WORLDCOM WOES COULD AFFECT REGULATORY ENVIRONMENT

FCC Chmn. Powell issued statement late Wed. saying he was “deeply concerned by the WorldCom developments, and the impact it could have on consumers and other providers in the industry.” He said agency was “closely monitoring the situation and are doing everything possible to ensure and protect both the stability of the telecommunications network and the quality of service to consumers.” He said he would go to N.Y.C. Fri. to meet with telephone industry officials, analysts and debt-rating agencies “to gain a first-hand understanding of the recent developments that continue to challenge the telecom industry.” Powell said he hoped that would assure financial markets that “the FCC is committed to doing whatever it can to assist in the recovery of the sector and strengthen the public trust in this vital segment of our economy.”

WorldCom announced late Tues. it had fired its chief financial officer, Scott Sullivan, after uncovering improper accounting for almost $4 billion in expenses since beginning of 2001. Trading was halted in WorldCom shares and SEC, which already had been investigating company, ordered it to file under oath detailed report of accounting irregularities. Company had reported that internal audit found that expenses had been booked improperly as capital investment, artificially inflating EBITDA. Irregularities involved $3 billion for 2001 and $800 million for first quarter 2002. WorldCom said it would restate earnings and lay off 17,000 employees. Controller David Myers resigned.

House Commerce Chmn. Tauzin (R-La.) said he ordered committee’s investigative staff to review facts surrounding WorldCom. “In many respects, this case appears to be eerily similar to the accounting hocus-pocus that occurred at Enron,” he said: “Once again, it seems as if accounting rules were manipulated to hide debt and inflate income, violating all accepted accounting standards and, perhaps, violating federal law as well. This was not a simple bookkeeping mistake. Clearly, it was an orchestrated effort to mislead investors and regulators, and I am determined to get to the bottom of it.” Tauzin said scandal only highlighted importance of Congress’s passing legislation to address financial accounting. WorldCom news came as House Commerce Consumer Protection Chmn. Stearns (R-Fla.) held hearing on proposal to improve Financial Accounting Standards Board (FASB). Draft legislation would direct FASB standards to be authoritative, direct FASB to promulgate rule requiring accountants to apply all FASB standards consistently with fundamental principles of transparency and understandability and requires FASB to promulgate rules in areas where current standards needed improvement, specifically off-balance-sheet accounting, revenue recognition and market-to-market accounting, Stearns said. Senate Commerce Committee spokesman didn’t return calls for comment. Senate Majority Leader Daschle (D-S.D.) said he would move accounting overhaul legislation to floor following Senate’s consideration of defense legislation. President Bush reportedly also addressed issue, saying it was “outrageous” and said Justice Dept. and SEC would investigate.

Legg Mason analyst Blair Levin said interplay among various Washington regulators could make or break WorldCom’s ability to stay afloat. SEC might be prone to come down hard on WorldCom, possibly affecting its ability to continue operating, he said. “To the extent the SEC wants to send a message to capital markets by severely punishing the company, it will impact on WorldCom’s ability to continue to compete,” Levin said in report Wed. Such action may suit SEC’s agenda but not goals of competition and consumer choice sought by FCC, he said. “The SEC has a mandate to protect investor interests and confidence in markets,” he said, “but its actions in pursuit of that agenda may make the FCC’s job of protecting competition in communications, as well as the reliability of the networks, more difficult.” In meantime, FCC’s efforts to rewrite some of its competitive rules could have “material effect on the long-term prospects for WorldCom,” Levin said. “The longer the SEC cloud stays over WorldCom, and the longer the uncertainty about the rules of the road remain, the more difficult it will be for the company to restructure its existing debt in a bankruptcy proceeding,” he said.

Even if WorldCom files for Chapter 11, “for a period of time they're going to continue to operate. The near-term impact on the Internet, and even on their customer base, will be minimal,” said Tom Nolle, pres. of telecom consultancy CIMI Corp. He said he believed bankruptcy was inevitable and WorldCom “can operate in Chapter 11… until about the year’s end.” By that time, its difficulties would “become unsurmountable and there will no possibility of reorganization, so they will either have to be acquired, be merged or go under,” he said. Aside from accounting scandal, WorldCom faces rapid loss of long distance revenue and lack of new services to provide “compensatory revenue for voice losses.” he said. “The problem is all these new services were contingent on residential broadband deployment, which has been fettered by regulations that were created by the Telecom Act to foster competition.” Nolle said WorldCom’s Internet backbone suffered from poor regulatory policy and he favored Bells’ position that 1996 Act provided disincentive to broadband service deployment. “Clearly the Internet will not be made more profitable… without some radical changes to the Internet service model and pretty much everyone agrees that those revisions are focused around broadband deployment,” he said.

WorldCom crisis could have positive effect on some parts of telecom industry, some said. One lobbyist said he wondered whether Bell companies would be beneficiaries, gaining even more market share in each state as they won Sec. 271 long distance entry permission. Levin said AT&T might benefit in big-business “enterprise” market. However, WorldCom might have difficulty selling off assets in potential bankruptcy reorganization because some of its assets, such as its ex-UUNet Internet backbone, weren’t profitable, analyst Scott Cleland said. At issue is backbone that carries large amount of Internet traffic and it’s demise could have severe ramifications for industry, he said.

Cleland said “the FCC has got to be concerned because it’s going to be involved in picking up the pieces.” One of strongest critics of WorldCom, he accused company of being involved in long-term fraud: “This was a momentum growth scam. Acquisition accounting hid true financial performance and no one was looking at the real accounting. As long as the stock price went up, no one asked questions.” CWA had warned FCC in 1998 that WorldCom-MCI merger was risky, dependent on “superior margins, earnings and growth” to work and raised accounting questions. Much of value was booked as goodwill and intangibles and only way for company to stay afloat was to maintain high stock prices, CWA warned then. FCC had dismissed CWA’s arguments as speculation, which union official said Wed. wasn’t unexpected.

FCC doesn’t have official role in WorldCom’s situation, but insiders say many in agency are concerned. Along with its Internet backbone serving Earthlink and AOL, WorldCom serves millions of long distance customers. Agency’s only direct role is to step in if company plans to stop service. Under Sec. 214 of Communications Act, companies must certify to FCC that public wouldn’t be affected through discontinuance of service. Companies have to give 30 days’ notice to assure that customers have chance to get alternative service. FCC official emphasized that that process clicked in only if service was to be stopped, not if company filed for bankruptcy.

Former MCI employees, and others who have been in telecom business for long time, said they felt grief for company that had been credited with starting entire competitive telecom industry through its challenge to one- time monopoly AT&T in 1970s. Founder William McGowan is “rolling in his grave,” said one ex-employee. “He and a band of visionaries worked hard to make something better and it’s gone,” ex-employee said. “I feel this overwhelming sadness.” WorldCom’s finances “felt like a house of cards,” ex-employee said. WorldCom CEO Bernard Ebbers by contrast “seemed more interested in making deals and buying companies than making companies work together,” ex-official said. “He wasn’t a manager. He wasn’t a telecom professional.”

WorldCom didn’t trade Wed. but telecom stocks were weak, with AT&T declining 33 cents (-3.3%) to $9.62. Shares of Qwest, another telecom facing extensive accounting probe, plunged $2.40 (-57.3%) to $1.79 and Sprint $1.19 (-10.54%) to $10.10 but Verizon rose 5 cents (0.13%) to $38.70. Telco suppliers such as Nortel also were hit, its shares dropping to 52-week low before closing at $1.47, down 14 cents (-8.7%). Rival Lucent fell 39 cents (-19.8%) to $1.58.