Co., which loaned $6 million. The 25 banks are seeking to have the money returned. The original loan was for $2.65 billion, including $160 million owed to Citibank and J.P. Morgan.

WorldCom spokeswoman Julie Moore said the company had no comment on the lawsuit.

Bloomberg News was used in compiling this report.

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