CNBC: Massive fraud at WorldCom -- Earnings inflated

MSNBC ^ | 6/25/02

[Brian Mosely]

CNBC: Massive fraud at WorldCom -- Earnings inflated

[Brian Mosely]

nothing further...

[kcvl]

bttt

[Mr. Jeeves]

First of many more. Fasten your seatbelts for the ride to Dow 3,000.

[Brian Mosely]

Massive fraud reported at WorldCom

EBITDA said to have been inflated by $3.6 billion in last year

By David Faber
CNBC

June 25 — WorldCom has engaged in what people close to the company describe as a massive fraud, which has only recently come to the attention of its board of directors. According to sources close to the company, WorldCom has inflated its EBITDA by some $3.6 billion over its last five quarters, by taking as capital expenditures, costs that should have been treated as ordinary. The company is planning to restate its financials in the near term to reflect the financial misstatements that have taken place.

WORLDCOM OFFICIALS AND officials at its banks have either not returned calls or declined comment.

Given the massive overstatement of EBIDTA (earnings before interest, depreciation, taxes and amortization) — the key gauge by which companies such as WorldCom are measured — assumptions about how much debt WorldCom can carry may have been similarly overstated.

The company has been in negotiations with its banks, which are being made aware of the size of the restatement in meetings Tuesday.

It is unclear what impact this will have on WorldCom’s negotiations to obtain new financing. But it seems sure to make it very difficult for WorldCom to raise any new money and could very likely result in WorldCom being forced to file for bankruptcy.

The company’s chief financial officer, Scott Sullivan, has been dismissed by the board of directors in the last 48 hours, said sources close to the board.

The broad outline of the fraud, as described by people familiar with it, transpired like this: Each quarter in 2001 and during the first quarter of 2002, Sullivan would allegedly transfer a similar amount of WorldCom’s ordinary costs and treat it as a capital expenditure. The costs are believed to have been related to WorldCom’s network, but should not have been treated as a capital expenditure. The amount in question would have reduced the company’s reported earnings before interest taxes, depreciation and amortization by $3.6 billion over those five quarters.

Because of its vast overstatement, WorldCom’s 43 percent margins were also a fiction. An internal audit is said to have uncovered the fraud. On May 15, the company replaced its former auditor Arthur Andersen with KPMG.

It is unclear how far back the effort to misrepresent costs may have extended. The period in question for the restatement is only five quarters, but Sullivan has been the company’s CFO since 1996.

It is unknown whether former CEO Bernie Ebbers, who resigned from the company at the end of April, was aware of the fraud, sources said.

[Skip Ripley]

3,000? Feeling a little pessimistic? If the Dow goes below its 9/21/01 lows I'll eat a bug.

And I don't mean a gold bug...

[jrlc]

Hype, Hype, Hype -- another KLINTOON LEGACY -- bill just coming due.

[rohry]

Here's the story:

June 25 — WorldCom has engaged in what people close to the company describe as a massive fraud, which has only recently come to the attention of its board of directors. According to sources close to the company, WorldCom has inflated its EBITDA by some $3.6 billion over its last five quarters, by taking as capital expenditures, costs that should have been treated as ordinary. The company is planning to restate its financials in the near term to reflect the financial misstatements that have taken place.

WORLDCOM OFFICIALS AND officials at its banks have either not returned calls or declined comment.

Given the massive overstatement of EBIDTA (earnings before interest, depreciation, taxes and amortization) — the key gauge by which companies such as WorldCom are measured — assumptions about how much debt WorldCom can carry may have been similarly overstated.

The company has been in negotiations with its banks, which are being made aware of the size of the restatement in meetings Tuesday.

It is unclear what impact this will have on WorldCom’s negotiations to obtain new financing. But it seems sure to make it very difficult for WorldCom to raise any new money and could very likely result in WorldCom being forced to file for bankruptcy.

The company’s chief financial officer, Scott Sullivan, has been dismissed by the board of directors in the last 48 hours, said sources close to the board.

