Worldcom Essay

1616 Words Jul 4th, 2013 7 Pages
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK ___________________________________________ ) SECURITIES AND EXCHANGE COMMISSION, ) 450 Fifth Street, N.W. ) Washington, D.C. 20539 ) ) Plaintiff, ) ) v. ) ) WORLDCOM, INC., ) ) Defendant. ) ___________________________________________)

Civil Action No. COMPLAINT (Securities Fraud)

The Securities and Exchange Commission (“the Commission”) alleges for its Complaint as follows: 1. From at least the first quarter of 2001 through the first quarter of 2002, defendant WorldCom Inc. (“WorldCom”) defrauded investors. In a scheme directed and approved by its senior management, WorldCom disguised its true operating performance by using undisclosed and improper accounting that
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WorldCom is a major global communications provider, operating in more than 65 countries. WorldCom provides data transmission and Internet services for businesses, and, through its MCI unit, provides telecommunications services for businesses and consumers. WorldCom became an important player in the telecommunications industry in the 1990s. However, as the economy cooled in 2001, WorldCom’s earnings and profits similarly declined, making it difficult to keep WorldCom’s earnings in line with expectations by industry analysts. 5. Starting at least in 2001, WorldCom engaged in an improper

accounting scheme intended to manipulate its earnings to keep them in line with Wall Street’s expectations, and to support WorldCom’s stock price. One of WorldCom’s major operating expenses was its so-called “line costs.” In general, “line costs” represent fees WorldCom paid to third party telecommunication


network providers for the right to access the third parties’ networks. Under GAAP, these fees must be expensed and may not be capitalized. Nevertheless, beginning at least as early as the first quarter of 2001, WorldCom’s senior management improperly directed the transfer of line costs to WorldCom’s capital accounts in amounts sufficient to keep WorldCom’s earnings in line with the analysts’ consensus on WorldCom’s earnings. Thus, in this manner, WorldCom

materially understated its expenses, and materially overstated its earnings, thereby defrauding investors. 6. As a result

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