Financial Scams - Enron Nov 2001 and Worldcom Jul21, 2002

I was really quite curious how these things can happen yr after yr with all these scams. Really amazed. I was selling Worldcom bonds back then. Haha.

http://en.wikipedia.org/wiki/Enron_scandal
The Enron scandal was a financial scandal involving Enron Corporation Former (NYSE ticker symbol: ENE) and its accounting firm Arthur Andersen, that was revealed in late 2001. After a series of revelations involving irregular accounting procedures conducted throughout the 1990s, Enron was on the verge of bankruptcy by November of 2001. A white knight rescue attempt by a similar, smaller energy company, Dynegy, was not viable. Enron filed for bankruptcy on December 2, 2001.

As the scandal was revealed, Enron shares dropped from over US$90.00 to less than 50¢. As Enron had been considered a blue chip stock, this was an unprecedented and disastrous event in the financial world. Enron's plunge occurred after it was revealed that much of its profits and revenue were the result of deals with special purpose entities (limited partnerships which it controlled). The result was that many of Enron's debts and the losses that it suffered were not reported in its financial statements.

In addition, the scandal caused the dissolution of Arthur Andersen, which at the time was one of the five largest accounting firms in the world.

http://en.wikipedia.org/wiki/MCI_Inc.#Accounting_scandals
MCI, Inc. is an American telecommunications company that is headquartered in Ashburn, Virginia. The corporation was the result of the merger of WorldCom (formerly known as LDDS followed by LDDS WorldCom) and MCI Communications, and used the name MCI WorldCom followed by WorldCom before taking its final name on April 14, 2003 as part of the corporation's emergence from bankruptcy. The company formerly traded on NASDAQ under the symbols "WCOM" (pre-bankruptcy) and "MCIP" (post-bankruptcy). The corporation was purchased by Verizon Communications with the deal closing on July 7, 2006, and is now identified as that company's Verizon Business division with the local residential divisions slowly integrated into local Verizon subsidiaries.

MCI's history, combined with the histories of companies it has acquired, echoes most of the trends that have swept American telecommunications in the past half-century: It was instrumental in pushing legal and regulatory changes that led to the breakup of the AT&T monopoly that dominated American telephony; its purchase by WorldCom and subsequent bankruptcy in the face of accounting scandals was symptomatic of the Internet excesses of the late 1990s. It accepted a proposed purchase by Verizon for US$7.6 billion.

For a time, WorldCom (WCOM) was the United States' second largest long distance phone company (AT&T was the largest). WorldCom grew largely by acquiring other telecommunications companies, most notably MCI Communications. It also owned the Tier 1 ISP UUNET, a major part of the Internet backbone. It was based in Clinton, Mississippi before moving to Ashburn, Virginia.

Bernard Ebbers became very wealthy from the rising price of his holdings in WorldCom’s stock. However, shortly after the MCI acquisition in 1998, the telecommunications industry entered a downturn and WorldCom’s growth strategy suffered a serious blow when it was forced to abandon its proposed merger with Sprint in late 2000. By that time, WorldCom’s stock was declining and Ebbers came under increasing pressure from banks to cover margin calls on his WorldCom stock that was used to finance his other businesses (timber and yachting, among others). During 2001, Ebbers persuaded WorldCom’s board of directors to provide him corporate loans and guarantees in excess of $400 million to cover his margin calls.The board hoped that the loans would avert the need for Ebbers to sell substantial amounts of his WorldCom stock, as his doing so would put further downward pressure in the stock's price. However, this strategy ultimately failed and Ebbers was ousted as CEO in April 2002 and replaced by John Sidgmore, former CEO of UUNet Technologies, Inc.

Beginning in 1999 and continuing through May 2002, the company under the direction of Scott Sullivan (CFO), David Myers (Controller) and Buford “Buddy” Yates (Director of General Accounting) used fraudulent accounting methods to mask its declining earnings by painting a false picture of financial growth and profitability to prop up the price of WorldCom’s stock.

The fraud was accomplished primarily in two ways:

• Underreporting ‘line costs’ (interconnection expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them.
• Inflating revenues with bogus accounting entries from ‘corporate unallocated revenue accounts’.

Eugene Morse, an internal auditor at WorldCom reporting to Cynthia N. Cooper, uncovered approximately $3.8 billion of the fraud in June 2002 during an examination of capital expenditures.Cynthia Cooper subsequently alerted the company’s new auditors, KPMG (who had replaced Arthur Andersen, WorldCom’s external auditors during the fraud) and the chairman of the audit committee, and she has been widely credited as having uncovered the fraud at Worldcom. Shortly thereafter, the company’s audit committee and board of directors were notified of the fraud and acted swiftly: Sullivan was fired, Myers resigned, Arthur Andersen withdrew its audit opinion for 2001, and the U.S. Securities and Exchange Commission (SEC) launched an investigation into these matters on June 26, 2002. By the end of 2003, it was estimated that the company's total assets had been inflated by around $11 billion.

On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection in the largest such filing in United States history at the time (since overtaken by the collapse of Lehman Brothers in September 2008). The WorldCom bankruptcy proceedings were held before U.S. Federal Bankruptcy Judge Arthur J. Gonzalez who simultaneously heard the Enron bankruptcy proceedings which were the second largest bankruptcy case resulting from one of the largest corporate fraud scandals. None of the criminal proceedings against WorldCom and its officers and agents were originated by referral from Gonzalez or Department of Justice lawyers.

WorldCom changed its name to MCI, and moved the corporate headquarters from Clinton, Mississippi to Dulles, Virginia, on April 14, 2003. Under the bankruptcy reorganization agreement, the company paid $750 million to the SEC in cash and stock in the new MCI, which was intended to be paid to wronged investors. In May 2003, the company was given a no-bid contract by the United States Department of Defense to build a cellular telephone network in Iraq. The deal has been criticized by competitors and others who cite the company's lack of experience in the area.