WorldCom Sought Influence Up to Announcement
Access to Politicians in Both
Parties,
Donations Mean Earnings Scandal
May Have Fallout on Hill
JIM VANDEHEI / Washington Post 27jun02
As recently as one week before it revealed it had lied about its earnings, WorldCom Inc. was still trying to influence politicians in town.
The company, which is lobbying policymakers for an edge in the lucrative high-speed Internet market, contributed $100,000 to last week's Republican fundraising gala featuring President Bush -- enough to be listed on the program as a vice chairman of the event.
WorldCom, which has also sought tax breaks and other assistance, has been a top contributor to its hometown congressman, Charles W. "Chip" Pickering Jr. (R-Miss.), and once gave $1 million to the University of Mississippi's Trent Lott Leadership Institute, named in honor of the Senate's top Republican.
In what is becoming an all-too-familiar story line, WorldCom, like so many other corporations under investigation for duping investors, enjoyed considerable access to politicians of both parties and gladly spread its money around to keep the doors of power wide open.
And, as in the Enron Corp. scandal, WorldCom's financial misbehavior is likely to have widespread ramifications on Capitol Hill, where leading politicians yesterday called for an investigation into what could be the largest accounting fraud in history and demanded legislation to crack down on corporate wrongdoers.
Still, WorldCom is not Enron, and its top officials did not place a flurry of phone calls to the Bush administration before going public with their bad news. There is no evidence that WorldCom ever sought government assistance to get out of its bind. And WorldCom's top executives did not have the close ties to top White House officials that Enron's former chairman Kenneth L. Lay enjoyed.
Nevertheless, as tempers flared in Congress, House Energy and Commerce Committee Chairman W.J. "Billy" Tauzin (R-La.) said in a statement he will hold public hearings on a scandal he called "eerily similar to the accounting hocus-pocus that occurred at Enron." Senate Majority Leader Thomas A. Daschle (D-S.D.) said he would intensify his push for legislation that would reform accounting standards, a principle both parties support, though they disagree on the details. "There must be aggressive enforcement of the law," he said.
And lawmakers are mulling ways to help the thousands of people WorldCom is expected to lay off and to jump-start the economy. WorldCom's decline is costing investors, politicians among them, millions of dollars in losses.
Even lawmakers on the committees overseeing WorldCom didn't see this coming. Senate Commerce Committee members John Breaux (D-La.) and John Edwards (D-N.C.) both hold as much as $15,000 in WorldCom stock, according to the latest financial disclosure records. So do Reps. John D. Dingell (D-Mich.) and Lois Capps (D-Calif.), both of whom sit on the House Energy and Commerce Committee. Several lawmakers, including Sen. Sam Brownback (R-Kan.), got out before the crash.
The WorldCom scandal is already having political implications.
Since the beginning of 2000, WorldCom has contributed more than $1 million to candidates, about half to Republicans, half to Democrats. It has paid much more for a stable of lobbyists who promote the company's views on Capitol Hill and at the White House -- including its opposition to a bill that would deregulate the Baby Bells, according to the nonpartisan Center for Responsive Politics.
The donations could complicate the Justice Department's probe of WorldCom's misstatement of earnings. Shortly before becoming attorney general, John D. Ashcroft received $10,000 from the company for his Senate campaign. Ashcroft recused himself from the Enron investigation because of similar contributions from the energy giant. The Justice Department said yesterday a decision had not been made whether Ashcroft would recuse himself in the WorldCom case.
Democrats, who have adopted a new strategy of accusing Republicans of aiding and abetting corporate malfeasance, yesterday tried to blame the GOP for the WorldCom debacle.
House Minority Leader Richard A. Gephardt (D-Mo.) said, "Now we're seeing the results of" the GOP's years-long campaign to "unwind regulations" and limit the scrutiny of corporations.
Rep. Ronnie Shows (D-Miss.), who is running against Pickering for reelection, said he will make the Mississippi Republicans' close relationship with WorldCom an issue in their race. Pickering has received $45,000 from WorldCom and its employees during the past two election cycles. "I do think there will be some political fallout for this," Shows said. "I don't even think I'll have to make it an issue. The people will because so many have their life savings wrapped up in companies" such as WorldCom.
