A federal judge set a March trial date on Wednesday for scandal-plagued telecommunications group WorldCom on alleged securities fraud and named a former top regulator to oversee that no key documents are shredded and no excessive payouts are made to top officers.
In a late development on Wednesday, the US House Financial Services Committee in Washington withdrew two key witnesses from a hearing scheduled for Monday for fear their testimony could compromise other investigations into WorldCom.
Shares of the Clinton, Mississippi-based company more than doubled in Nasdaq trading, albeit only going to 22 cents from 10 cents, a day after chief executive John Sidgmore apologised for the scandal and tried to stem the company`s fall.
US District Judge Jed Rakoff set 31 March as the tentative date for the Securities and Exchange Commission to begin presenting its case accusing WorldCom of violating securities laws by covering up $1.22 billion in losses by improperly booking $3.85 billion in expenses.
The SEC is seeking unspecified monetary penalties and to bar the company from violating securities laws again.
Rakoff also appointed Richard Breeden, a former head of the Securities and Exchange Commission, to ensure no documents are destroyed by the company and that no payments that exceed $100 000 are made to current or former executives.
"I want a hands-on monitor who will report to me what`s going on," Rakoff said, adding that Breeden will be free to "look into every nook and cranny to fulfil his function".
Breeden`s appointment follows allegations that bankrupt energy trader Enron`s auditor, Andersen [ANDR.UL], and telecommunications provider Global Crossing shredded documents that could have shed light on the companies` accounting methods. Enron also awarded bonuses to key staffers as the energy company`s problems deepened.
WorldCom`s Sidgmore on Tuesday tried to allay fears on Wall Street that the company would file for bankruptcy protection or break up its core assets, but he made clear that its position was dependent on negotiations for new credit lines.
"This [bankruptcy] is not our preferred path," he told reporters on Tuesday. "And I think, fundamentally, the real issue hinges on what the banks do right now."
Shares move up, speculative?
The House Financial Services Committee scratched WorldCom`s internal auditor Cynthia Cooper and the audit committee chairman, Max Bobbitt, from Monday`s hearing.
Committee chairman Michael Oxley "became concerned that testimony from these two individuals could potentially compromise other inquiries," Peggy Peterson, spokesperson for the committee, said. WorldCom is being probed by the Justice Department and the SEC.
The Wall Street Journal on Wednesday reported that Cooper found the accounting errors on her own and the audit committee delayed taking action on her findings, differing from the chronology offered by WorldCom. A company spokesperson declined to comment on the report.
Testimony was expected from WorldCom chairman Bert Roberts, Sidgmore, Salomon Smith Barney telecommunications analyst Jack Grubman, and Melvin Dick, once a senior partner at former WorldCom auditor Andersen.
WorldCom, which is the number two US long-distance telephone and data services company and has operations in 65 countries, carries about half of all e-mails in the world and 70% of all e-mails in the US.
Shares of WorldCom Group, which tracks the company`s data services operations, shot up to 29 cents at the open of regular trading, after closing at 10 cents on Tuesday.
The stock pared gains to close up 12 cents, or 120%, at 22 cents, with 1.02 billion shares trading hands. The shares of MCI Group, which track the carrier`s consumer long-distance operations, closed up 16 cents, or 48.5%, at 49 cents.
"I do not think there is any value in the equity," said Patrick Comack, who at Guzman & Co has a "sell" rating on the shares and does not own any WorldCom stock. "I guess some people are speculating they might be able to get new credit lines and avert bankruptcy."
In addition to finding new lines of credit, WorldCom is also looking for errors in its 1999 and 2000 financial records.
'Eyes and ears`
Rakoff said was pleased with the initial efforts by WorldCom to cooperate. He said that part of Breeden`s responsibilities as monitor is to make sure WorldCom assets are not affected by unnecessary payments, including salaries, severance payments, bonuses, gifts and loans.
Breeden was selected from a list of candidates agreed upon by the SEC and WorldCom. After the hearing, Breeden told reporters he expected to start his work immediately.
"I am not there to replace the company`s management, I`m there to be the eyes and ears of the court," he said.
Breeden will also make sure that WorldCom has developed document retention policies and has complied with them.
Breeden served as SEC chairman from 1989 to 1993 and now runs his own firm, which specialises in corporate workouts and distress situations, as well as strategic consulting in corporate governance, accounting and disclosure issues.
(With additional reporting by Jeremy Pelofsky in Washington.)
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