WorldCom charged with 'fraud'

AMERICA'S top financial regulator, the Securities and Exchange Commission, accused WorldCom of widescale fraud last night in a writ filed in a New York Court. The SEC demanded that WorldCom immediately stopped defrauding investors, is prevented from destroying or tampering with documents, is prevented from making payouts to present or former employees and should be fined an undisclosed amount.

The writ states: 'Starting at least in 2001, WorldCom engaged in an improper accounting scheme intended to manipulate its earnings to keep them in line with Wall Street's expectations, and to support WorldCom's stock price.

'One of WorldCom's major operating expenses was its so called 'line costs'. In general, 'line costs' represent fees WorldCom paid to third-party telecommunication network providers for the right to third parties' networks. Under GAAP (Generally Accepted Accounting Practices), these fees must be expensed and may not be capitalised.

'Nevertheless, beginning at least as early as the first quarter of 2001, WorldCom's senior management improperly directed the transfer of line costs to WorldCom's capital accounts in amounts sufficient to keep WorldCom's earnings in line with the analysts' consensus. Thus, in this manner, WorldCom materially understated its expenses and materially overstated its earnings thereby defrauding investors.'

The SEC alleges that in the whole of 2001 when WorldCom reported pre-tax earnings of $2.4bn (£1.6bn) it actually lost $662m. In the first quarter of 2002 when it reported earnings of $240m, it actually lost $557m.

This meant WorldCom 'falsely portrayed itself as a profitable business' and the SEC said: 'WorldCom's improper transfer of certain costs to its capital accounts was not disclosed in a timely fashion and misled investors about WorldCom's reported earnings.'

SEC chairman Harvey Pitt said: 'We are committed both in word and in deed to taking every conceivable action to make sure that a system that was allowed to go unimproved for far too long is now improved.'

Responding to criticism that the SEC had failed to prevent Enron, Tyco and WorldCom, Pitt said: 'In my 10 months as SEC chairman, the commission has laid out and is actively implementing creative and effective solutions to the problems I inherited.'

Britain warned: WorldCom disaster could strike here

Scandals that burned the City

Lying, cheating coboy and empire built on paper

Don't look for corporate honesty on golf course