Republicans said they aren't worried about being punished at the polls for taking money from so many scandal-tarred corporations, particularly because Democrats received money from the same firms. Gephardt has received $10,000 from WorldCom since the beginning of 2000 -- tops among Democrats.
But Republicans are growing increasingly concerned that the flurry of corporate scandals will depress stock prices for months to come, perhaps right through the elections, which could have devastating consequences for the party in power.
A number of pollsters have found strong evidence that voters are almost as concerned about the economy as they are about defending the homeland and winning the war on terrorism. And history has shown that voters often punish incumbents when the economy is tanking.
"If [contributions] is all the Democrats have got, we're fine. But if the economy continues to hurt, we're dead," said Rep. Jack Kingston (R-Ga.). "If it's October or November, and middle-aged voters are looking at their IRAs and 401(k)s and savings plan and see bad things, it will hurt us" at the polls. Added a top GOP lobbyist: "The one obvious leak in the boat is the economy. That's what we are terrified about."
Republicans quickly tried to distance themselves from the scandal, as Bush called for an SEC investigation into the matter. Bush renewed his call for new measures to hold corporations accountable and promised to crack down on the corruption. But the president does not plan to call on his party to return the $100,000 check WorldCom wrote for the $30 million fundraiser.
Researchers Madonna Lebling and Lucy Shackelford contributed to this report.
Accounting Spot-Check Unearthed A Scandal in WorldCom's Books
JARED SANDBERG, DEBORAH SOLOMON and REBECCA BLUMENSTEIN / Wall Street Journal 27jun02
NEW YORK -- It all started a few weeks ago with a check of the books by Cynthia Cooper, an internal auditor for WorldCom Inc. The telecom giant's newly installed chief executive had asked for a financial review, and her job was to spot-check records of capital expenditures.
According to people familiar with the matter, Ms. Cooper soon found something that caught her eye. In quarter after quarter, starting in 2001, WorldCom's chief financial officer, Scott Sullivan, had been using an unorthodox technique to account for one of the long-distance company's biggest expenses: charges paid to local telephone networks to complete calls.
Instead of marking them as operating expenses, he moved a significant portion into the category of capital expenditures. The maneuver was worth hundreds of millions of dollars to WorldCom's bottom line, effectively turning a loss for all of 2001 and the first quarter of 2002 into a profit.
Ms. Cooper contacted Max Bobbitt, the head of WorldCom's auditing committee, setting in motion a chain of events that resulted in Mr. Sullivan's firing late Tuesday. The company said that it had turned up $3.8 billion of expenses that were improperly booked and will now be restated.
Even in a season when one giant company after another has been laid low by accounting scandals, WorldCom's disclosure stands out. The coming financial restatement will almost certainly be one of the largest in corporate history -- more than six times that of Enron Corp. More important, it offers the clearest warning sign yet of the ease with which telecom companies, operating on the frontiers of accounting amidst a huge speculative excess, could manipulate their books to inflate their earnings.
President Bush himself called for a full investigation into the spiraling scandal, calling the accounting irregularities "outrageous."
The loss of trust by investors, customers and financial institutions has been profound. Shareholders have lost more than $2 trillion, and more than 500,000 telecom workers have lost their jobs.
"There was so much pressure on companies to continue to grow and support those share prices," says Charles H. Noski, who is a vice chairman of AT&T Corp. and its former chief financial officer. AT&T hasn't come under fire for its accounting, although its stock has tumbled amid the general industry malaise. "People are going to try to figure out how do you know enough to trust what corporations are telling investors. There is an overhang on the market now."
Stock markets around the world reacted swiftly Wednesday to a growing sense of unease that, like WorldCom itself, much of the explosive, double-digit growth of the stock market boom may have been a mirage. The Dow Jones Industrial Average fell 6.7%. Qwest Communications International Inc., a big Denver telecom company under investigation by the Securities and Exchange Commission for alleged accounting irregularities, saw its stock fall nearly 60% Wednesday, to $1.79 a share. The company has denied wrongdoing.
