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WorldCom CFO Accused of $3.6 Billion Fraud
winter was among the first to point out that allegations of fraud have led to a massive stock drop at WorldCom. A flurry of stories have popped up on Yahoo!, none of them good news for WorldCom. CFO Scott Sullivan is accused of misstating the company's revenues, specifically its earnings before interest, taxation, depreciation and amortization (aka EBITDA), and the stock has slid more than 50% (as of this writing) in after-hours trading.
This is just another example of the real trouble American companies are in. On PBS the other night, Frontline divoted a whole hour to the extreme mess than the accounting/stock/ceo situation is in... Basically, Stock options aren't reported. CEO gets huge stock options. CEO lies about company's value. Accountants lie for value too, as they have consulting contracts with the company. Truth is found out, company's stock plunges, accounting company shreds paper... pays off politicians to keep things status-quoe... cycle starts over again. Very scarry.
when I checked stocks were .20 a share, down 78%
Yahoo Real-time Mkt
Thanks to file sharing, I purchase more CDs
Thanks to the RIAA, I buy them used...
The $3.6 Billion, is how much the value of the company sank on the news, in after hours trading.
"Politicians are interested in people. Not that this is always a virtue. Fleas are interested in dogs." P.J. O'Rourke
Their accountant was...Arthur Andersen LLP. As Gomer Pile would say: surprise, surprise.
If it had been one of the other "Final Four" accouting firms, maybe it would have been the beginning of something huge. Expect a "what do you expect?" while they move on to the next scandal.
Guess who was their auditor until last May... Andersen. (Bloomberg) However, they claim WCom was wihholding information from them, hum.... Fortunately for your own company, you can't choose Andersen to be your auditor anymore :-)
I suggest you look up 'Kondratiev cycle technology'. Jay Forrester (inventor of magnetic-core memory), studied this at MIT/Sloan school and determined that the a long-term economic cycle develops due to the 'self-ordering' nature of capital equipment.
Basically Forrester's group found evidence for the following feedback loop: Early in the deployment of any technology there is a scarcity of capital. Capital equipment is expensive, and early investments involve high degrees of risk accompanied by high profits in a given technology sector. That in turn brings investment in the businesses developing this capital. However, a large part of this capital is used in the development of the capital itself (i.e. IT tends to need advanced hardware and software to develop the bleeding-edge new hardware and software for actual end-use).
Thus the 'buildup phase' of new technology creates a high demand (for both the acutal equipment and the stock of the companies that make it). At some point, however the generation of this new (and expensive) equipment (or software) exceeds the actual (end-user) demand. When this happens the high profit margins that were being realized during the build-up phase disappear quite rapidly, the investment-value follows (crashing stock prices) and the investment money looks for other places. See this article
Sound familiar? Whether or not you buy into the economic details, this is one of the behaviors seen in economics. The inflated acquisition prices mentioned are the direct result of this effect.
Because sure people make stupid mistakes even (especially?) with billion dollar transactions. But the funny thing about the stock market is that the money doesn't ever go away. Whenever someone loses in the market, someone else has made a profit.
And yes it sucks when the players break the rules but especially on the financial rules the market punishes you very hard. I worked for a biotech firm that was growing well, showing solid net earnings ca $300m on $2b sales, a 30:1 p/e ratio. Our japan division was found to have been moving inventories to the tune of changing the sales #'s by $50m. This lie, accounting for only 2.5% caused a nearly 50% drop in stock price and a (justified) shareholders lawsuit.
Whenever someone fsck's with the rules of the game (fixing the books, insider trading, breaking anti-trust rules, whatever), real people get hurt and we have SEC, IRS etc to try and keep up with the process. MS imo is an excellent example of how a determined and unscrupulous competitor can harm while evading the systems controls(sic).
I'm just thanking my stars that (so far) the politicians havent fscked up like they did after the '29 stock market crash. The US enacted protectionist trade tarrifs which effectively were the first blow in killing off the *world* economy.
