WorldCom Inc, which last year filed the largest US bankruptcy, has uncovered US$11 billion in overstated profit, US$2 billion more than what has been publicly disclosed, people familiar with the matter said.
WorldCom, the No. 2 US long-distance telephone company, likely will announce by June it will restate results to reflect the misstatements, which date back to 1999, people familiar said.
WorldCom doesn't expect to find more errors, the people said.
The new irregularities show the lengths to which former WorldCom executives went to hide the company's deteriorating performance. Federal prosecutors are trying to build a criminal case against former Chief Executive Officer Bernard Ebbers and have already charged ex-Chief Financial Officer Scott Sullivan with securities fraud. He has pleaded not guilty.
"What matters to prosecutors is whether they can link the errors to Ebbers," said Michael Perino, a securities-law professor at St. John's University in New York. "So if there are misstatements in this new round that prosecutors can tie directly to Ebbers then their hand is strengthened."
New CEO Michael Capellas is trying to clean up WorldCom's books to guide it out of bankruptcy this year. The Clinton, Mississippi-based company filed for Chapter 11 protection in July after initially revealing it hid US$3.85 billion in costs, masking losses. The people familiar declined to give details on the new errors.
WorldCom spokeswoman Claire Hassett declined to comment. A lawyer for Ebbers, who resigned in April 2002 under pressure from falling sales and stock prices, didn't return a call or e-mail seeking comment. Ebbers has denied wrongdoing.
As part of the company's drive to keep its WorldCom Group data unit looking profitable, executives shifted US$3.3 billion of expenses onto the books of the separately traded MCI Group consumer long-distance unit in 2001, people familiar with the matter said. The size of WorldCom's restatement won't be affected by the cost allocation.
A January 2002 e-mail sent to Ebbers by MCI's then-Chief Operating Officer Wayne Huyard asking for details of expenses on his unit's books was ignored, the Wall Street Journal reported earlier today. Parent-company executives including Ebbers owned more shares in the data unit than they did in MCI.
MCI reported US$1.4 billion of earnings before interest, taxes, depreciation and amortization in 2001. The separate classes of shares were created that year.
Huyard, now president of MCI Mass Markets, wasn't available for comment, Hassett said.
The e-mail is contained in an internal report on WorldCom's accounting by law firm Wilmer Cutler & Pickering, one person familiar with the matter said. The report, being prepared for WorldCom's board by former US Securities and Exchange Commission enforcement chief William McLucas, is due to be released in June.
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