Four Down, Ebbers to Go

Two more guilty pleas from the accounting department at WorldCom. Also: Sweetheart deal for a Tyco acquisition?; at many companies, option play turns into a keeper; and more.


Two more former WorldCom finance executives pleaded guilty for their role in the telecom giant’s $7 billion fraud, which resulted in the largest U.S. bankruptcy in history.

Betty Vinson and Troy Normand, both certified public accountants who worked in WorldCom’s general accounting department and assisted in the preparation of financial documents, pleaded guilty to one count of securities fraud and one count of conspiracy to commit securities fraud in Manhattan federal court. They also agreed to cooperate with prosecutors, according to reports.

Their pleas come just three days after former accounting director Buford Yates Jr. pleaded guilty to two felony charges, stating that he both conspired to commit and committed securities fraud.

Last month former WorldCom controller David Myers pleaded guilty to filing false documents with securities regulators, conspiracy to commit fraud, and securities fraud. He said he was directed by the company’s senior management to falsify the books, according to reports at the time.

The feeling is that the feds are slowly trying to build a case against former chairman Bernie Ebbers and former CFO Scott Sullivan. Last month Sullivan pleaded not guilty to charges that he participated in WorldCom’s fraud.

Vinson reported to Yates, who reported to Myers, who reported to Sullivan.

Vinson and Normand reportedly told U.S. Magistrate Judge Andrew Peck that their supervisors ordered them to falsify the financials with the goal of hiding expenses. “I came to believe these adjustments being made to WorldCom’s financial statements contravened Generally Accepted Accounting Principles” and were meant to mislead investors and financial analysts, said Vinson, according to Bloomberg.

Vinson and Normand face a possible maximum prison term of 15 years, but they are expected to receive shorter sentences since they are cooperating. Vinson is scheduled to be sentenced on January 13, and Normand on April 10.

Sweetheart Deal for a Tyco Acquisition?

Did former Tyco International CEO Dennis Kozlowski forge a secret deal with Leon Hirsch, former CEO of U.S. Surgical, when the two companies agreed to merge in 1998?

The office of Manhattan District Attorney Robert Morgenthau seems to think it’s possible. The prosecutor is investigating whether Kozlowski guaranteed a $14 million retention package to Hirsch in exchange for his agreement to the takeover, according to USA Today.

The inquiry is an outgrowth of the probe of Kozlowski and former Tyco CFO Mark Swartz, who were indicted last month for stealing millions of dollars from the conglomerate.

When Tyco bought U.S. Surgical in a $3.17 billion all-stock deal, Hirsch was named nonexecutive chairman of Tyco Healthcare Products Group, which absorbed his company.

Tyco paid Hirsch about $14 million through a $340,000-a-month retainer, according to the paper, citing a person close to the review. The paper also noted a Securities and Exchange Commission filing that shows Hirsch was scheduled to join Tyco’s board; he never did.

Tyco paid $42.50 per share, well below the $50 per share that many analysts thought U.S. Surgical was worth at the time of the deal, according to the report. The paper added that William Patterson, director of the AFL-CIO’s office of investment, questioned the deal’s price tag at the time in a June 1998 letter to U.S. Surgical’s board.

Patterson also questioned whether Hirsch’s interest in his own job security at the time affected the board’s decision-making process, and he urged U.S. Surgical’s outside board members to seek higher bids, according to the USA Today article.

The paper said Morgenthau’s office is exploring whether Hirsch facilitated the deal “because he knew what he was going to get.”

For Many Companies, Option Play Turns into a Keeper

So much for the rush to expense options. Dozens of companies seemed to trip over one another this past summer, when the options issue became a hot topic, announcing plans to adopt such a policy.

It turns out that a lot of talk is turning into little action.

Just 8 percent of companies plan to begin expensing options within the next 12 months, according to a Deloitte & Touche survey of senior financial and human resources executives from 120 Fortune 1,000 companies with median revenues of $1.3 billion.

Another 53 percent of respondents are postponing any decision on the matter, while 35 percent do not intend to expense options unless mandated by legislation or regulatory changes.

The main reason companies are delaying their decision: they are unsure how to value options accurately.