Post-sept-11'th fears and RIAA / DMCA idiocies aside, at least across a several bumpy decades our boneheads in Washington, the EU, etc at least so far have managed not to fsck up. They still have opportunities to snatch defeat from the waiting hands of victory, but so far it could be a whole lot worse I think.
Linux is Linux, if One need clarify their dist: <Dist>/GNU Linux
bsds are of course just BSD
I'm going to go a little off topic here, but this is my personal analysis of why we are seeing so many large companies like WorldCom collapsing in on their own corruption.
We all know that power and money doesn't circulate within a vacuum. Everything in the world is tied together, so that when one force of influence diminishes another will rise to take its place. The five main players I see in the modern world economy are - The governments, big business, small business, unions, and workers/individual consumers. The dynamics and fairness/wealth distribution of an economy are highest when there is a balance of influence between each of those forces. Historically, they are rarely balanced (and in some countries they are completely imbalanced), but I think the opportunities to correct it are greater than ever now.
As you may guess, I believe that the weight of influence in the American economy (in a concerted push since the early 80's) has tipped to predominantly favour big business and big government/military. Since America's economy is twice the size of number 2 - Japan - it controls global economic policy and as such is creating mirror economies to its own around the world. This imbalance is spreading like an epidemic around the world, seriously affecting other countries who model themselves off America - like my own country Australia.
So, what can be done about it? It seems a rebalancing isn't going to happen on its own, or at least not until the current situation degenerates to a point where violent revolution is needed to fix the problem. I guess there's several paths that could be chosen but here are two off the top of my head. One - allow the current consolidation of small and medium sized business into large/uber businesses to continue but restore power to the unions. Two - shift all laws that favour big business to favour small business instead.
Personally, I favour the latter. A society run by small business is far less likely to have organised and entrenched corruption - eg Would Dick Cheney have been swayed by the CEO of a company that controlled only one or two power stations? What benefit would a government get by helping out small companies that can't contribute many campaign funds and have little influence around the nation?
Anyhow, I think I'll cut the sermon off here. I think +5 troll and +5 offtopic is a good enough effort for today!
was one of those people laid off. I can remember chuckling a little when I learned that my severance package was "tied up in court" but that I'd see it down the road. Good thing I've heard that one before and knew I'd have a better chance of seeing a stable microsoft OS in my lifetime. The worst part about this one is how things were handled. The long time employees were still talking about how the Rigas's would save the day even when word of their 3.6 billion dollar theft from company coffers hit the news. Most of them were completely convinced that everything would be alright. Given the scope of this disaster, ABS knew full well it was going to happen when they hired me, and outright lied to me about how stable the company was and where it was headed. They lied to at least 5 new people in the department I joined also. For those of you that don't know, Adelphia Corporate is located in Coudersport, PA. It's a quaint little northern Pennsylvania town about 30 miles from the NY border. Population 2500. About 400 houses, homes and small businesses. A McDonalds, A Subway, oh and a 9 billion dollar telecommunications company. It's also 45 miles from NOTHING AT ALL. The makings for a great Stephen King novel. Tons of people displaced by the tech decline risked everything to move to the middle of nowhere for half the pay. When the layoffs came, they got rid of all the new people. The idea being to try to save some face in the community by keeping the people that were born and raised in Coudersport. Some of the new folk that were laid off had bought houses there. I feel for those people the most. As someone that's used to getting company's shot out from under me, I rented. My bad habit of eavesdropping on upper management let me know two weeks ahead of time that I'd be gone. I was actually relieved to be getting off the sinking ship early. Now I'm enjoying a very large unemployment check that Adelphia has to pay for. I figure I'll suck about 25 grand out of them then get a job. For the time being I'm kicking back, sipping drinks, and watching cable. I have no bills, so I have no