Securities and Exchange Commission
Litigation Release No. 17588 / June 27, 2002
Accounting and Auditing Release No. 1585 /June 27, 2002
Securities and Exchange Commission v. WorldCom, Inc., Civil Action 02 CV 4963 (S.D.N.Y.) (June 27, 2002)
SEC Charges WorldCom with $3.8 Billion Fraud
Commission Action Seeks Injunction, Money Penalties, Prohibitions on Destroying Documents and Making Extraordinary Payments to WorldCom Affiliates, and the Appointment of a Corporate Monitor
The Securities and Exchange Commission filed a civil action yesterday in federal district court in New York charging major global communications provider WorldCom, Inc. with a massive accounting fraud totaling more than $3.8 billion. The Commission's complaint alleges that WorldCom fraudulently overstated its income before income taxes and minority interests by approximately $3.055 billion in 2001 and $797 million during the first quarter of 2002.
The complaint further alleges that WorldCom falsely portrayed itself as a profitable business during 2001 and the first quarter of 2002 by reporting earnings that it did not have. WorldCom did so by capitalizing (and deferring) rather than expensing (and immediately recognizing) approximately $3.8 billion of its costs: the company transferred these costs to capital accounts in violation of established generally accepted accounting principles ("GAAP"). These actions were intended to mislead investors and manipulate WorldCom's earnings to keep them in line with estimates by Wall Street analysts.
The complaint charges WorldCom with violating various antifraud and reporting provisions of the federal securities laws, including Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rules 10b-5, 13a-1, 13a-13 and 12b-20. The Commission is seeking court orders permanently enjoining WorldCom; imposing civil monetary penalties; prohibiting WorldCom and its affiliates, officers, directors, employees, and agents from destroying, altering, or hiding relevant documents; prohibiting WorldCom and its affiliates from making any extraordinary payments to any present or former officer, director, or employee of WorldCom or its affiliates, including but not limited to any severance payments, bonus payments, or indemnification payments; and appointing a corporate monitor to ensure that documents are not destroyed and that no such extraordinary payments are made.
In a related action yesterday, the Commission ordered WorldCom to file with the Commission, under oath, a detailed report of the circumstances and specifics of these matters by 8 a.m. next Monday, July 1.
The Commission thanks the U.S. Attorney's Offices for the Southern District of New York and Southern District of Mississippi, the U.S. Department of Justice, and the Federal Bureau of Investigation for their cooperation in this matter.
The Commission's investigation is continuing.