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WorldCom Seeks SEC Accord As Report Claims Wider Fraud

Nov 5, 2002 | Wall Street Journal

WorldCom Inc. is in talks with the Securities and Exchange Commission are in talks to settle SEC fraud charges against the company amid rapid developments in the case, people familiar with the talks told The Wall Street Journal.

The broad outlines of an agreement in the massive accounting-fraud case, hammered out a week ago, would include a court injunction barring WorldCom from violating securities law. WorldCom would also agree to a consent decree of those terms, under terms of the settlement. The SEC is also expected to settle charges against several individuals. The individuals' names aren't known, but people close to the situation say they are low- to mid-level executives who wouldn't be subject to charges by federal prosecutors who are also conducting an investigation. Some of those people have already worked out or are working out plea agreements.

The amount of the fines against WorldCom and potentially against individuals as well under the settlement terms is unclear. One of the considerations the SEC is said to be looking at is how potential fines would affect shareholders and creditors of WorldCom.

A deal could be announced within the next week or so.

A WorldCom spokesman declined to comment.

On a separate front, a special bankruptcy-court examiner accused WorldCom of a "smorgasbord" of fraudulent accounting adjustments and disclosed that ousted Chief Executive Bernard Ebbers personally guaranteed or pledged WorldCom stock in order to receive $1 billion in loans -- an amount considerably higher than previously believed.

In a highly critical report that is the most sweeping to date of WorldCom's massive accounting problems, former U.S. Attorney General Richard Thornburgh describes a company culture rife with conflicts of interest and lacking proper controls. Mr. Thornburgh, appointed in August by the bankruptcy court to examine wrongdoing, mismanagement and incompetence at WorldCom, found some of each.

The report, which also criticized the company's outside auditors and Salomon Smith Barney's former telecommunications analyst Jack Grubman, hints that the extent of the improper accounting at WorldCom, this time relating to revenue, could be more extensive than the $7.2 billion restatement the company already has said it will make. Now, the report indicates, WorldCom also is under fire for accounting methods used in recording revenue, an entirely new avenue for investigators. Those investigators also are looking at what the report refers to as "fraudulent journal entries and adjustments" made by WorldCom executives.

A spokeswoman for Citigroup, parent of Salomon, said that "in light of ongoing discussions with the various regulators, we are declining to comment." A lawyer for Mr. Grubman couldn't be reached.

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