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House panel will call top WorldCom figures in probe of $3.8 billion scandal

Thu, 06/27/2002 - 8:00pm
William Glanz

Copyright 2002 Knight Ridder/Tribune Business News

Copyright 2002 The Washington Times

The Washington Times…06/28/2002

From LexisNexis

The House Financial Services Committee planned to issue subpoenas yesterday for three current and former WorldCom Inc. officials and an investment banker to appear at a July 8 hearing on the company's disclosure that it hid $3.8 billion in expenses to improve its balance sheet.

Another congressional committee called on WorldCom to turn over a detailed list of financial records within the next two weeks.

Subpoenas will be issued to former Chief Executive Officer Bernard Ebbers, current Chief Executive Officer John Sidgmore, former Chief Financial Officer Scott Sullivan and Salomon Smith Barney analyst Jack Grubman.

"The WorldCom news dramatically underscores the need for legislative and regulatory reform," Rep. Michael G. Oxley, Ohio Republican and chairman of the House Financial Services Committee, said in a statement. "Problems with accounting in telecommunications are, unfortunately, damaging a key growth sector of the economy that is already facing other, steep challenges."

The committee's hearing is intended to look further into accounting problems in the telecommunications sector and their effects on employees, retirees and investors.

Clinton, Miss.-based WorldCom isn't the only telecommunications company under scrutiny. The Securities and Exchange Commission also is investigating Qwest Communications.

Mr. Ebbers resigned in April, and Mr. Sullivan was fired Tuesday, when the company disclosed that it concealed expenses for fiscal 2001 and the first quarter of 2002.

Mr. Sidgmore replaced Mr. Ebbers in April.

It is not clear whether Mr. Sidgmore will appear at the hearing, and company officials did not return calls seeking comment.

A Salomon Smith Barney spokeswoman indicated Mr. Grubman will appear at the hearing.

"Of course we will fully cooperate with any inquiries, as is our practice," Mary Ellen Hillery said.

Mr. Grubman is being sued by investors who say he misled them about WorldCom stock. Mr. Grubman maintained "buy" ratings throughout WorldCom's long decline. On Monday, when shares of WorldCom fell below $1 for the first time, Mr. Grubman downgraded his WorldCom outlook from "neutral" to "underperforming."

The SEC's decision to charge WorldCom with fraud in federal court Wednesday could prevent current and former corporate officials from testifying at the July 8 hearing.

"Since there's an SEC investigation, they will probably take the Fifth. I can't imagine why they would say anything that could be used against them in a court of law," Davenport & Co. telecom analyst Drake Johnstone said. The Fifth Amendment gives them the right not to incriminate themselves.

In addition to the subpoenas, Rep. Billy Tauzin, Louisiana Republican and chairman of the House Energy and Commerce Committee, and Rep. James C. Greenwood, Pennsylvania Republican and chairman of the Commerce Committee's oversight and investigations subcommittee, wrote in a letter to Mr. Sidgmore that WorldCom has until July 11 to turn over a long list of financial records.

Mr. Tauzin and Mr. Greenwood said the committees want records including information on WorldCom's recent internal audit and all records relating to both Mr. Sullivan and David Myers, the WorldCom controller who stepped down Tuesday.

Also yesterday, President Bush said he was concerned about the potential economic impact from the WorldCom accounting scandal, and Treasury Secretary Paul H. O'Neill said corporate executives who falsely certify company finances should go to jail.

Goldman Sachs Group Inc. will advise WorldCom on the sale of its long-distance carriers.

The company has $30 billion in debt, and divesting itself of assets could help WorldCom raise money and may let it stave off bankruptcy.

Two WorldCom holdings it could sell include Embratel Participacoes SA, Brazil's biggest long-distance carrier, and Avantel SA, Mexico's second-biggest long-distance company. WorldCom owns 19 percent of Embratel, paying $2.3 billion for the company in August 1998, according to SEC documents.

WorldCom acquired its stake in Avantel when it bought MCI Communications Corp. in 1998; it owns 45 percent of the company.

But WorldCom may not have much luck trying to unload them now, Mr. Johnstone said.

"In the current market environment, with a lot of telecom companies under a heavy debt load, I think it would be very hard to sell assets. You would have to sell them at fire-sale prices," he said.

To help it cut costs, WorldCom intends to begin laying off 17,000 workers today.

Laurel Web-hosting firm Digex Inc., which is owned by WorldCom, said yesterday it laid off 86 workers, or 7 percent of its work force. The layoffs leave Digex with an estimated 1,200 employees.

A Digex spokeswoman said the layoffs have nothing to do with WorldCom's colossal fiscal problems and that the Laurel company was not forced by WorldCom to cut its work force. The job cuts stem from an effort to align expenses with revenue, A Digex spokeswoman said.

WorldCom owns 61 percent of Digex shares and has a 94 percent voting stake in the company. Digex closed at 24 cents a share, down 2 cents, on the Nasdaq Stock Market.

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