Word: worldcom
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Creditors and bondholders are also taking a hit as WorldCom struggles with its $32 billion of debt. Dozens of mutual funds, banks and financial-services firms are exposed, including Bank of America, Citigroup, Deutsche Bank and GE. Citigroup holds an estimated $335 million of WorldCom bonds and could face lawsuits as a result of its cozy ties to the telecom. In May 2001 Citigroup co-underwrote, along with J.P. Morgan Chase, an $11.9 billion WorldCom bond issue. Buyers of those bonds may move to sue the banks, claiming they failed to properly inspect WorldCom's books...
...developments at WorldCom suggest that accounting games may be more pervasive than we had thought. With Enron, the tricks involved complicated partnerships, off-the-books debt and exotic hedging techniques that made the firm's financial results difficult to assess even for pros. It seemed unlikely that anything so complex could be widespread. But with WorldCom, as House Financial Services Committee chairman Mike Oxley, an Ohio Republican, says, it looks like "good old-fashioned fraud." Oxley's committee subpoenaed Sidgmore, Sullivan, Ebbers and Jack Grubman, telecom analyst for the Salomon Smith Barney unit of Citigroup, to a July 8 hearing...
Grubman gives the episode a surreal quality. A star telecom analyst, he was paid $20 million a year for covering the stocks of companies like WorldCom that send billions of dollars in investment-banking business to Salomon. He was so tied in at WorldCom that for a time he even advised Ebbers on takeover strategy. Grubman typically avoids the press. Last week a camera crew from financial channel CNBC tracked him down near his New York City residence and tried to interview him on the fly--evoking images of paparazzi stalking a movie star. "Nobody saw this coming," Grubman said...
...exactly, did WorldCom cook its books? By treating routine expenses as capital investments. Normal operating expenses must be subtracted from a company's revenues in the year they occur. But capital expenditures can be subtracted from revenues a little at a time over many years. In the short term, that lets money flow to the bottom line and boosts financial results. It's the oldest trick in the book, and mind-numbingly simple. Dennis Beresford teaches Accounting 101 at the University of Georgia and says what happened at WorldCom is "plain vanilla" trickery that he covers on the second...
...WorldCom's auditor--Arthur Andersen, the firm convicted of obstructing justice in the Enron case--somehow missed it. Andersen, which was paid $4.4 million a year to certify that WorldCom's books were honest, says WorldCom CFO Sullivan never handed over the material Andersen requested. "That's like a police officer saying the criminal didn't turn himself in," scoffs analyst Patrick Comack of the brokerage Guzman...