A Salomon Smith Barney debt analyst e-mailed WorldCom CFO Scott Sullivan to ask about a rumor of a $3 billion liability at the company a day before it revealed $3.9 billion in hidden expenses, say people familiar with a congressional probe of the company.
The timing of the e-mail has raised eyebrows on the committee, because it was sent June 24, three days after Salomon’s star telecom analyst Jack Grubman downgraded WorldCom stock to ”underperform” from ”neutral.” Shares fell 25%.
In his June 21 report, Grubman, who had been a booster of the company even as it fell on hard times, predicted WorldCom would significantly dilute shareholders’ stakes as it tried to cut $30 billion in debt.
The e-mail and other issues will be aired today at a hearing of the House Financial Services Committee, which is exploring how WorldCom hid expenses in 2001 and early 2002. Grubman, WorldCom officials and a former Arthur Andersen partner will appear.
Salomon says the e-mail to Sullivan by debt guru Robert Waldman was not connected with Grubman’s report and that they work in different departments.
”The writer clearly is writing (about) a rumor picked up from the street but seems to have no link to the accounting fraud and nothing to do with Jack Grubman,” says Salomon’s Arda Nazerian.
On the day after the e-mail, WorldCom revealed that billions of dollars in expenses were improperly called capital expenditures for five consecutive fiscal quarters, thus inflating earnings. Sullivan was fired for his alleged role.
WorldCom declined comment on the e-mail, which Sullivan forwarded to a company lawyer, say people familiar with the matter.
Members also are expected to ask about:
Conflicts. Grubman and others from Salomon, which reaped millions in fees for giving WorldCom financial advice, attended WorldCom board meetings, even offering ideas, according to people familiar with the probe. Some panel members question the propriety of advising both investors and management.
Salomon’s Nazerian couldn’t confirm that Grubman attended board meetings, saying, ”To the extent he discussed his views with senior management, it was in the scope of normal and appropriate analyst activities.”
WorldCom declined comment.
Audit cuts. Under financial pressure, WorldCom cut its internal audit budget by 10%, raising questions about whether it was doing enough to catch improper accounting, say the people familiar with the matter.
WorldCom declined to comment on its audit budget.
An internal auditor, Cynthia Cooper, found the alleged fraud in May.