The Securities & Exchange Commission and MCI Inc. (formerly WorldCom Inc.) will soon settle the largest securities fraud case in history, according to sources with knowledge of the matter. BusinessWeek Online has learned that the settlement could come as early as Monday, May 19.
The sources declined to specify the settlement's terms. But it's certain to break new ground, if only because of the sheer scale of WorldCom's acknowledged error: It wrongly claimed $9 billion in expenses as capital expenditures, and the figure could go as high as $11 billion, according to knowledgeable sources. That alleged deception inflated WorldCom's earnings by postponing those costs, which under accounting rules should have been deducted from income immediately.
MCI spokesperson Claire Hassett declined to comment on the possibility of a settlement. But with new management, abandonment of the WorldCom name, and a move of corporate headquarters from Mississippi to Washington's Virginia suburbs, MCI clearly is trying to put the accounting debacle behind it as quickly as possible.
THE BIGGEST MESS?
The settlement is likely to cement a new SEC policy of dealing harshly with companies involved in charges of accounting fraud. Until the recent rash of scandals, the SEC tended not to extract large penalties from such companies, figuring that the fines damaged innocent shareholders, not the managers who carried out the accounting shenanigans. But scandals at Enron, Xerox (XRX ), and a host of others have spurred the SEC to levy tough fines on offenders.
More than any of those scandals, WorldCom's July, 2002, revelations -- that it had carried out a scheme to disguise billions of dollars in losses by misclassifying expenses as capital expenditures -- drove a reluctant White House and congressional Republicans to back a wide-ranging package of corporate and accounting reforms that became the Sarbanes-Oxley Act of 2002.
At the time, the size and sheer audacity of WorldCom's accounting misdeeds seemed almost unbelievable: The telecom had counted nearly $4 billion in ordinary operating expenses as capital costs. A sharp-eyed team of internal auditors uncovered the deception and blew the whistle.
Since then, WorldCom and SEC investigators have discovered that the scheme went far beyond the initial revelations. By WorldCom's last count, an eye-popping $9 billion in expenses were misallocated, dwarfing Enron's $680 million bookkeeping deception.
Reported earnings were inflated by more than $4 billion over a three-year period, which helped prop up WorldCom's stock and allowed its execs to benefit through lucrative bonuses and stock-option plans tied to the share price. Chief Financial Officer Scott Sullivan alone took home $45 million in stock options and bonuses from 1999 to 2001.
The SEC, within hours of WorldCom's initial 2002 report, filed a civil-fraud suit. Five weeks later, Justice Dept. lawyers followed up with criminal indictments. Five WorldCom officials, including CFO Sullivan, the former controller, and former accounting director, have been charged with criminal fraud.
Four of the five have pleaded guilty. Sullivan, however, is fighting the charges. He has repeatedly denied wrongdoing. His attorney, Irving Nathan of Washington's Arnold & Porter, was traveling on May 16 and unavailable to comment on reports that the company would settle with the SEC. Former CEO Bernard Ebbers hasn't been charged.
Edited by Paula Dwyer