TOP STORIES--JUNE 23-28
WorldCom Hit With Federal Fraud Lawsuit
Federal investigators slapped WorldCom Inc., the nation’s second-largest long-distance company, with a civil fraud lawsuit to prevent it from disposing of assets, destroying documents and paying off senior officers.
This followed WorldCom’s disclosure that it had improperly accounted for $3.9 billion in expenses over the last five quarters, showing that it was earning significant profit at a time it was losing hundreds of millions of dollars.
Key WorldCom executives, including former Chief Executive Bernard J. Ebbers and former Chief Financial Officer Scott D. Sullivan, who was fired as part of the scandal, were subpoenaed to appear before a House panel investigating the affair.
The disclosure also prompted the Securities and Exchange Commission to accelerate plans to force chief executives and financial officers to guarantee financial statements, making them potentially liable if the data are found to be fraudulent. The certifications would be required of the nation’s 1,000 largest corporations by Aug. 15, the agency said.
The scandal is expected to force WorldCom into a bankruptcy filing that could make the company stronger, if it doesn’t lose massive numbers of customers in the process.
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Xerox Inflated Revenue, Will Restate Earnings
Xerox Corp. said it inflated revenue by $1.9 billion over the last five years by misreporting sales of equipment and service contracts. Xerox’s stock plunged on the report.
By shifting the timing and makeup of sales, Xerox was able to meet earnings forecasts. The Securities and Exchange Commission fined the company a record $10 million in April because of the false reporting of about $3 billion in sales.
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First Criminal Charges Filed in Enron Case
In the first criminal charges stemming directly from Enron Corp.’s financial dealings, federal prosecutors accused three former employees of a British bank of secretly investing in an Enron partnership from which they earned more than $7 million in illicit profits.
Prosecutors charged three former investment bankers at Greenwich NatWest with wire fraud, alleging that they cheated their employer by recommending that it sell its stake in an Enron partnership controlled by then-Enron Chief Financial Officer Andrew S. Fastow for $1 million--knowing it was worth much more.
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Investigation of Martha Stewart Widens
Shares of Martha Stewart Living Omnimedia Inc. continued to plunge after reports of a wider investigation of alleged insider trading by Martha Stewart, who heads the multimedia company.
Authorities were reported to be looking into possible charges of obstruction of justice and making false statements regarding alleged insider trading in Stewart’s sale of shares in ImClone Systems Inc.
The reports so far appear to have had little effect on the company’s business. Stewart’s most important constituency--the TV viewers, magazine readers and home-decorating disciples who buy products ranging from paint to gardening tools emblazoned with her name--have stood by the entertaining expert, retailers and others said.
Stewart continued to deny wrongdoing in the affair, although she refused to elaborate on the matter at public appearances during the week, including her regular weekly appearance on CBS’ “The Early Show.”
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United Airlines Seeks Federal Loan Guarantee
United Airlines, severely damaged by the weak economy, labor-management feuds and a slump in air travel after Sept. 11, applied for a $1.8-billion federal loan guarantee to help ensure its survival.
Although the nation’s second-largest carrier has nearly $3 billion in cash, United and parent company UAL Corp. are losing millions of dollars a day, facing big debt payments later this year and are nearly closed off from conventional lending sources. So the airline decided to seek federal backing before the loan-guarantee program stopped taking applications.
United’s petition for help--by far the largest request since the program was created by Congress after the terrorist attacks--is fraught with unknowns. Among them: whether United would be granted the guarantee and, if not, how much that would further cripple the carrier. For 2001, United reported a loss of $2.1 billion, an airline record.
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Adelphia Files for Bankruptcy Protection
Adelphia Communications Corp., the nation’s sixth-largest cable provider and the leader in Southern California, filed for Chapter 11 bankruptcy protection, plagued by one of the biggest accounting scandals in corporate history.
The bankruptcy filing had been expected for weeks, following the disclosure of $3 billion in off-the-books borrowings by Adelphia’s founding Rigas family.
Adelphia’s nearly 6 million customers nationwide--and 1.2 million in Southern California--probably won’t see any immediate change in their television service. The company said it would continue to operate as usual during bankruptcy proceedings, while working on a reorganization plan to restructure its debt and get back on track.
The company is expected to downsize and sell assets to reduce debts. Among the properties that could be sold are its prized local cable systems in Los Angeles, Beverly Hills, Pacific Palisades, Santa Monica, Brentwood and Redondo Beach and in Orange and Ventura counties.
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Vivendi’s Messier Loses a Key Supporter
Already struggling to quell the tumult surrounding his company, French media baron Jean-Marie Messier suffered yet another blow when his top supporter became the fifth board member to resign this year from Vivendi Universal.
Bernard Arnault, chairman of luxury goods maker LVMH Moet Hennessy Louis Vuitton and one of France’s most respected businessmen, did not explain why he was stepping down from Vivendi’s board of directors. But analysts speculated that he and other French board members were frustrated by some of Chief Executive Messier’s recent decisions and conflicting statements about his plans for Vivendi’s water business.
The departure leaves Messier’s position on the company’s 15-member board more tenuous than ever, analysts said.
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Northrop, Lockheed Win Coast Guard Contract
Northrop Grumman Corp. and Lockheed Martin Corp. won the Coast Guard’s largest-ever contract--worth a potential $17 billion over 30 years--to replace and upgrade aging ships, aircraft and communications systems.
The fiercely contested contract, considered big even by today’s defense industry standards, calls for Northrop and Lockheed to help modernize a service that operates a fleet of ships and planes that is among the oldest in the world.
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Raises to Shrink for White-Collar Workers
For the first time in nine years, many white-collar workers will get pay raises of less than 4% in 2002, according to a report released by the Conference Board. The survey is the latest indication that compensation gains are slowing, and prompts concerns among economists that smaller raises could dampen consumer spending and economic growth.
A majority of workers will get the traditional 4% pay increase, but a larger share of employees will see raises smaller than they received in the last several years, according to the survey of 533 companies conducted by the New York-based nonprofit business research organization.
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Jury Awards Punitive Damages to City of Hope
A jury ordered Genentech Inc. to pay City of Hope National Medical Center $200 million in punitive damages for betraying its trust with the renowned cancer hospital.
The award ends a four-month trial over the contract that established a brief collaboration between the hospital and Genentech 26 years ago. It came a week after jurors ordered Genentech to pay $300.2 million in compensatory damages to City of Hope for withholding royalties from the Duarte medical center.
Jurors awarded punitive damages to punish Genentech for acting with fraud or malice.
Genentech said it was disappointed by the award and would appeal, setting in motion a legal process the company said could take one to four years to complete.
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Markets Finish Worst First Half in Decades
Major stock market indexes completed their steepest first-half decline in more than three decades, amid concerns about corporate profits, the slowing economic recovery, the weakening dollar and doubts over companies’ accounting. On a brighter note, many major indexes managed to post gains for the week, snapping a five-week losing streak.
The Standard & Poor’s 500 rose less than 0.1% for the week but lost 13.7% in the first half, the most in a year’s first six months since 1970. The Dow Jones industrial average slipped 0.2% for the week and was down 7.8% for the first six months. The Nasdaq composite index added 1.5% for the week but is down 25% year to date.
Meanwhile, the dollar continued to sink, approaching a one-to-one exchange rate with the euro.
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or a preview of this week’s business and economic news, please see Monday’s Business section.