Fully 49 percent of respondents are waiting for more clarification and standardization in the methodology for expensing stock options. In fact, when asked to identify the single most difficult issue regarding options expensing, 60 percent cited the need to determine a proper valuation methodology.

“While many companies remain on the fence, most need to make a decision about expensing options for 2003 by year-end,” said Michael S. Kesner, partner in Deloitte & Touche’s Performance Management and Compensation Practice, in a statement. “Despite the murkiness around valuation, another wave of prominent companies announcing plans to expense options, in addition to the Financial Accounting Standards Board’s recent announcement about converging its standards with the International Accounting Standards Board’s, could trigger an options-expensing Tsunami.”

Indeed, 45 percent of respondents said expensing options would negatively affect their earnings by 5 percent or more, which could further depress stock prices.

Another reason why this issue is important to companies: stock options are the only long-term incentive program for 72 percent of the respondents.

“I am expecting a very large correction in executive pay,” said Kesner in his statement. “Expensing options, combined with efforts to keep within stock dilution guidelines, will force many companies to cut back on grants to senior managers and perhaps eliminate them entirely for middle managers and professionals. The resulting widespread drop in executive and middle management pay may cause people to feel less wealthy, leading them to curtail spending, which has been propping up the economy.”

As a result, companies are looking at alternatives to options to compensate their key people.

For example:

  • 61 percent are considering a return to cash-based performance plans.
  • 49 percent are looking at performance-vested stock options.
  • 45 percent are evaluating performance-vested restricted stock.

The responses total more than 100 percent because most companies surveyed said that more than one approach would be used.

Short Takes

  • The SEC filed charges in U.S. District Court against Lernout & Hauspie Speech Products, alleging that the developer of speech and language technologies inflated revenues and earnings from 1996 through the second quarter of 2000. “The result was an international financial scandal, the destruction of Lernout & Hauspie as an operating company, and a loss of at least $8.6 billion in market capitalization, borne by investors in Belgium, the United States, and elsewhere,” according to the regulatory agency.
  • Barbara T. Alexander, a director who served on the audit committee at Homestore Inc. since April 2001, resigned from the board. “Her longstanding leadership regarding corporate governance, including assisting the company in the implementation of rigorous internal audit controls, the adoption of a companywide code of conduct and the introduction of an anonymous ‘whistle-blower’ program, will continue to serve Homestore very well,” said Homestore chairman Joe Hanauer in a statement.

At the beginning of the year, Homestore warned that it would restate revenues for the first three quarters of 2001 by between $54 million and $95 million. Alexander supervised the company’s finance department after chief financial officer Joseph Shew resigned in early December 2001.

  • Moody’s Investors Service downgraded the long-term ratings of J.P. Morgan Chase & Co. from Aa3 to A1. Moody’s also cut the long-term senior ratings of all of J.P. Morgan Chase’s bank subsidiaries by one notch, from Aa2 to Aa3. The outlook for all ratings is stable, it added.

Moody’s said that the downgrade reflects its concerns regarding the medium-term outlook for JPM Chase’s business performance in the context of longer-term concerns about the prospects for the successful execution of its investment banking and capital markets strategies. “JPM Chase’s financial performance has lagged behind similarly rated peers during this cycle,” it added. “Moody’s is concerned that JPM Chase’s recent problems may further complicate its ability to execute its capital market strategy, which has so far met with only partial success.”

  • Viacom Inc. said that from time to time it would repurchase up to $3 billion of its stock. The new program will begin with the completion of the company’s most recent $2 billion market purchase program, under which Viacom has purchased approximately $1.8 billion in Viacom stock since February 2001. Viacom will finance the purchase program with cash flow generated by the company’s operations.
  • SEC chairman Harvey Pitt indicated that he would exempt auditors in the European Union from U.S. supervision if the EU set up its own regulatory system. “We want to make sure that no one is subject to duplicative regulation,” he told Dow Jones.

The EU Commission reportedly is not happy about the United States’s plans to create an accounting oversight committee that would have authority over non-U.S. auditing firms. As a compromise, the EU Commission said it would consider setting up its own accounting oversight committee based on the U.S. model.

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