U.S. Files Fraud Suit Against WorldCom

After the SEC initially issued a statement saying that the commission is "actively investigating" WorldCom's financial statements, SEC Chairman Harvey Pitt noted that the agency moved to file suit in U.S. District Court in New York.

Pitt said the move -- which will freeze certain proceedings within WorldCom -- is aimed at preventing the type of document destruction that ensued when investigators closed in on Enron after massive accounting fraud was uncovered at that company last year.

On the Brink

Analysts said the lawsuit also likely pushed WorldCom closer to what is widely believed to be an inevitable bankruptcy proceeding.

WorldCom acknowledged that certain transfers from line expense accounts to capital accounts during the past five quarters were not made in accordance with generally accepted accounting principles (GAAP), resulting in misstatements of $3.055 billion in 2001 and $797 million in the first quarter of this year.

The transfers, potentially the largest case of accounting fraud ever unveiled, also resulted in WorldCom reporting net profits instead of financial losses for each of the affected time periods.

Feeling the Effects

Meanwhile, scores of telecommunications and Internet companies moved to distance themselves from WorldCom as the effect of the accounting revelations rippled outward. Sprint (NYSE: S) , for example, said it welcomes "any questions related to [its] accounting practices."

Network hardware provider Juniper Networks (Nasdaq: JNPR) released a statement saying that less than $7 million of its current quarterly revenue comes from WorldCom.

And Qwest Communications (NYSE: Q) -- whose shares dropped more than 50 percent Wednesday after the WorldCom revelations -- issued a statement calling the fraud allegations "unfortunate."

"Qwest is a different company, and I wouldn't be here if I didn't believe that," Qwest CEO Richard Notebaert said. His comments came on the heels of published reports that claimed the SEC is checking into accounting practices at Qwest as well.

U.S. stock markets rebounded from the initial blow of the WorldCom news, closing down just a fraction on Wednesday and moving up in early trading Thursday before relinquishing their gains again. The Nasdaq had yet to release WorldCom shares for trading as of midday Thursday.

Keeping Hope Alive

Meanwhile, WorldCom president and CEO John Sidgmore issued a videotaped statement saying he was "shocked" by the misstatement, which he said was uncovered during a routine internal audit.

In addition to firing chief financial officer Scott Sullivan, Sidgmore said WorldCom also dismissed its controller, hired a former SEC official to conduct an internal investigation and immediately notified the SEC of what it found.

"In other words, we turned ourselves in," Sidgmore said.

Underneath It All

Sidgmore also sought to restore confidence in the company, emphasizing that the restatement will not affect cash flow and that the company remains in a strong cash position.

"Underneath all this, we remain a company with $30 billion in revenue and 25 million customers," he said. "While this is an undeniable setback, I'm convinced ... WorldCom can emerge as a stronger and even more competitive force in the telecommunications industry."

Forrester Research analyst Maribel Dolinov told the E-Commerce Times that while WorldCom customers should not have to worry about disruptions in service right away, the news does underscore that they should consider establishing backup systems for all of their vital communications services.

"Companies should see this as a wake-up call and make sure they have a diverse carrier network in place," Dolinov said. Customers eventually might benefit from the debacle, she added, as WorldCom strives to prevent them from jumping ship.