Scrambling to respond to the mammoth accounting scandal unfolding
at WorldCom Inc., a congressional committee demanded to hear
testimony from top current and former executives of the
telecommunications giant, as well as a stock analyst who had long
served as the company’s most vocal booster.
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The
House Financial Services Committee’s action came as President Bush and
other administration officials fretted publicly Thursday that the
recent spate of corporate accounting scandals could pose a threat
to the nation’s economy.
“I’m concerned about the
economic impact of the fact that there are some corporate lead
ers who haven’t upheld their responsibility,” Bush told reporters
while attending a global economic summit in Canada.
Washington’s legislative and regulatory machinery has been
clanking into gear since WorldCom stunned Wall Street by
disclosing that it had used improper accounting techniques to grossly
overstate profits and sweep $3.8 billion in expenses under the rug.
Shortly after the president called for a full
investigation of the episode, the Securities and Exchange Commission
filed civil securities-fraud accusations Wednesday against WorldCom,
the financially beleaguered parent of long-distance provider
MCI.
The SEC, which was criticized for responding
too slowly to the fiasco involving Enron Corp. and its accountant,
Arthur Andersen, says it is determined to act aggressively to ensure
that the public’s faith in U.S. financial markets doesn’t erode further.
“We’re in a period where investor
confidence has been shaken,” SEC Chairman Harvey L. Pitt said
Thursday. In the case of WorldCom’s disclosure, Pitt added: “We
learned about some of the fraudulent activities and were in court
within hours. That is unprecedented for the SEC.”
Pitt made his comments as institutional investors — many of
which had already seen their portfolios socked by the financial
meltdown that followed discovery of Enron’s phony accounting — began to tote up their expected WorldCom losses.
During its late-1990s heyday, the Mississippi company sold
tens of billions of dollars in bonds to pension plans, insurance companies, bond mutual funds and others as it pursued an
aggressive growth-through- acquisition strategy.
Now, in the face of widespread speculation that the company will file
for bankruptcy, WorldCom’s stock is valued at less than a dollar a share, and
its bonds are trading at pennies on the dollar.
General Electric Co. announced Thursday that it will suffer a $110
million loss on its WorldCom bond holdings. The California Public
Employees Retirement System, also known as Calpers, said its loss
from WorldCom investments would likely total $565 million. And
New York’s state retirement system estimated that it lost $300
million investing in WorldCom stocks and bonds.
“The
WorldCom news dramatically underscores the need for legislative and
regulatory reform,” said Rep. Michael G. Oxley, the Ohio Republican
who chairs the House Financial Services Committee.
Oxley’s committee, which has jurisdiction over accounting-related issues, ordered WorldCom’s co-founder and former
chief executive, Bernard J. Ebbers, to testify before the committee on
July 8.
The panel also subpoenaed John W. Sidgmore,
who assumed CEO chores after Ebbers was ousted in April because of
questionable loans that he had accepted from the company.
Also called to appear is Scott D. Sullivan, who had long enjoyed a reputation as a financial whiz kid but was fired from his job
as WorldCom’s chief financial officer this week after directors
learned of the accounting tricks the company had been employing for
more than a year.
What is unusual about the up
coming WorldCom hearings is the committee’s decision to subpoena
Jack Grubman, a Salomon Smith Barney investment analyst who served
as one of WorldCom’s most vocal Wall Street cheerleaders.
Grubman, whose glowing recommendations helped drive
WorldCom shares to a peak of nearly $62 in 1999, maintained a positive
stance on WorldCom and other telecom players well after the once-
highflying industry’s fortunes began plunging two years ago.
Critics have said that Grubman’s enthusiastic “buy”
recommendations were designed to help Salomon Smith Barney win
investment-banking business from telecom companies, sometimes at the
expense of investors taking his advice.
Solomon
stood by Grubman Thursday, saying he “continues to be an important
analyst at our firm.”
James P. Miller is a
reporter for the baiduhai.
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