For WorldCom, the development could well spell the end of the nation's No. 2 long-distance company, which sells to consumers under the MCI brand name. WorldCom's banks said they wouldn't immediately act on debt covenants that could allow them to call their loans. But people familiar with the matter said a bankruptcy-court filing remains an option. Nasdaq halted trading in WorldCom's stock all day Wednesday. It currently stands at 83 cents, far from its high of $64.50 in 1999.
The SEC Wednesday filed civil fraud charges against WorldCom, saying the company "falsely portrayed itself as a profitable business." The U.S. Justice Department has launched a probe that could result in criminal charges, according to people familiar with the situation. These people said WorldCom and Mr. Sullivan could potentially face charges including securities fraud, bank fraud and mail fraud.
Andrew J. Graham, Mr. Sullivan's attorney, said he wouldn't comment. But people familiar with Mr. Sullivan say he firmly believes he didn't do anything wrong.
Brad Burns, a spokesman for WorldCom, declined to comment on the SEC charges but said the company is "very focused on serving our customers, working with our bank lenders and ensuring our employees that we'll get through these difficult times."
WorldCom had already been reeling under a heavy debt load and declining revenues. In April, the board ousted the long-time chief executive, Bernard J. Ebbers, in part because of a controversy surrounding a $408 million loan WorldCom extended to him to cover margin calls on loans secured by company stock. Since then, its new chief executive, John Sidgmore, has been trying to hold off a financial crisis and restore investor confidence.
Internal Investigation
At this point, it's unclear whether anyone else at WorldCom knew what Mr. Sullivan was doing. The company has launched an internal investigation and is trying to determine who knew what and when. WorldCom has hired William McLucas, an SEC former enforcement chief who assisted in an internal probe of Enron's accounting, to help in the WorldCom investigation. One of the people under scrutiny is Mr. Ebbers, a close confidant of Mr. Sullivan. The two men shared an adjoining office at their Clinton, Miss., headquarters.
Mr. Ebbers couldn't be reached for comment, and his attorney didn't have any immediate comment.
What is clear is that over the past five quarters as the market softened, Mr. Sullivan undertook an aggressive approach to the company's way of accounting for one of its biggest expenses.
This happened just as WorldCom's acquisition machine was grinding to a halt. Mr. Ebbers had cobbled together his empire from modest roots as a long-distance reseller and motel owner in Mississippi. Mr. Sullivan became a trusted ally after Mr. Ebbers acquired his company, Advanced Telecommunications Corp., in 1992. The two executives worked in tandem as WorldCom, then known as LDDS, acquired dozens of companies, seemingly springing out of nowhere to snag MCI Communications Corp. in 1998. WorldCom's double-digit growth rates helped it win a takeover battle for MCI, trumping a bid by GTE Corp.
But by early 2001, the growth had started to slow. The booming telecommunications market was beginning to falter from a glut of capacity after a frenzied investment in fiber-optic networks. Suddenly, it found it had too much capacity. It had signed multibillion-dollar contracts with third-party telecommunications firms such as Baby Bells to insure it would be able to complete calls for its customers. An appraisal commissioned by WorldCom showed that roughly 15% of these costs weren't producing revenue, according to a WorldCom insider.
Mr. Sullivan made an important decision, says a person familiar with his thinking. Instead of reducing profits by those costs whenever WorldCom issued results in 2001, Mr. Sullivan would spread those costs to a future time when the anticipated revenue might arrive.
Creative Accounting
By booking certain costs as a capital expense, WorldCom was able to boost its bottom line. A look at how the company conducted such accounting in 2001.
WorldCom's Accounting Expense 1 Capital Expense Accounting $3.1B in 'line costs,' including telecom access and transport charges, as capital expenditure. 2 Amorization Plans to amortize $3.1B over a period of time, possibly as much as 10 years. 3 Higher Net Income Reports net income of $1.38B for 2001. Generally accepted accounting principles 1 Operating Expense The $3.1B 'line-cost' expense is booked as an operating expense. 2 Cost of Business The entire $3.1B would have been counted as a cost of business for that quarter. 3 Lower Net Income Net Income for 2001 would have been a loss, amount to be determined.
