Three WorldCom Inc executives, including former Chief Executive Officer Bernard Ebbers, and Salomon Smith Barney analyst Jack Grubman were subpoenaed by a congressional committee after the phone company was accused of fraud for concealing losses.
The House Financial Services Committee called for Ebbers, Grubman, former WorldCom Chief Financial Officer Scott Sullivan and current Chief Executive Officer John Sidgmore to testify July 8 as Congress seeks to restore trust in public companies.
"The WorldCom news dramatically underscores the need for legislative and regulatory reform," said Michael Oxley, the Ohio Republican who chairs the committee.
The Securities and Exchange Commission is alleging that the second-largest US long-distance phone company committed fraud by misreporting US$3.8 billion in expenses.
The case adds to a congressional calendar thick with investigations into companies including ImClone Systems Inc, Global Crossing Inc and Enron Corp. Congress has been weighing legislation to tighten laws on accounting and to protect workers' pensions.
"I'm concerned about the economic impact of the fact that there are some corporate leaders who have not upheld their responsibility," President George W. Bush said.
Billy Tauzin, a Louisiana Republican and chairman of the House Energy and Commerce Committee, asked WorldCom to surrender by July 11 the audit that led to the disclosures, minutes of audit committee and board meetings, and other documents.
The SEC said it's not in discussions with WorldCom to settle fraud charges filed against the company, refuting a CNBC-TV report. The report is "flat out not true," said SEC spokeswoman Christi Harlan.
Grubman, who is being sued for allegedly misleading investors on WorldCom, cut his rating on the company to "underperform" Monday after holding a "buy" rating on the company for four years. He couldn't be reached to comment. He told CNBC in a brief interview that he was "as shocked about this as everyone else." Mary Ellen Hillery, a spokeswoman for Salomon Smith Barney, said the company "will fully cooperate with any inquiries."
The analyst is also under investigation by New York Attorney General Eliot Spitzer, who is looking into Wall Street research on WorldCom. "It did catch many people's eye that he finally issued a downgrade," Spitzer said of Grubman. "We will take a look at it [WorldCom] as it relates to analyst commentary."
WorldCom spokeswoman Julie Moore declined to comment on the committee's plan to subpoena Sidgmore. Ebbers and Sullivan couldn't be reached to comment.
"Just like the administration is reacting with appropriate fury, Congress is reacting with appropriate fury," said Scott Cleland, chief executive of Precursor Group, an independent research firm in Washington. "This is potentially the biggest white-collar crime in American history."
SEC Chairman Harvey Pitt said that the agency would try to stop WorldCom from making "extraordinary" payments, including severance payments and bonuses, to current or former executives. The SEC asked a judge to appoint a monitor to ensure that WorldCom doesn't destroy documents, Pitt said.
The SEC also ordered WorldCom to file under oath, before the stock market opens Monday, "a detailed report of all the specifics, including the relevant circumstances that led to the restatements," Pitt said. The report will be made public.
The House Financial Services panel is the first to announce hearings and subpoenas related to WorldCom.
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