Fed Holds Rates Steady (Updated)

The U.S. Federal Reserve decided to do nothing.

It did not cut interest rates, as a number of seers had predicted, or actually hoped.

But, it did warn that the economy was slowing so fast that there was a risk of a sharp downturn. To many this was a signal that the Central Bank is on the verge of cutting rates.

However, investors were not happy with this outcome. Stocks plunged on the news, staged a rally, and then fell again.

The Dow Jones Industrial Average closed down more than 61 points to 10584.37, the S&P 500 dropped 1.3 percent while the Nasdaq Composite tanked by more than 4 percent, to 2511.14.

“The drag on demand and profits from rising energy costs, as well as eroding consumer confidence, reports of substantial shortfalls in sales and earnings, and stress in some segments of the financial markets suggest that economic growth may be slowing further,” the FOMC said in its post-meeting statement.

You’ve Got More Stability

Well, it looks like America Online already has reaped one benefit from agreeing to merge with an old economy company.

On Monday, Moody’s raised the ratings of America Online, Inc., Time Warner Inc. and Time Warner Entertainment, L.P. to Baa1 (senior unsecured) as a result of the pending merger between AOL and Time Warner.

The transaction, which is still awaiting FCC approval, is expected to close by year-end or by early January.

“The upgrade of AOL’s debt ratings reflects the significant benefits gained from the merger, including the credit strength and stability of TWI/TWE, the content richness within many of TWI’s and TWE’s operating units, the significantly increased scale and diversification, and broadband capability in a portion of the U.S. from TWI/TWE’s cable operations,” according to a Moody’s release.

“Moody’s expects that the company will provide cross guarantees between AOL and the TWI group of companies (not including TWE), thereby eliminating any potential for structural subordination between the merged companies, and creating a diverse portfolio to reduce risk for each of the companies’ respective bondholders,” Moody’s adds. “The merger mitigates some concerns that overshadowed AOL’s ratings in the past. They included the uncertainty about AOL’s ability to compete in an environment where telecommunications and cable providers were aggressively upgrading their networks to offer a high-speed Internet access alternative which could compete and cut into AOL’s subscriber base.”

IBM Goes Super Size

Big Blue is boasting that bigger is better.

IBM said it will build the world’s largest commercial supercomputer for NuTec Sciences Inc.’s Life Sciences unit.

The computers will enable NuTec’s researchers to study gene combinations behind illnesses such as diabetes, heart conditions and strokes, as well as prostate and breast cancer, according to IBM.

NuTec will also lease time on the system to academic research centers and biotechnology and pharmaceutical companies.

The machine will have a processing capacity of 7.5 trillion calculations a second. This will rank among the top 10 of the world’s 500 largest supercomputers and will be the fastest system installed outside a government agency, IBM and NuTec said.

Ex-Coopers Honcho Goes to the Slammer

Robert T. Caruso, the former No. 3 executive at Coopers & Lybrand, was sentenced to 27 months in federal prison Friday after admitting that he defrauded his former employer and Seton Hall University in a charity scheme.

Caruso, who served as the vice chairman of Coopers, now called PricewaterhouseCoopers, broke down in tears as he admitted cheating the company and his alma mater of more than $318,000.

Caruso said he became obsessed with money when he saw that other executives at his firm were receiving lucrative benefits to which he believed he was also entitled. In a statement in a Newark federal court, he reportedly said, “What I did to Coopers & Lybrand was wrong. I had a position of trust; I violated it. I failed them, I failed my family, and I failed myself.”

In 1995, Caruso was charged with tax evasion, money laundering, and wire fraud in an 18- count indictment. He is now cooperating with federal prosecutors as part of a plea agreement.

Caruso resigned from Coopers in 1993.

Caruso made large donations to Catholic charities, including Seton Hall, for which his employer later reimbursed him. Caruso then asked the university to return the money to him.

He had told the university that he wanted instead to donate it later in a different manner and complained that he did not like the way that Seton Hall invested the dough. However, Caruso admitted that he kept the money for himself.

The fraud played out between 1987 and 1991. It also involved double-billing Coopers for expense reimbursements and other monetary benefits, according to Assistant U.S. Attorney Ralph J. Marra.

Ackerman also ordered Caruso to pay a $50,000 fine and ordered him to report to the U.S. Bureau of Prisons on Jan. 29. Additionally, the judge ordered him to pay $305,960 to reimburse his former employer, and to reimburse Seton Hall nearly $13,000.

Microsoft’s Double Standard

Microsoft Corp., which last week issued its first earnings warning since 1989, apparently told employees in a memo that it plans to cut costs throughout its businesses, according to The Wall Street Journal.

