SEC Chief Scorches WorldCom

The chairman of the Securities and Exchange Commission derided as "wholly inadequate and incomplete" a sworn statement by WorldCom Inc. explaining how it came to inflate earnings by nearly $4 billion.

The criticism from Harvey Pitt — unusually blunt for an SEC chairman — came Monday as WorldCom, already facing civil fraud charges and believed to be on the brink of bankruptcy, told the agency it is investigating possible new accounting problems with its reserve accounts.

The statement, which the SEC had demanded from the embattled telecommunications company, "demonstrates a lack of commitment to full disclosure to investors and less than full cooperation with the SEC," Pitt said.

The Nasdaq stock market said it would remove shares of WorldCom from trading on Friday. Investors pummeled WorldCom stock, which plunged 90 percent to 6 cents a share in Monday's early trading after a three-day halt that followed its disclosure of accounting irregularities.

By noon Monday, WorldCom — which once topped $64 a share — had become the most heavily traded stock in a single day in U.S. history as the markets tumbled again.

During the day, 1.47 billion shares of WorldCom traded, at prices as high as 15 cents and as low as 5 1/2 cents.

The SEC is continuing its civil investigation of the company, and Pitt said, "Criminal charges may be too good for the people who brought about this mess."

Referring to WorldCom's sworn statement, Pitt said Sunday, "If there's even an iota of false statement in there, people will pay heavily."

President Bush, who has denounced irresponsible corporate behavior nearly every day since the WorldCom affair came to light, said in a speech in Cleveland: "By far the vast majority ... of corporate America are aboveboard and doing their jobs just the way you'd expect them to do. ... It's also important to know we're going after those who aren't and hold them accountable."

A WorldCom accounting manager who has sued the company for firing him said employees in his division in Richardson, Texas, received an e-mail in December 2000 directing them to misclassify expenses.

The employee, Kim Emigh, said in a telephone interview that he complained to a superior that "this is just fraud."

"I can't understand how or why anybody would do this," Emigh said.

WorldCom's woes got deeper and wider Monday:

The company, which already has laid off thousands of employees, said it had defaulted on $4.25 billion in bank loans. The Standard & Poor's credit-rating agency accordingly lowered its ratings on WorldCom's bonds, noting that the default allows the banks to demand immediate repayment of the loans.

Shareholders sued WorldCom in federal court in Mississippi, where it is based. The class-action lawsuit said shareholders paid artificially inflated prices for the stock because the company had failed to disclose significant adverse information in its financial reports.

The General Services Administration, which oversees federal contracts, said it was reviewing all of WorldCom's government contracts.

In its statement to the SEC, WorldCom said its audit committee was reviewing financial records for 1999 through 2001 because questions were raised about significant changes in reserves against potential financial losses.

"No conclusion has been reached regarding these entries," said the statement. It gave a detailed account of the circumstances surrounding the discovery of the questionable accounting disclosed last week, accounting that misrepresented $3.8 billion in expenses to make earnings appear greater.

Companies use reserve accounts to set aside revenue to be used against predictable future costs, such as unpaid bills or pending lawsuits. Companies have much latitude to reduce or increase those reserves, but they are not supposed to do it simply to make revenues look better.

One WorldCom reserve account that appeared to shrink substantially during 1999 and 2000 was the one it used to cover liabilities it would assume from the many companies it was buying up. WorldCom added $2.81 billion to that accounting line from 1998 to 2000, its annual filings with the SEC show.

It did not appear from the filings that the company had paid off most of the liabilities. If money had been moved from the reserve account to the company's revenue line, it would make WorldCom's business look much healthier but would probably be a violation of accounting rules, according to Wayne Shaw, an accounting professor at Southern Methodist University.

"Today's filing is consistent with our pledge to be forthright and open and to cooperate fully with both internal and external investigations," WorldCom's president and chief executive officer, John Sidgmore, said in a statement.

WorldCom, which owns MCI, is second only to AT&T in the long-distance market.