Leaders of three big, troubled telecommunications companies are being called before Congress to explain how well they can maintain essential operations if their financial conditions deteriorate further.
Top executives of WorldCom Inc., which filed the biggest corporate bankruptcy in history on July 21; Global Crossing Ltd., also bankrupt; and Qwest Communications International Inc., which acknowledged major accounting errors on Sunday, are testifying before a Senate committee.
The Justice Department and the Securities and Exchange Commission which already has filed civil fraud charges against WorldCom — are investigating accounting irregularities at the telecom titan whose interests include No. 2 long-distance telephone company MCI. WorldCom disclosed it had disguised nearly $4 billion in expenses, thereby inflating its earnings.
Global Crossing, which operates a worldwide fiber-optics network, has acknowledged that documents were shredded before and after its January bankruptcy filing and the disclosure of a federal accounting investigation in February.
The SEC is investigating Qwest’s swaps of fiber-optic capacity, and the federal General Services Administration is reviewing government contracts with the Denver-based provider of regional phone service. The Justice Department also is investigating the company.
In reaction to a wave of business scandals that has rattled investor confidence, President Bush on Tuesday was signing corporate accountability legislation in a splashy White House ceremony.
Stocks of telecommunications companies hit dizzying heights in 1999. But their shares slid with the burst of the dot-com bubble and other market forces that caused an industrywide implosion.
The high-speed Internet infrastructure that telecom companies had been building through the late 1990s lost much of its value very quickly once it became apparent there was little consumer demand for the services being offered over the so-called broadband network.
The long-distance telephone sector, meanwhile, has been pounded by falling rates and growing competition from local Baby Bells, who have received federal permission to horn in on the market. Long-distance carriers like MCI are also losing business as customers grow fond of e-mail and cell phones.
The Senate Commerce Committee wants to know whether the three companies will be able to maintain essential operations. WorldCom, for example, which has laid off 17,000 of its 80,000 workers, is the largest operator of the Internet backbone.
The three executives — WorldCom Chief Executive Officer John Sidgmore, Global Crossing CEO John Legere and Qwest President Afshin Mohebbi — were testifying Tuesday at a hearing of the committee.
Investigators with another Senate panel are examining now-bankrupt Enron Corp.’s ties with Merrill Lynch & Co., saying the nation’s biggest brokerage firm knowingly participated in deals that Enron used to mask its true financial condition.
The Justice Department is investigating one of the transactions in question, in which Enron sold an interest in barges in Nigeria to an offshore company established by Merrill Lynch, according to the brokerage and Senate sources. At issue is whether the transaction allowed Enron to artificially inflate its profits, the sources said Monday, speaking on condition of anonymity.
One Merrill Lynch official who was asked to testify at a hearing on Tuesday is invoking his Fifth Amendment privilege and refusing to answer questions, his attorney has notified the investigative panel of the Senate Governmental Affairs Committee.
At the same time, an official of banking giant Citigroup Inc. told the subcommittee in a sworn affidavit that it does not directly or indirectly own another offshore company used in complex financial transactions in which Citigroup made loans to Enron that investigators say helped boost Enron’s cash flow to match its profit growth on paper.
Similarly, the chief executive officer of J.P. Morgan Chase & Co., William Harrison, told the subcommittee in a letter that an offshore company it used in transactions with Enron “is a legally independent entity” not controlled by the Wall Street investment firm.
“It appears that Merrill Lynch, like other financial institutions, knowingly participated in deals that were used to make Enron’s financial position appear more robust than it actually was,” subcommittee chairman Sen. Carl Levin ( news, bio, voting record), D-Mich., said in a statement. “Merrill’s desire to make money from Enron and stay in Enron’s good graces apparently superseded professional responsibilities and reputational and financial concerns.”
Merrill Lynch spokesman William Halldin said the brokerage firm “believes its dealings with Enron … were appropriate and proper based on what we knew at the time. At no time did we engage in transactions that we thought were improper.”