WorldCom May Have Grounds to Sue

KPMG, Citibank, former executives fare poorly in a report commissioned by a bankruptcy judge. Also: Parmalat debt much larger than reported; Donaldson calls for more cooperation with E.U. regulators; Henley nets quick $5.3 million; more.


Former U.S. Attorney General Richard Thornburgh has issued a 500-page report stating that MCI — whose legal name remains WorldCom — may have grounds to sue KPMG LLP and Citigroup Inc. for hundreds of millions of dollars because of advice they gave the company before it filed for bankruptcy, according to Bloomberg’s account of the work.

Thornburgh’s report, written with a team of lawyers at Kirkpatrick & Lockhart LLP led by Michael Missal, is the last of three commissioned by U.S. Bankruptcy Judge Arthur Gonzalez on WorldCom’s demise.

The report added that MCI can sue former chief executive officer Bernard Ebbers, other top executives, and a number of former board members for their roles in the telecom company’s $11 billion accounting scandal.

KPMG, the company’s current auditor, provided it with a flawed strategy for minimizing state taxes, according to accounts of the report. The state-tax strategy “is yet another example of the company converting what could be legitimate into something that appears improper as a result of its aggressive design and implementation,” stated the report.

WorldCom likely avoided hundreds of millions of dollars in taxes between 1998 and 2001 by charging subsidiaries in various states more than $20 billion in royalties for services such as “the foresight of top management,” noted the report. The units deducted the royalty expenses for state-tax purposes, while the parent company was lightly taxed for them.

“Our corporate tax work for WorldCom was performed appropriately in accordance with professional standards and all rules and regulations, and we firmly stand behind it,” KPMG spokesman George Ledwith told Bloomberg.

In a statement, MCI added that “KPMG’s involvement in this program has previously been carefully reviewed by our current audit committee of the company’s board of directors and the company’s inside and outside tax counsel. Based upon this earlier review, the company concluded that the tax program recommended by KPMG in 1997 and 1998 was appropriate. As a result, the company has no plans to pursue claims against KPMG.”

According to wire-service analyses, the report also maintained that Citigroup helped Ebbers breach his fiduciary duty to the company by giving him shares in initial public offerings that resulted in more than $12 million of profits. Thornburgh linked the IPO allocations to the $100 million in investment-banking fees that Ebbers awarded Citigroup between 1996 and 2002, reported Bloomberg.

The report also accused Citigroup of giving assistance to Ebbers that the bank wouldn’t have offered to other retail customers, including a $53 million loan when the shares backing it were plummeting.

The company also may be able to file claims against Ebbers and former CFO Scott Sullivan as well as 11 former directors for approving $400 million of loans to Ebbers that he couldn’t repay, added the report.

In related news on Monday, Sullivan’s trial — scheduled to begin February 4 — has been pushed back by U.S. District Judge Barbara Jones to April 7 following a request by the defense for more time to prepare, reported the Associated Press. Sullivan has pleaded not guilty to securities fraud, conspiracy to commit securities fraud, and fraud in connection with the purchase or sale of securities.

Parmalat Debt Much Larger Than Reported

The Parmalat debacle is becoming worse by the day.

The food and milk giant had net debt of 14.3 billion euros ($17.6 billion) at the end of September 2003, according to a press release from the company. The release cited a preliminary report by PricewaterhouseCoopers, which in December was brought in to check the books.

In November, the company had announced that its debt at the end of September was 1.8 billion euros.

According to the release, PwC also found that Parmalat had heavily inflated its sales and core earnings figures. For the January-to-September period, earnings before interest, tax, depreciation, and amortization were only 121 million euros, much lower than the 651 million euros the company had reported. Revenues were 4 billion euros, compared with a reported figure of 5.38 billion.

The news battered the company’s bonds.

“If the figures are correct, a recovery rate of less than 10 percent is likely,” an investment banker in London told Reuters, which noted that previous market estimates of recovery rates assumed net debts of 10 billion euros and ranged between 30 percent and 50 percent.

Donaldson Calls for More Cooperation with E.U. Regulators

William Donaldson, chairman of the Securities and Exchange Commission, has called for greater cooperation with European Union market regulators to help prevent scandals like those that have rocked Parmalat, Ahold, and other companies.