worries. It's good to be prepared. I feel the most for the town of Coudersport. It really is a nice place. Absolutely beautiful. It was nice driving a mile to work and worrying more about hitting a deer than traffic or having my stereo stolen. I really didn't feel the need to lock my door. Nobody there does. No crime, no drug problem, great school, perfect place to start a family. The American Dream. The local economy there is centered around Adelphia, and ABS. The Rigas's own at least 90 percent of the town. I saw massive evidence that they truly love their small northern mountian town. They invested a fortune (granted, it was probably stolen money) trying to save it from tumbleweeds. They built a multi-million dollar data center in the middle of nowhere. They built their corporate headquarters in that same middle of nowhere. They employed the whole town, and gave loans to many townspeople. It's sad to know that within a few years, Coudersport will be an empty zipcode. There will be nothing there to support the town. The Rigas's will no doubt move to Buffalo or Phili. The datacenter will stand empty. The people left in town will move to Wellsville or Bradford (where they make Zippo Lighters) and seek new employment. Imagine a small town where a military base has been closed, and multiply the effect by 3. That's what it's going to be like. Slow motion Hiroshima with no boom. The only positive I can think of is the demise of the corrupt local goverment there. Since dead towns don't have courts, the world will be slightly better once the coudy courthouse is empty. I'd like to give a shout out to those left behind in the UNIX dept. I hope yall are hanging in there, and finding better jobs (If you all haven't been laid off already). You were all really great people (ScottU sucks though =P ). Make sure you file for unemployment at:
http://www.dli.state.pa.us
immediately after you are laid off. I can't get the year of my life back that was stolen from me by Adelphia, but I can sure as hell get every last cent I can. Good Luck!
The most important thing any republican needs to know.
>investors - had their eyes closed to the obvious.
...unless you read NANOG-l, where the network engineers, architects and hackerish observers of the network industry have been saying for (literally) years "Bernie Ebbers is a crook, what a shame UU will probably go down in the wreck when it finally comes."
By all accounts (and from some personal experience as a customer) UUNet have a pretty solid, reliable, professionally run network. I just hope the receivers realise a lit network complete with engineering teams is worth a lot, lot more than a dark network with no engineers.
"None are more hopelessly enslaved than those who falsely believe they are free." -- Goethe
http://www.theregister.co.uk/content/4/24068.html
:-)
However, having untold billions in the bank should help a little
It could be worse. I work at a R&D operation that supplies Worldcom. We were told last week that $50M of expected business had fallen through, and that lost us a bunch of conditional investment. And gee, now Worldcom discloses that it has $3.7B less than it thought. Spot the connection, and bear in mind that Worldcom will have put damage limitation and cost control in place before going public with this.
So now we've got an enforced company wide pay cut, compulsory redundancies with statuatory minumum compensation and no employee consulatation, and an off the record statement from HR that our contracts aren't worth the paper they're written on. The worst bit? Our CFO - the guy who booked $50M of potential sales plus conditional investment as a done deal - retains his job. Why? Because now, more than ever, we apparently need steady hands at the tiller. It's very brave and noble for the captain to stay at the helm and go down with his ship - but not if he's already asset stripped the lifeboats and thrown the entire crew overboard to gain bouyancy.
Sorry, gripe mode off. I just wanted to remind everyone that when you see headlines like these, it's not just the 17,000 poor shmoes at Worldcom that are getting stiffed. That $3.7B - and the lost investment and sales that it will cause - are going to be clawed back by cancelling orders or withholding money from suppliers, many of whom have already spent or invested on the basis that, hey, if you can't trust Worldcom to pay up, who can you trust. The hurt just spreads and spreads.
God damn but this is a bad time to be in telecomms.
If you were blocking sigs, you wouldn't have to read this.
Not that you need much convincing, but this article over at the NYTimes is rather interesting, considering recent events. It talks about the extremely rough times that telecom companies are going through, and leaves open the possibility of a complete meltdown of that market. Scary, because as you said this affects everyone in the tech industry.