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(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the
Federal Securities Law Reports.)
SEC Brings Civil Action Against
WorldCom
The Securities and Exchange
Commission filed a civil action in the Southern District of New York against
telecommunications company WorldCom, Inc., claiming the company "disguised
its true operating performance" by overstating income by $3.055 billion in
2001 and $797 million in the first quarter of 2002. WorldCom is accused of
violating Sections 10(b) and 13(a) of the Exchange Act and various rules
thereunder.
Monitor to Be Appointed
The SEC's complaint sought court
orders imposing monetary penalties and enjoining WorldCom from violating various
provisions of the Exchange Act, and requested that WorldCom be prohibited from
destroying or altering any documents relevant to the allegations. U.S. District
Court Judge Rakoff entered an order two days later which directed WorldCom to
preserve documents, and also provided for the appointment of a corporate monitor
to ensure that documents are not destroyed, and that the company does not make
"any extraordinary payments," to officers, directors or employees,
such as severance or bonus payments. Until the monitor is in place, the court
prohibited WorldCom from paying more than $100,000 to any present or former
officer, director or employee.
Earnings Manipulation
Allegations
The SEC charged that WorldCom
intentionally manipulated its earnings by capitalizing "line costs,"
described as fees paid by WorldCom to third parties for the right to access the
third parties' networks. These fees should be expensed under Generally Accepted
Accounting Principles, according to the Commission's complaint. "These
actions were intended to mislead investors and manipulate WorldCom's earnings to
keep them in line with estimates by Wall Street analysts," the SEC stated.
The Commission additionally ordered WorldCom to file a statement describing the
circumstances of the matter with the Director of the Division of Enforcement.
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