He was in a murky area. One of accounting's most basic rules is that capital costs have to be connected to long-term investments, not ongoing activities.
According to WorldCom, the company transferred more than $3.8 billion in "line cost" expenses to its capital accounts. WorldCom hasn't provided more detail about what those costs included, or what portions of their line costs were improperly capitalized. But line costs, according to the company's most recent annual report filed with the SEC, consist principally of access charges and transport charges. WorldCom's "line costs" totaled $8.12 billion in 2001, according to the company's income statement.
While companies can capitalize some costs like installation and labor, the magnitude of WorldCom's capitalization appears to be far beyond its industry peers.
A person familiar with the matter says Mr. Sullivan didn't appear to have realized any personal financial gain from his strategy. At WorldCom's peak in 1999, his shares were worth more than $150 million, and he currently owns about 3.2 million shares. But he hasn't sold any WorldCom stock in nearly two years, according to Thomson Financial/Lancer Analytics, a data service.
Mr. Sullivan never attempted to cover up the aggressive accounting method, the person familiar with the matter says. Details are spelled out clearly enough in internal company documents, this person says, that "other people had to see it unless they were blind." Still, Arthur Andersen, WorldCom's auditor at the time, said it wasn't consulted or notified about the capitalized expenses.
The CFO capitalized costs in amounts ranging from $540 million to $797 million each quarter. When April results came out this year, though, he began to doubt whether some of his revenue projections related to the line costs would be realized. In May, according to people familiar with his thinking, Mr. Sullivan was contemplating taking a charge. On May 23, the board was notified that a charge would include the line costs, but didn't signal how much it would be, a person familiar with the matter said.
Then in early June, Ms. Cooper called Mr. Bobbitt, chairman of the board's audit committee, notifying him that she had found suspect entries in the books.
Mr. Bobbitt had been under fire for months for his controversial role in extending Mr. Ebbers the $408 million personal loan from WorldCom. He quickly notified the newly hired accountants, KPMG LLP, of the discrepancy. The firm set to work.
Two weeks ago, KPMG came to WorldCom's offices in Washington and told the committee there was a problem. The investigation continued through the week and last Thursday the audit committee met at KPMG's Washington offices to ask Mr. Sullivan and company controller David Myers to justify their accounting treatment. Mr. Sullivan, according to people familiar with the situation, gave an impassioned defense of his decision, saying that since WorldCom wasn't receiving revenue, he could defer the costs of leasing the lines until they produced revenue. But KPMG officials weren't satisfied, citing accounting rules that clearly dictate that the costs of operating leases can't be delayed. The KPMG partner in charge of the WorldCom account, told Mr. Sullivan that he couldn't "get past the theory" but gave him the weekend to produce a so-called white paper that would set out his justification, a person close to the matter said.
Accounting experts say the rules are clear on what costs can be capitalized and what has to be expensed. "If the amounts being paid out are going to have created a long-lasting asset, then the costs depreciate and can be amortized over several years," says Carr Conway, a former SEC official and senior forensic accountant with Dickerson Financial Group in Denver. Unless the asset is going to generate value in future years, the cost for it can't be capitalized, he adds.
Weekend Huddle
Mr. Sullivan spent the weekend huddled with his team in Clinton, Miss., reviewing documents and constructing the white paper. But it wasn't going well. "He was becoming increasingly pessimistic" that he would have enough time to satisfy KPMG, said one person familiar with the matter.
At a board meeting Monday night at WorldCom's offices, Mr. Sullivan again made his case. A national practice specialist at KPMG said, however, that the issue was "an open-and-shut case," said one person who attended. "The KPMG people left no door open." After asking Mr. Sullivan to leave the room, board members concluded at the meeting that they would have to restate earnings. The meeting ended without a vote, which was postponed until Tuesday when Mr. Sullivan was fired and Mr. Myers was asked to resign.
