WorldCom Says Big Loan to CEO May Have Spurred SEC's Inquiry
By SHAWN YOUNG
Staff Reporter of THE WALL STREET JOURNAL
WorldCom Inc. Chief Executive Bernard Ebbers might wish he hadn't borrowed $340 million from his now-scrutinized telecom company.
WorldCom said the IOU, started in 2000, was in WorldCom's best interest. "The very essence of why Mr. Ebbers was granted a loan was to protect shareholder value," said Brad Burns, a spokesman for the company, which is based in Clinton, Miss. He said Mr. Ebbers couldn't be reached with a request for an interview.
But the Securities and Exchange Commission, which has listed the loan as one of the subjects of its wide-ranging inquiry into the No. 2 long-distance carrier's finances, doesn't always see such loans this way.
Go to Questioning the Books
"A large loan to a senior executive epitomizes concerns about conflict of interest and breach of fiduciary duty," said former SEC enforcement official Seth Taube, who is now chairman of securities litigation and business crimes at the New Jersey law firm McCarter & English LLP.
Indeed, the loan is one of the triggers that helped the SEC set off on its current inquiry, some accounting experts believe. The SEC also is looking into a wide range of accounting issues and sales practices that include how WorldCom accounted for the value of some of the 60 companies it bought over the years and how it accounted for bills owed by customers. The agency also is looking into the company's sales practices, sales commissions and contracts with customers.
WorldCom and Mr. Ebbers's rationale for the loan: It was necessary to avoid forcing him to sell some of his WorldCom stock to pay debts he incurred while buying the stock. The brash Mr. Ebbers, who took WorldCom from obscurity to the height of New Economy stardom, has been praised for believing so strongly in his company that he borrowed money to buy more stock. But he faced a crisis as WorldCom's share price began to falter two years ago and he was subject to a margin call -- a demand that he put up more collateral for the loans he used to buy the shares. The company came to Mr. Ebbers's rescue to avoid the stigma associated with a chief executive's bailing out of his own stock.
Margin calls can be disastrous for any investor, and Mr. Ebbers is selling personal property to begin repaying the company.
"One thing the SEC looks for in any accounting fraud or case is what might be the motive for someone to commit wrongdoing," said Carr Conway, a former SEC enforcement official who is now senior forensic accountant at Dickerson Financial Investigation Group in Denver. The SEC could view the loan and the circumstances surrounding it as "entirely sufficient motive for him to do some bad things."
Even if no wrongdoing occurs, loans to top executives create a predicament for companies, said Robin Ferracone of SCA Consulting, a unit of William M. Mercer Companies LLC.
"The dangerous territory companies get into when they engage in these things is accusations that they have a motive to inflate the stock," Ms. Ferracone said. "Companies get themselves into difficult situations when they make these kinds of loans."
The suggestion that Mr. Ebbers was trying to avert a personal financial mess is raised in a pending shareholder class-action lawsuit, which was filed in 2000 in the U.S. District Court for the Southern District of Mississippi, Jackson Division. Mr. Burns said the company categorically denies the allegations in the suit, which claims the company misrepresented its finances in an effort to keep its stock price high while it was trying to use stock to buy Sprint Corp.
One of the central claims in the suit is that WorldCom continued to list bills it should have known it couldn't collect as assets. The suit alleges that the company kept millions of dollars in uncollectible bills on its books in the category for receivables, which are payments that are pending: It continued to classify some debts as receivables from 1997 until the third quarter of 2000 after some companies that owed the money had filed for bankruptcy.
The SEC has requested extensive information about a $685 million charge WorldCom took in the third quarter of 2000 that was related to uncollectible debts. Companies are required to write off uncollectible debt as soon as they identify it, said Robert Willens, a tax and accounting analyst at Lehman Brothers. But identifying it "is more or less of a judgment call" and a matter of common sense, he said. Still, he said, there are certain obvious triggers and a bankruptcy filing is one of them.
The SEC could be looking at whether WorldCom missed some of those triggers and kept classifying some revenue it couldn't collect as pending, according to the accounting experts.
If the SEC finds that WorldCom violated accounting rules, it can take a wide range of actions, depending upon the seriousness of the violations, including levying fines, bringing fraud suits against executives, forcing the company to restate financial reports and change its accounting practices. The SEC can also bar company officials from serving as officers or directors of public companies.
The SEC has declined to comment on any aspect of its inquiry into WorldCom.
The shareholder suit also claims that WorldCom continued to claim as pending revenue money it had reason to believe it couldn't collect because customers were disputing the charges or had canceled the accounts.
Mr. Burns said the company denies all the allegations in the suit.
The company said it has completed an internal investigation into misdeeds by some sales agents that led them to collect duplicate commissions. The company said the employees cheated the company out of $4 million, but their actions didn't have the effect of inflating revenue.
Write to Shawn Young at shawn.young@wsj.com
Updated March 14, 2002 |