“Parmalat made us all realize that fraud knows no national boundaries,” Donaldson told a conference on regulatory issues in Brussels, where he was visiting to meet E.U. officials, according to reports. “The lesson from Parmalat is a lesson for the need of cooperation between United States regulators and regulators around the world. That is exactly what we are calling for now.”

Donaldson, who was scheduled to meet with European Internal Market Commissioner Frits Bolkestein on Monday, said he would propose a formal dialogue between the SEC and the Committee of European Securities Regulators, which helps the European Commission draft E.U. financial laws and the vital implementation guidelines, added the report.

When the United States passed the sweeping Sarbanes-Oxley Act in the aftermath of the Enron debacle, regulators and corporate executives in a number of countries were upset by provisions that clashed with their own countries’ rules. They were especially upset with a rule that requires non-U.S. auditors to be supervised by the Public Company Accounting Oversight Board, the new U.S. accounting watchdog.

The SEC chairman, however, seems willing to discuss changes to the rules. Said Donaldson, “As the SEC began to implement the legislation, it became clear that some of the provisions may conflict with the law of home jurisdictions of foreign participants in U.S. markets such as multinational issuers and audit firms.”

Donaldson, however, will not permit E.U. exchanges to trade directly in the United States, a right foreigners have been clamoring for. He added the SEC would consider some exemptions, but only after it had completed an analysis of the market structure. “Allowing exchanges and their listed companies to access U.S. markets without registration [with the SEC] would result in disparate regulatory treatment,” said Donaldson, according to reports.

Henley Nets Quick $5.3 Million; Oracle Launches PeopleSoft Proxy Fight

Oracle Corp. chief financial officer Jeffrey Henley, who was recently named chairman of the software giant, made more than $5.3 million from exercising and then quickly selling more than 500,000 stock options at the end of the last year.

Henley paid $2.54 for each of the shares, then unloaded them for $13.20 a pop.

“Our senior executives may only trade at certain times during the quarter and must follow specific trading procedures,” Oracle spokeswoman Jennifer Glass told the San Jose Mercury News in an emailed statement. “Trades occur regularly as individuals seek to diversify their portfolios. Beyond that, I cannot comment on our executives’ personal investment decisions.”

All told, last year Henley made nearly $35 million from exercising options on and subsequently selling 3.5 million Oracle shares.

Meanwhile, Oracle is launching a proxy fight in an attempt to complete its $7.3 billion offer for PeopleSoft, which was rejected back in June.

Oracle announced that it nominated five individuals to the PeopleSoft board of directors, although only four of eight seats are up for election.

Oracle added that it intends to introduce a stockholder proposal to expand the PeopleSoft board to nine members if Michael Maples is not put up for election. Maples joined PeopleSoft’s board in mid-July as part of its acquisition of J.D. Edwards & Co., where he held a seat on that company’s board.

“We believe that the incumbent PeopleSoft board of directors has consistently refused to consider its stockholders’ best interests” regarding the tender offer, said Oracle spokesperson Jim Finn.

In a statement, PeopleSoft countered that “We believe that Larry Ellison’s attempt to gain control of PeopleSoft’s board of directors is solely to advance Oracle’s agenda and is not in the best interests of PeopleSoft’s stockholders,” adding that Oracle’s offer significantly undervalued the company. Since the beginning of June, the statement continued, PeopleSoft’s stock price has increased more than 45 percent.

Short Takes

  • United Rentals Inc. raised $1.375 billion in two parts in the private placement market, the largest sale in the junk bond market since October. It sold $1 billion of senior notes due in 2012, priced at 272 basis points over comparable treasurys, and $375 million of senior subordinated notes due in 2014, priced at 297 points over the benchmark.
  • Schering-Plough took a $179 million charge to cover early retirement offered to about 900 employees. The company had offered this deal to 2,400 employees as part of a plan to reduce payroll expenses by 10 percent.
  • L-3 Communications declared its first quarterly cash dividend of 10 cents per share. Says chairman and chief executive officer Frank C. Lanza, “The initiation of a quarterly dividend demonstrates the board’s confidence in the company’s financial condition and expectations for continued strong cash flow.”

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