The broad outline of the fraud, as described by people familiar with it, transpired like this: Each quarter in 2001 and during the first quarter of 2002, Sullivan would allegedly transfer a similar amount of WorldCom’s ordinary costs and treat it as a capital expenditure. The costs are believed to have been related to WorldCom’s network, but should not have been treated as a capital expenditure. The amount in question would have reduced the company’s reported earnings before interest taxes, depreciation and amortization by $3.6 billion over those five quarters.

Because of its vast overstatement, WorldCom’s 43 percent margins were also a fiction. An internal audit is said to have uncovered the fraud. On May 15, the company replaced its former auditor Arthur Andersen with KPMG.

It is unclear how far back the effort to misrepresent costs may have extended. The period in question for the restatement is only five quarters, but Sullivan has been the company’s CFO since 1996.

It is unknown whether former CEO Bernie Ebbers, who resigned from the company at the end of April, was aware of the fraud, sources said.

[monkeyshine]

Look how they brazenly call it "fraud". Amazing. Maybe it is fraud, but don't they have to prove it, first?

[rohry]

Looks like you beat me to it by a few minutes...

[thatsnotnice]

It is unknown whether former CEO Bernie Ebbers, who resigned from the company at the end of April, was aware of the fraud, sources said.

Eh heh, yeah I've got to remember that one... "It is unknown..." Ha!

[leadpenny]

On Saturday's McGlothlin Group, John Mcglothlin predicted there would be at least 10 more Enron type scandals over the next six months. Nine to go.

[Dialup Llama]

>3,000? Feeling a little pessimistic? If the Dow goes below its 9/21/01 lows I'll eat a bug.

I note you picked the Dow. If you had chosen another index, you would be preparing your bug meal today.

[Timesink]

Reporting EBITDA results should be banned by the SEC. It's all those "earnings before blah blah blah" statements that allow these shenanigans to be covered up so easily.

[NeoCaveman]

If the Dow goes below its 9/21/01 lows I'll eat a bug.

I wouldn't promise that it is only 1,000 points from here to there.

[berned]

We should have known that WCOM's lofty, buck-and-a-half, price per share was based on grossly inflated, wild, over-optimism. Hee hee!

[Southack]

Professional short sellers LOVE to float bad news stories right at the ex-Dividend date (tomorrow for MCIT, WCOM's "Tracking stock").

The stock will automatically drop $.60 tomorrow at the open due to its dividend (MCIT) payout to shareholders of $.60 being set after the bell closed today.

That's a big, planned drop for a stock that already trades under $2 per share. Now toss in a little bad news, some fear-mongering, stir, and you've got yourself a panic selloff in MCIT and WCOM shares.

And someone out there will be waiting for their chance to buy a long distance company on the cheap, with Billions in annual earnings and hundreds of thousands of established, loyal customers.

Remember, when you want to buy a bargain, spread the bad news to coincide with the Ex-Dividend date...

[habs4ever]

Capitalizing expenses isn't fraud, so this piece by Faber is very vague as to exactly what expenses should have been written off on the income statement.If it was network costs, what's the trouble?

We need more facts before jumping up and down.This is sloppy reporting.

[Timesink]

First of many more. Fasten your seatbelts for the ride to Dow 3,000.

Not to nitpick, but WCOM's a Nasdaq stock. At least for another week or so, until the NASD gets around to booting them to the pink sheets.

[NeoCaveman]

Reporting EBITDA results should be banned by the SEC. It's all those "earnings before blah blah blah" statements that allow these shenanigans to be covered up so easily.

EBIDTA is pure cashflow before interest and taxes. Net Income is riddled with accounting subjectivitness like depreciation estimates and goodwill right-offs.

If one lies about their revenues then their EBITDA and Net Income, and Earnings per share are all false.

[jpl]

Maybe it is fraud, but don't they have to prove it, first?

Nope. The media can say darn near just about anything it wants to nowadays.