WorldCom On The Verge Of Collapse

WorldCom Inc., the nation's No. 2 long-distance company, slid toward bankruptcy Wednesday after disclosing what could be the biggest case of crooked accounting in U.S. history. President Bush vowed to "hold people accountable."

A few hours after Mr. Bush spoke, the Securities and Exchange Commission filed civil fraud charges against WorldCom in federal court in Manhattan.

SEC Chairman Harvey Pitt, who announced the action to reporters in New York, said it also was aimed at preventing the destruction of documents by WorldCom while the SEC continues investigating.

In a statement Tuesday, WorldCom said its board of directors had found $3.8 billion that was wrongly listed on its books as capital expenses in 2001 and 2002. That means WorldCom may have actually lost millions of dollars when it reported profits.

John Sidgmore, who was appointed WorldCom's chief executive on April 29, said the board was "shocked" by what it found.

The company said it had fired Scott Sullivan, its chief financial officer. Sullivan could not be reached for comment; his telephone number in Florida was not published. The company also said it has accepted the resignation of David Myers as senior vice president and controller.

News of the telecom group's balance sheet mess sent stocks plunging in the opening minutes of trading on Wall Street. But bargain hunters led stocks to stage a brief, spectacular turnaround.

The Dow Jones average fell as much as 200 points and slipped below 9,000 for the first time since October before recovering to post only a slim loss. The Nasdaq traded below its post-Sept. 11 closing low but also rebounded to record a small gain.

Mr. Bush called for more corporate accountability and said the recent string of accounting scandals has contributed to declines in stock prices.

"We will fully investigate and hold people accountable for misleading not only shareholders but employees as well," Bush said on the opening day of an eight-nation economic summit in the Canadian Rockies.

The SEC had already been looking into lending and accounting practices at the Mississippi-based company, which owns the MCI telephone company.

The U.S. Justice Department said WorldCom was under review, but declined further comment. Its investigation of Enron led to the conviction earlier this month of auditor Andersen, which also vetted WorldCom's books.

Analysts said the former Wall Street darling could declare bankruptcy within the week as lenders call in millions in loans. WorldCom said it will start laying off 17,000 people -- about 20 percent of its global work force -- on Friday.

"If loans are called, in order to avoid an immediate shutdown, leaving lots of customers in the lurch, they'd have to file for bankruptcy," said Alec Ostrow, a partner in the bankruptcy law firm of Salomon, Green & Ostrow in New York.

WorldCom said the job cuts were part of a bid to save $900 million a year. Its 2001 revenues were $35.2 billion.

It also said it would slash another 40 percent from sharply lower capital spending plans, taking its annual investment budget to $2.1 billion.

Shares in WorldCom, which peaked at more than $64 in 1999, fell as much as 76 percent in after-hours action Tuesday and remained halted on Nasdaq as the exchange requested "additional information" from both WorldCom and MCI Group.

WorldCom, whose colorful, cowboy-boot wearing former chief executive and co-founder Bernie Ebbers quit in April with an apology to shareholders, burst on to the European stage in 1997 when it trumped BT Group Plc's bid for U.S. peer MCI - leaving BT's transatlantic ambitious in tatters.

Ebbers, who had funded over 60 acquisitions with his highly valued stock over a decade, fell on his sword after WorldCom's shares collapsed and the SEC probed the company's support of his personal loans earlier this year.

"When you look at the history of WorldCom, and their acquisition trail, you have a classic wheeler-dealer. And now this is the age were wheeler-dealers get called for what they are," said Frank Dzubeck, president of consulting firm Communications Network Architects.

The news follows hard on the heels of the collapse of energy trading company Enron Corp. and the conviction of auditor Arthur Andersen for obstructing a probe into Enron. That scandal spawned investor concerns over companies that enjoyed meteoric growth in the boom times of the late 1990s.

Andersen audited WorldCom's financial statements for 2001.

"Important information about line costs was withheld from Andersen auditors by the chief financial officer of WorldCom," Andersen said in a statement.

So will Andersen get the blame again? Probably not, says CBSNews.com Legal Analyst Andrew Cohen: "Don't blame Arthur Andersen for this one - the auditing firm has already gone public with the view that WorldCom simply didn't give its folks the proper information, which would have allowed Andersen to offer investors an accurate picture of what was going on inside the company.

"There is going to be - there already is - enormous pressure on federal regulators and prosecutors to go after WorldCom if there is even a close call on criminal conduct. Remember, no one yet has been prosecuted at Enron for that mess. This is much, much bigger than that. I think the government would want to take one of these opportunities to send a signal that this sort of bookkeeping can't be tolerated," he said.