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Top WorldCom accountant says he committed fraud; Tyco plans to take back CFO severance; IRS backs away from small-company audits; Senate rips SEC over Enron; AOL Time Warner needs breathing room; EchoStar, Hughes want more time; and more.
Stephen Taub, CFO.com | US
October 8, 2002
A second key WorldCom finance executive has pleaded guilty to participating in the largest corporate fraud.
On Monday, former accounting director Buford Yates Jr. pleaded guilty to two felony charges, stating that he both conspired to commit and committed securities fraud, according to published accounts. The conspiracy charge reportedly carries a maximum penalty of 5 years in prison and a $250,000 fine, while the fraud charge carries a maximum of 10 years in prison and a $1 million fine.
"I came to believe that the adjustments I was being directed to make in WorldCom's financial statements had no justification and contravened generally accepted accounting principles," said Yates, explaining that he had expressed his concerns to his supervisor. "I concluded that the purpose of these adjustments was to incorrectly inflate WorldCom's reported earnings in order to meet the expectations of securities analysts, and mislead the investing public of the company's financial condition."
Last month, former WorldCom controller David Myers pleaded guilty to filing false documents with securities regulators, conspiracy to commit fraud, and securities fraud. Reportedly he said he was directed by the company's senior management to falsify the books. This came after Yates and former chief financial officer Scott Sullivan pleaded not guilty to charges that they participated in WorldCom's fraud.
Observers believe that the feds are hammering out deals with former WorldCom executives for the part they played in the alleged financial fraud so they can reel in the biggest fish—former chairman Bernard Ebbers.
Also on Monday, the Securities and Exchange Commission filed a civil suit against Yates, charging him with participating "in a massive fraud that inflated the company's earnings at the direction and with the knowledge of WorldCom's senior management."
Tyco Wants Swartz's Money
Give us the money.
That's what Tyco International wants from the company's former chief financial officer Mark H. Swartz.
Officials at the embattled conglomerate hope to put together an arbitration claim later this week against Swartz, seeking repayment of tens of millions of dollars in severance and other compensation, according to the Wall Street Journal.
Swartz received $45 million from Tyco as part of a severance deal reached in August when company executives attempted to get him to resign, an arrangement that at the time was heavily criticized by Manhattan District Attorney Robert Morgenthau. Under the severance agreement between Tyco and Swartz, the conglomerate can't sue the former CFO, but must instead file any claim against him with an arbitrator, according to the report.
Legal experts expect Tyco to at least seek repayment of the $45 million, and perhaps try to recover some of the money Swartz is accused of stealing from the company. Charles Stillman, an attorney for Swartz, told the Journal the money Tyco paid his client is "totally, 100 percent rightfully his. To the extent the company has any claims, they may or may not be asserted in arbitration."
Under his departure deal, Swartz received $9.1 million in a lump-sum severance deal, $24.5 million from an executive life-insurance plan, and $10.4 million from a deferred compensation plan.
Audits of Small Companies Decrease
The number of IRS examinations related to corporate, S corporation, and partnership returns has continued to decrease, according to a report by the Treasury Inspector General for Tax Administration.
The total number of U.S. Corporation Income Tax Returns examined decreased 18 percent, from 43,383 in fiscal 2000 to 35,705 in fiscal 2001, according to the report, which analyzes trends in compliance activities through fiscal year 2001.
The exception: examinations of very large corporations with assets of $100 million or more. The number of examinations in that class of company increased slightly, from 4,439 to 4,674.
The number of partnership returns examined decreased from 6,539 in fiscal 2000 to 5,070 in fiscal 2001.
The reasons for the downward trend, according to the report, include budgetary constraints, the IRS' desire to provide more customer service, and the need to implement and provide additional taxpayer protections and rights mandated by the IRS Restructuring and Reform Act of 1998.
Senate Committee Blasts SEC's Enron Role
A new Senate report attacks the SEC's oversight of Enron Corp., calling it a "catastrophic failure" that contributed to the financial losses of the company's workers and investors, according to published accounts of the 127 page document.
