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.

Comments

'20's auto market probably an excellent analogy

[fw3]

The comparison to the auto industry doesn't work. Back when there were 50 auto companies there were a lot fewer people...

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.