Through it all, Mr. Sullivan was "very calm and articulate," says one person who attended the meetings. "He handled himself very well, though you could tell he was pained." As far as the board members, added another person, "most people were absolutely flabbergasted."
In a speech Wednesday, Mr. Sidgmore tried to make the most out of a bad situation. "We want to make clear that WorldCom reported itself in this matter and moved swiftly to do so," he said. "We turned ourselves in, in other words."
SEC Charges WorldCom With Fraud in Civil Suit
MICHAEL SCHROEDER / Wall Street Journal 27jun02
WASHINGTON -- The Securities and Exchange Commission, acting quickly after WorldCom Inc. disclosed it had used improper accounting, filed a civil suit alleging that the struggling telecommunications company engaged in a fraudulent scheme to pad earnings by $3.8 billion.
In a complaint filed Wednesday night in federal court in Manhattan, the SEC alleges that WorldCom senior management used improper accounting in 2001 and through the first quarter of 2002 to "manipulate its earnings to keep them in line with Wall Street's expectations, and to support WorldCom's stock price." The alleged scheme inflated 2001 earnings by $3 billion and first-quarter 2002 earnings by $797 million, the SEC said.
Reacting to a string of revelations regarding accounting irregularities by U.S. companies, SEC Chairman Harvey Pitt also is ordering top executives at all the nation's largest publicly traded companies to vouch for the accuracy of their recent financial statements.
WorldCom is one of the world's largest telecom companies, with 20 million consumer customers, thousands of corporate clients and 80,000 employees.
In an unusual move, the SEC specifically ordered WorldCom and its officers and directors from destroying, altering or removing any documents related to the alleged scheme. It also is barring any severance or bonus payments to officers, directors and employees. The agency also is ordering appointment of a "corporate monitor" to ensure WorldCom complies with the ban on document destruction and sweetheart severance packages.
While the SEC didn't name specific WorldCom executives in its complaint, the agency said company officials knew or should have known the financial statements were false. The agency said its investigation is ongoing.
Beginning in early 2001, WorldCom's senior management transferred line costs -- fees the company paid to telecom-network providers for use of their transmission networks -- into capital accounts to keep earnings in line with analysts' estimates, the SEC said.
These transfers, which violated accounting standards, should have been subtracted as expenses from net income, the complaint said. In 2001, WorldCom reported line costs of $14.7 billion and pretax earnings of $2.4 billion. The SEC alleges the line costs actually were $17.8 billion, which would have produced a loss of $662 million for the year. The company also reported pretax income of $240 million for the first quarter of this year instead of the $557 million loss it would have incurred using standard accounting.
On Tuesday, WorldCom's audit committee said it had uncovered the $3.8 billion accounting irregularities, and the Clinton, Miss., company fired its chief financial officer and accepted the resignation of its controller.
The SEC has been investigating the company's accounting practices since February. In responding to its concerns, the audit panel found irregularities and referred the matter to its newly hired auditor KPMG LLP.
Mr. Pitt said the SEC ordered WorldCom to file under oath, before the market opens Monday, a detailed report of all the specifics of its restatements, including the relevant circumstances that led to them. The report will be made public.
Meanwhile, at a news conference before giving a speech at the Economic Club of New York, Mr. Pitt said the agency plans to order the chief executives and chief financial officers of the 1,000 largest U.S. companies to certify the accuracy of disclosures and financial statements. The executives will have to certify the results from the last annual report. He said this is necessary "to ensure personal accountability by those at the top of companies."
In addition, the SEC will speed the process to create a public auditor oversight board, consulting with government officials and corporate representatives and investors to get suggestions for who might serve on the board. Originally, the agency was aiming for year's end. Mr. Pitt didn't give a timetable, but said the issue is "too important and too critical to wait."
WorldCom Facing Charges of Fraud; Bush Vows Inquiry
SIMON ROMERO / NY Times 27jun02
The Securities and Exchange Commission filed fraud charges against WorldCom yesterday and President Bush vowed to "hold people accountable" for the bookkeeping scandal at the company, the nation's second-largest long-distance provider and a major carrier of Internet traffic.