The report concluded that the SEC failed to detect Enron's questionable business practices by failing to review any of the energy company's post-1997 annual reports. It said the SEC didn't find any fraud because it was not actively looking for it. The SEC "must play a meaningful part in fraud detection if it wishes to fulfill its responsibility to ensure the integrity of the markets," wrote Sen. Joseph Lieberman of Connecticut and Sen. Fred Thompson of Tennessee in a letter that accompanied the report.
"The SEC staff imposed significant conditions on the decision to permit Enron to change accounting methods, but never checked to make sure Enron was meeting those conditions," the letter continued.
SEC chairman Harvey Pitt responded in a statement: "Since I have taken on the leadership of the Commission, we have been working hard to fix the problems that have created the current crisis of confidence, and we have been making enormous strides to correct mistakes and abuses of the past."
SEC Probing AOL's Accounting
The SEC is investigating how AOL Time Warner Inc. accounted for its investment-and-advertising deal with Oxygen Media Inc., according to theWall Street Journal. The main concern: the media giant allegedly booked the same revenue at more than one division.
The $100 million deal being investigated was a complex one that called for Time Warner Cable to put the women-oriented cable channel on its systems without a launch fee. In exchange, Oxygen would spend about $100 million in advertising, mostly on AOL, according to the report.
The SEC is reportedly looking into how AOL constructed intercompany advertising transactions so that the ad revenue would be reflected both in America Online's divisional numbers and those of Time Warner Cable. The Journal reported that AOL chief financial officer Wayne Pace recently told a small group of investors that the SEC's inquiry was focused on transactions that crossed outside of AOL into other divisions, singling out Oxygen as an example.
Apparently, although AOL officials said the double-booking would have been eliminated on consolidation of the divisional results, investors frequently prefer to look at numbers on the divisional level to discern how well a company and its individual units are faring. In August, the media giant's management admitted that three transactions involving its AOL unit and third parties may have been inappropriately recognized as advertising and commerce revenues. The revenues amounted to about $49 million over six quarters.
During that same week, reports surfaced that the SEC had expanded its investigation into AOL Time Warner's accounting practices, turning that probe into one of the largest corporate investigations on record. The reports also said investigators were focusing on Michael Kelly, who served as chief financial officer of AOL Time Warner last year until he was mysteriously demoted to chief operating officer of the AOL division.
EchoStar, Hughes Ask FCC to Delay Merger Decision
According to news reports, EchoStar Communications (owner of the Dish Network) and Hughes (the parent company of DirecTV) have sent a letter to the SEC requesting a postponement of the decision on their proposed $26 billion merger.
Regulators at the SEC and antitrust enforcers at the Justice Department both have voiced their objections to the merger, citing the elimination of competition in the satellite-TV market, according to reports.
Rash of Downgrades
The lousy economy is taking its toll on credit ratings, as an unusually large number of high-profile companies have seen their debt downgraded in the past few days.
On Friday, Standard & Poor's cut Walt Disney Co.'s long-term credit rating for the second time in a year, saying earnings may not turn around for at least another year.
S&P also lowered several bond ratings on Conseco Inc., saying the resignation of chairman Gary Wendt as chief executive is a prelude to a bankruptcy filing.
Meanwhile, Moody's Investors Service downgraded the ratings of SBA Communications and its subsidiary. "This downgrade is prompted by the weakening financial performance of the company and the likelihood that business conditions remain poor over the medium term," said the Moody's report. SBA ratings are also on review for possible further downgrade.
Moody's also downgraded the debt ratings of El Paso Corp. and its subsidiaries to Baa3 senior unsecured. The ratings remain under review for possible further downgrade.
Finally, Moody's changed the ratings outlook of Advanced Micro Devices Inc. to negative, following a company announcement that pointed to significantly lower-than-expected revenues and a substantial loss for the third quarter. "The negative outlook reflects concerns that liquidity will be further pressured," said Moody officials.
In other debt-related news, Devon Energy Corp. registered to sell up to $ 1.5 billion in mixed securities, according to a shelf registration filing. Devon executives said the securities may include common stock, preferred stock, debt securities, stock purchase agreements, and stock purchase units. Management expects to use the net proceeds from the sale of the securities for general corporate purposes, including repayment of outstanding debt and for working capital, capital expenditures, and acquisition.