STATE FALLOUT FROM WORLDCOM INCLUDES PENSION LOSSES, CONTRACT QUESTIONS

State employee pension fund managers still were tallying their losses from their holdings of WorldCom stocks and bonds, but early indications were that some losses would be major. Five of larger state employee pension funds projected combined losses of $1.23 billion on WorldCom securities. Massive Cal. Public Employee Retirement System said it lost $655 million on its 23 million shares of WorldCom. N.Y.’s state employee pension fund lost $300 million, Mich. fund $116 million, Fla. $87 million and Ark. $74 million. Some states, however, escaped unscathed. Managers of Nev. state pension fund lost nothing on WorldCom, saying that last year they cleared all stocks and bonds of questionable companies out of their portfolio after losing $22 million when energy marketer Enron imploded.

States such as Tex. may file suit against WorldCom because their losses appear to be result of fraud, not bad business breaks, officials said. Tex. state pension fund managers were working to identify how much WorldCom debacle had cost state’s teachers and other public employees and no preliminary estimates were available, but Tex. Attorney Gen. John Cornyn said WorldCom’s “apparent fraudulent conduct is highly disturbing,” and vowed to use every legal tool at state’s disposal to “bring to justice all those whose improper or illegal actions have hurt Texas public employees, taxpayers, investors and honest, hardworking WorldCom employees in Texas.”

Cornyn said he ordered investigation to identify and pursue claims for money owed to state and to recover any losses sustained by state’s pension and investment funds, and will be talking with state comptroller, PUC and other state agencies to determine what state interests need to be protected. Ironically, Cornyn received $11,000 in campaign contributions from WorldCom as Republican candidate for state Senate and then as attorney gen. candidate. AG spokesman said return of money was being considered. Other elected Tex. officials also have received WorldCom campaign contributions, including Gov. Rick Perry (R), who received $10,000.

WorldCom’s shaky status also was raising questions about its fitness as telecom service provider. For instance, it’s leader of one of 2 bidding consortiums vying for massive $1.87 billion deal for total privatization of Ga. state and local govt. telecom operations. Some state agency chiefs and lawmakers have questioned whether WorldCom, now valued at under $1 billion, would have sufficient financial stability to fulfill mammoth 10-year contract.

Ga. contract would give winning bidder responsibility for all state and local agency telecom services and up to 500 state telecom employees would become employees of winning bidder. Five entities were qualified for deal, but only WorldCom’s group and rival consortium led by BellSouth and AT&T submitted bids. Bidders were required to file financial disclosures last year when they were qualified for contract, but their balance sheets hadn’t been reviewed since. Officials of Ga. Technology Authority (GTA), which will award contract by Dec., said current financial status of bidders would be scrutinized as part of bid evaluation process. If WorldCom’s bid is disqualified for lack of financial fitness, GTA still could award contract to BellSouth/AT&T group, although such action probably would create some political unrest. -- Herb Kirchhoff

WorldCom Notes…

House Commerce Committee requested WorldCom provide extensive accounting records by July 11. Records requested include: (1) Report sought by SEC to detail “circumstances and specifics” of accounting issues and all records relating to that report. (2) All records relating to internal audit. (3) All records since 1997 relating to communications with SEC, including communications on WorldCom’s accounting principles and practices and communications relating to internal audit. (4) All meeting minutes since 1997 for WorldCom audit committee. (5) All meeting minutes since 1997 from board of directors relating to accounting principles and practices. (6) All records relating to former WorldCom CFO Scott Sullivan and internal audit. (Sullivan was fired Mon.) (7) All records relating to both David Myers, former WorldCom senior vp-controller, and internal audit. (8) All records since 1997 relating to accounting policies for treatment of operating costs/expenses and capital investment/expenses. (9) All records relating to accounting policy on capacity swaps. Committee also requested information on each Indefeasible Right of Use (IRU) contract or capacity swap, including: (1) Description of IRU swap, including transaction date and dollar amounts, into which WorldCom entered into as either buyer or seller since 1998. (2) All records relating to IRU contracts or capacity swaps during stated time frame. (3) List of all law firms, accounting firms, investment bankers and other outside consultants that rendered advice or opinions on structure of each IRU contract or capacity swap. For each IRU contract or capacity swap, committee request for information included: (1) Whether each transaction was accounted as a lease, sale or asset swap. (2) Relevant generally accepted accounting principles (GAAP) standards used to account for each transaction. (3) Explanation of how WorldCom’s financial results would have differed for each reporting period had these transactions all been accounted for as asset swaps. Records were requested in June 27 letter addressed to WorldCom CEO John Sidgmore and signed by committee chmn. Tauzin (R-La.) and oversight and investigations subcommittee chmn. Greenwood (R-Pa.) “To restore confidence in the telecommunication and accounting industries, as well as American business generally, we are committed to learning exactly how such a massive misstatement could have occurred and how to prevent similar debacles in the future,” letter said. -- TL

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WorldCom CEO John Sidgmore told President Bush in June 27 letter that company took accusations of accounting fraud seriously. “I want you to know that we, the current management team, are equally surprised and outraged,” Sidgmore wrote: “That is why we immediately brought this matter to the attention of the SEC and the public.” Letter “reaffirmed” WorldCom’s resolve to work with govt. “to investigate this serious matter.” Among other things, WorldCom has retained William McLucas, ex-chief of SEC Enforcement Div., to conduct independent investigation, Sidgmore said.