As the stock market shuddered yesterday in response to Tuesday night's disclosure that WorldCom had falsely reported profits for the last five quarters, the Nasdaq exchange suspended trading of shares in WorldCom and the tracking stock of its MCI unit. And as the value of WorldCom's corporate bonds plummeted, it became clear that the debt-ridden company would now face tougher negotiations with its bank lenders, making a bankruptcy filing more likely.
Meanwhile, the Justice Department and a House committee opened investigations of the company's accounting methods, and the S.E.C. said it would expand its own investigation, which it began in March.
As the company's work force braced for a wave of pink slips — WorldCom plans to cut 17,000 of its 85,000 employees beginning tomorrow — some consumer and corporate customers of WorldCom's MCI long-distance unit were already looking for alternative carriers.
Few telecommunications companies looked like havens yesterday, though, as WorldCom's bad news helped batter stocks of other carriers in this country and overseas, companies that have already been struggling to emerge from the communications industry's long recession.
"The industry is reeling from this black mark," Jose Collazo, chief executive of Infonet, a WorldCom competitor, said in an interview.
It was as if months of accounting scandals, which have already engulfed Enron, Global Crossing and Adelphia Communications, among others, as well as the auditing firm Arthur Andersen, had finally hit critical mass with the disclosure late Tuesday that WorldCom had masked losses by overstating its financial results by $3.8 billion — one of the largest cases of false corporate bookkeeping yet.
President Bush, speaking yesterday on the opening day of an eight-nation economic meeting in Kananaskis, Alberta, called the WorldCom revelation "outrageous" and vowed, "We will fully investigate and hold people accountable for misleading not only shareholders but employees as well."
In an apparent show of the administration's resolve, a few hours later the chairman of the S.E.C., Harvey L. Pitt, told reporters in Manhattan that the commission had taken the unusual step of filing civil fraud charges against WorldCom. He said part of the aim was to prevent the destruction of documents by WorldCom while the S.E.C. continued its investigation.
In its court filing, the S.E.C. said WorldCom violated antifraud and reporting provisions of federal securities laws by creating an accounting scheme intended to manipulate earnings to meet Wall Street's expectations and to support the company's stock price. Under this scheme, the S.E.C. said, WorldCom improperly booked so-called line costs, or the fees WorldCom paid to other communications companies to use their networks, as capital investments, which had the effect of masking losses.
The accounting strategy, which the S.E.C. said was put in place in early 2001 as the slowing economy resulted in a decline in WorldCom's profits, may have been blessed by executives other than Scott D. Sullivan, the chief financial officer who was fired this week, and David Myers, the controller, who resigned, according to the commission's complaint.
"In a scheme directed and approved by its senior management, WorldCom disguised its true operating performance by using undisclosed and improper accounting that materially overstated its income," the S.E.C. said in its complaint.
It remains to be seen whether the Justice Department will investigate WorldCom with the same intensity it has shown in its investigation of Enron, for which it set up a special task force. Bryan Sierra, a spokesman for the Justice Department, declined to comment yesterday, but people close to the company said that a Justice inquiry was under way. The House Energy and Commerce Committee, meanwhile, which has looked into business practices at Enron, Global Crossing and ImClone, will now turn its attention to WorldCom, according to its chairman, Billy Tauzin, Republican of Louisiana. "This was not a simple bookkeeping mistake," Mr. Tauzin said in a statement released yesterday. "Clearly, it was an orchestrated effort to mislead investors and regulators, and I am determined to get to the bottom of it."
John W. Sidgmore, WorldCom's chief executive, who disclosed the WorldCom bookkeeping problem on Tuesday night and announced that Mr. Sullivan had been fired, was not available for comment yesterday. Instead, he put a statement on the company's Web site, saying in part, "This has been a very tough week for WorldCom, there's no doubt about it."
