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WorldCom Hit With Federal Fraud Lawsuit

Scandal: The action aims to prevent internal abuses. The stock market is jolted, then recovers.


Amid shock waves from the WorldCom Inc. accounting scandal that rocked corporate America on Wednesday, federal investigators slapped the nation's second-largest long-distance company with a civil fraud lawsuit to prevent it from disposing of assets, destroying documents and paying off senior officers.

In a measure of the scandal's growing effect, the Securities and Exchange Commission said it has accelerated plans to force chief executives and financial officers to guarantee financial statements, making them potentially liable if the data are found to be fraudulent. The certifications would be required of the nation's 1,000 largest corporations by Aug. 15, the agency said.

Shares of major banks and many telecommunications firms were hit hard Wednesday over concerns that the accounting and debt woes of the Clinton, Miss.-based WorldCom would cause broad economic harm. WorldCom's bonds plummeted to as little as 11 cents on the dollar, and major New York banks saw their stocks skid over concerns that they stand to lose billions on shrinking WorldCom bonds.

Though the overall market dropped sharply in the morning, much of its loss was erased by the close of trading--a recovery explained by some market watchers as a result of the declining shock value of corporate scandals on Wall Street traders.

WorldCom disclosed Wednesday that it had improperly accounted for $3.9 billion in expenses over the last five quarters, showing that it was earning significant profit at a time it was losing hundreds of millions of dollars.

President Bush branded the news as "outrageous." Lawmakers said it underscored a new urgency in Washington to strengthen federal oversight of corporate accounting and governance. Members of Congress said the WorldCom disclosures put pressure on them to produce legislation cracking down on corporate misdeeds.

Analysts said the WorldCom crisis creates a new crunch on the already besieged SEC, and pushes the Justice Department to bring more criminal cases against executives whose companies are accused of fraud.

WorldCom, meanwhile, appeared headed for a bankruptcy that could allow it to emerge as a healthier player in an industry of weak and damaged rivals.

But after a season of seemingly endless corporate corruption, the damage caused by WorldCom's disclosure is not only a financial blow. Wall Street watchers said it has further solidified the public's mistrust of the business world, and convinced many that the days of "ethical" Fortune 500 companies are long gone.

"WorldCom's future depends on the faith that its creditors put into it," said Michael Hodel, an analyst at Morningstar Inc. in Chicago. "This fraud wipes out the majority of faith that any creditor has in this company."

WorldCom's acknowledgment that it inflated profit could lend credence to the idea of systemic problems requiring more sweeping action. Bush told reporters Wednesday at an annual economic meeting that the federal government would begin taking a far more aggressive approach to companies engaging in such practices.

"There are some concerned about the validity of the balance sheets of corporate America, and I can understand why," Bush said on the opening day of the Group of 8 economic summit in Canada.

Senate Majority Leader Tom Daschle (D-S.D.) promised, as the first order of business after the July 4 recess, to bring to the Senate floor legislation that would increase oversight of auditors and make corporate officers more accountable for the accuracy of their companies' financial statements. He predicted that it would easily win Senate approval.

The House voted Wednesday to authorize nearly a doubling of the SEC budget, from $481 million in Bush's proposed budget to $776 million for the fiscal year beginning Oct. 1.

Rep. W.J. "Billy" Tauzin (R-La.), chairman of the House Energy and Commerce Committee, launched an investigation into WorldCom's restatement of earnings and losses, suggesting the case was "eerily similar to the accounting hocus-pocus that occurred at Enron."

Hours after the vote, the SEC filed its civil suit against WorldCom in U.S. District Court for the Southern District of New York.

"By improperly transferring certain costs to its capital accounts, WorldCom falsely portrayed itself as a profitable business during 2001 and the first quarter of 2002," according to the civil complaint. "This improper accounting action was intended to manipulate WorldCom's earnings.... WorldCom violated the anti-fraud and reporting provisions of the federal securities laws and, unless restrained and enjoined by this Court, will continue to do so."

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