June 29, 2002

Encouragement for investors to take legal action against WorldCom executives appears to be growing, as Adam Christie reports.


Vulture-like lawyers circle over WorldCom's death throes

LEGAL action against top WorldCom executives has grown more likely, as the fallout from the Corporation's accounting scandal attracts vulture-like lawyers circling above its death throes.

Kent Auberry, partner and leader of the business practice area for US lawyers Smith Moore, said shareholder suits against members of the audit committee and possibly the board of directors did seem likely.

WorldCom's restatement of earnings announcement has presented a significant challenge to the current market system to react to recent events that have eroded investor confidence, he said.

WorldCom's announcement and similar news in recent months will put a greater burden on boards of directors to more closely police their professional staff and audit committees, Auberry said.

Another lawyer, Jeff Sanders, a media and communications attorney at New York-based Arent Fox Kintner Plotkin & Kahn, said: "Financially distressed communications companies, already pressured by heavy debt loads, declining revenues and ice cold capital markets, are now suffering the consequences of questionable accounting practices that were encouraged and became customary during the telecom boom of the late 90s.

"A certain result of more intense accounting scrutiny will be a new wave of telecom bankruptcies," he continued.

"Since many aggressive accounting practices are widespread across the industry, these bankruptcies are likely to include once-dominant long-distance providers such as WorldCom, equipment manufacturers and even some ILECs.

"While the magnitude of WorldCom's problems far surpasses that of most others, in the wake of Enron and Arthur Andersen, it is certain that regulators, legislators, securities lawyers and courts will be sharply focused on accounting practices in the telecom industry," said Sanders.

Adrian Drozd, a technology analyst for Datamonitor, said: "The revelations will destroy bankers' trust in the current management, as well as bringing the company into breach of its banking covenants. Bankruptcy seems inevitable for WorldCom.

"But it's not just WorldCom's shareholders who look set to lose out. Many of the company's business customers depend absolutely on telecoms and data transmission, and therefore need absolute confidence in their telecoms provider," said Drozd.

"The WorldCom scandal will inevitably hurt creditor confidence - meaning that weaker companies in the sector may follow the former giant down the road to failure."

Other corporations and executives could be drawn into an almost revenge-like mentality as a direct consequence of the WorldCom fall from grace.

Christina Sultan, managing director of Sultan and Company, a corporate investigation and forensic accounting firm located in Los Angeles and New York said she also believed it was highly probably that WorldCom's admission of accounting tricks would lead to broader investigations of other telecom firms downmarket.

But, she asked, is it just the CEOs' fault, or does the market itself play a role?

Answering her own question, she said: "The telecom stocks were overheated for a long time and that put pressure on them to perform.

"Wall Street set unrealistic expectations for the telecoms and led to them moving their numbers where they weren't supposed to."

The American consciousness has been dealt blow after blow, said Joyce L Gioia CMC, president of the Herman Group and co-author of How to Become an Employer of Choice.

"With a crisis of leadership of these proportions, it's no wonder that the stock market appears to be headed for 7500. The root cause of most of our problems is the way we compensate these leaders.

"We reward the wrong behaviors and short-term thinking that results in profit for the companies, as well as the huge bonuses paid to the executives," Gioia said. "Corporate boards of directors need to wake up and smell the coffee. Otherwise, there may be no tomorrow to wake up to."

No one, it seems, can escape making greater efforts if they want greater security in their savings and investments - and entrepreneurialism has emerged as Americans once again see opportunities in others' distress.

"In light of today's market realities, investors need to take an active role in managing their portfolio, even if they use a broker or financial advisor," said Leland Hevner, president of the National Association of Online Investors (NAOI), an educational organization dedicated to enabling individuals to take control of their investments through online resources.

To help tackle a task Hevner and his colleagues describe as "sometimes daunting", NAOI has developed a "reality check" study course so consumers can look afresh at their investments that have been hit hard.

The commercial interests of lawyers and large law firms in the US are so strong that ligitation against WorldCom executives, past or existing, seems inevitable. Quite how much they will be able to recover on behalf of their clients may be another matter altogether.