Mr. Sidgmore spent much of the day yesterday in discussions with WorldCom's large customers and some of its employees, but it could not be determined whether he had held further talks with the company's bankers, with whom he had met in New York on Tuesday.
WorldCom's future hinges on negotiating additional loans with its banks, led by Bank of America and including J. P. Morgan Chase and Citigroup. The company had been planning to tap a multibillion-dollar credit line this week. But now that does not seem feasible, because the accounting disclosures indicate that the company was in violation of its financing terms throughout 2001 and the beginning of this year.
Without additional loans, analysts said, WorldCom has about $2.5 billion of available cash, which the company would probably consume within three months.
"We believe WorldCom's lead banks may refuse to honor additional requests to draw down credit lines and that negotiations over new, securitized credit lines are likely to falter," said Dan Reingold, an analyst at Credit Suisse First Boston. "This, of course, means bankruptcy is now a distinct and near-term possibility."
Mr. Sidgmore took over as chief executive in late April after WorldCom's longtime leader, Bernard J. Ebbers, resigned following the company's disclosure that Mr. Ebbers owed WorldCom more than $366 million for loans and loan guarantees the company had granted him. In the wake of the new disclosures, Mr. Sidgmore is now faced with the task of drastically scaling back WorldCom's work force and its expectations.
He is making his base in Washington, the city where MCI had its headquarters before being acquired by WorldCom in 1998, as he maintains distance from WorldCom's official headquarters in Clinton, Miss.
The first of the 17,000 job cuts are scheduled to begin tomorrow at several locations around the world. In addition to Clinton and Washington, WorldCom's large offices in the United States are in Dallas; Ashburn, Va.; Tulsa, Okla.; and Alpharetta, Ga. The dismissals are expected to be distributed fairly evenly among work categories and geographic locations.
WorldCom's disclosure of its accounting problem weighed on the entire telecommunications industry yesterday. Although trading in the company's shares was officially suspended by Nasdaq, in off-exchange electronic trading on Instinet and elsewhere, the stock fell to as low as 9 cents, down from 83 cents at Tuesday's close. The North American Telecom Index, which includes WorldCom and other large service providers, fell more than 10 percent yesterday.
Shares in Qwest Communications, another large company whose accounting practices are under investigation by the S.E.C., plunged $2.40, to $1.79. Companies that sell equipment to WorldCom and its competitors also fell, with the shares of Lucent Technologies down 39 cents, to close at $1.58, and Nortel Networks down 14 cents, closing at $1.47.
Even shares in WorldCom competitors like AT&T and Sprint, which stand to gain from customer defections, fell yesterday. AT&T's stock reached a 10-year low, falling 33 cents, to end the day at $9.62.
"I am deeply concerned by the WorldCom developments, and the impact it could have on consumers and other providers in the industry," Michael K. Powell, chairman of the Federal Communications Commission, said in a statement yesterday. "We are closely monitoring the situation and are doing everything possible to ensure and protect both the stability of the telecommunications network and the quality of service to consumers."
Mr. Powell said he would travel to New York tomorrow to meet with telephone industry officials, analysts and debt-rating agencies to discuss the crisis in the telecommunications industry.
Several consumer groups called yesterday for greater regulation of the industry, fearful that a bankruptcy filing by WorldCom would limit the competitive choices that have steadily lowered the cost of long distance in recent years.
The Telecommunications Research and Action Center, a nonprofit group in Washington, asked the F.C.C. to reinstate full regulatory oversight of the long-distance industry to assure that consumers did not end up paying more for WorldCom's accounting scandal. Another group, Consumers Union, urged Congress to approve a corporate-accounting reform bill sponsored by Senator Paul Sarbanes, Democrat of Maryland and chairman of the Senate Banking Committee.
Whatever regulatory remedies may be applied, analysts said, the telecommunications industry is likely to be left reeling, as WorldCom's collapse works its way through a system that has already had $2 trillion of shareholder value in its member companies erased in the last two years.
Scott Cleland, chief executive of the Precursor Group, a consulting firm based in Washington, warned, "Investors are in denial, just like they were with WorldCom, on how much worse it can get."
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