However, at the same time it plans to give some employees a raise to prevent them from leaving for another company’ salaries to make sure they don’t jump ship, Tuesday’s Wall Street Journal reported.

According to the newspaper’s account, CEO Steve Ballmer asked all his top executives to “significantly reduce” some expenditures budgeted for the fiscal year. He wrote: “We all have a big incentive as shareholders to reignite the kind of cost-conscious culture that marked Microsoft’s earlier years.”

However, Ballmer assured that the company would not take the drastic step called layoffs. “To be clear, resource reductions don’t translate into employee layoffs,” he wrote. However, he did say that the company would “reduce unfilled head count.”

The Journal, however, pointed out that a Microsoft spokeswoman noted the company has about 5,000 unfilled jobs.

The Latest Lernout & Hauspie Shocker

Each day it is becoming clearer that the speech recognition company, a one-time hotshot among the tech and Wall Street sets, is one, big fraud.

As a result, experts are starting to doubt that the company would be able to emerge from bankruptcy since it is now not so apparent that it had nifty products but lousy management.

It seems that KPMG, the company’s longtime auditor wrote in a letter to the company’s chairman that senior executives at Lernout &Hauspie Speech Products NV conspired to “hide and falsify” information, overstate operating results and inflate L&H’s stock price for their personal benefit, according to the Journal.

A separate, internal investigation, meantime, concludes says that as much as $277 million — or one-third — of revenue over the past 2 1/2 years may have been improperly recorded. The figure is much larger than previously suspected.

According to the Journal’s account, the KPMG letter to L&H’s Chairman Roel Pieper “accuses certain of the company’s former executives of concealing documents and transaction details from KPMG auditors.” The letter also seems to accuse one of Belgium’s biggest banks, KBC NV, to have been part of a scheme to prop up a secondary stock offering of an L&H-linked venture-capital fund.

Layoff Watch

Red Herring Communications said it would eliminate about 32 jobs, or about 10 percent of its staff. In October it laid off about 25 workers, citing a softening advertising market.

Bank of America Corp. plans to cut 100 jobs in its investment and corporate banking unit, Bloomberg News reported on Monday, quoting people familiar with the matter.

Merger News

Telecommunications equipment maker Ciena Corp. agreed to buy privately-held Cyras Systems, for $2.6 billion in stock. The deal, which would extend Ciena’s optical networking portfolio and capabilities, will close in the first quarter of 2001. Ciena said the deal will add to pro forma earnings in the second half of fiscal 2002, and dilutes pro forma 2001 earnings per share by $0.19 to $0.22, before charges.

Regions Financial Corp. will acquire securities firm Morgan Keegan Inc. in a $789 million stock deal. Regions Financial will pay $27 in stock for each Morgan Keegan share, a 39% premium above Friday’s closing price. Morgan Keegan shareholders may also elect to receive $27 a share in cash, subject to a maximum of 30% of its shares being exchanged.

Hershey Foods Corp. has instituted a shareholder rights plan in order to avoid a hostile takeover. The largest candy maker in the U.S. said in a regulatory filing that its poison pill provision was not triggered by any overture by from a suitor. The shareholder rights plan, will be triggered if any shareholder acquires more than 15 percent of Hershey’s outstanding shares. The rule does not apply to Hershey’s largest shareholder, the Hershey Trust Co., which controls about 76 percent of the company’s voting stock and about 30 percent of its shares outstanding.

From the CFO.com “Brief” Case

J.P. Morgan Chase & Co. will replace J.P. Morgan & Co. in the 30-stock Dow Jones Industrial Average, according to The Wall Street Journal.

Olivetti SpA, the owner of Telecom Italia SpA, said it will issue more than 2.5 billion euros ($2.24 billion) in stock and convertible bonds.

Texaco Inc. has received a request for more information from the U.S. Federal Trade Commission on its proposed merger with fellow oil major Chevron.

Moody’s placed the senior secured bank facility and senior unsecured ratings of Polaroid Corp. under review for possible downgrade following its announcement Friday of lowered expectations anticipated for the fourth quarter of 2000. Moody’s said that the company’s operating performance has been less stable and weaker in recent quarters and that this may continue over the near-to-intermediate term.

Adelphia Communications Corp. said it was restating certain financial statements to revise its accounting treatment for an April 1998 swap of cable systems.

Cummins Engine Co. Inc. warned that fourth-quarter earnings would come in way below consensus forecasts. The diesel engine maker said it expects to lose between $0.35 and $0.45 per share and said that it will take a pre-tax charge in the quarter. Wall Street analysts were expecting the company to report a fourth-quarter profit of $0.66 per share, down from $1.82 per share a year earlier. The company said its estimate excludes a pre-tax charge of about $160 million.