More damaging information has come to light regarding that three ring circus called MCI, formerly known as WorldCom and their partners in crime KPMG and Citigroup. What makes these new details particularly irritating is the timing. Just two weeks ago the government gave MCI their “Good Housekeeping Seal of Approval.”
On January 26, 2004, Almar Latour and Dennis Berman of the Wall Street Journal reported that WorldCom avoided hundreds of millions of dollars in tax payments due to aggressive tax shelters designed by KPMG. This is according to a report filed by bankruptcy court examiner Dick Thornburgh. The report further states that WorldCom, now called MCI, has legal claims for malpractice against KPMG, as well as claims for breaches of fiduciary duty against its former Chief Executive Bernie Ebbers and against Salomon Smith Barney for aiding Mr. Ebbers. The report also says that WorldCom has legal claims against WorldCom Chief Financial Officer Scott Sullivan for committing fraud, and against the company’s former Board of Directors for breaching “duties of care.”
WorldCom avoided paying hundreds of millions of dollars in state taxes from 1998 to 2001 based upon the accrual of over $20 billion in what the report calls questionable royalty charges.
The report says that the heart of the KPMG Peat Marwick LLP-designed method was that “foresight of top management” was classified as an intangible asset, which WorldCom could license to the subsidiaries in exchange for huge royalty charges.
The report says that “management foresight” is not an intangible asset and thus could not support royalty charges, adding that there are other flaws in the WorldCom tax minimization program as well. The report says that WorldCom’s accrued royalties and the state tax savings created by the royalties may be subject to scrutiny from state taxing authorities.
The WorldCom report also paints the strongest picture yet of a quid pro quo between Mr. Ebbers and Salomon. The report says that WorldCom has claims for breaches of fiduciary duties of loyalty and good faith against Mr. Ebbers because he awarded investment-banking business to Salomon.
Meanwhile, Salomon gave Mr. Ebbers lucrative financial favors, including shares in initial public offerings between 1996 and August 2000 and assisted with personal loans between 2000 and 2002. The report says that the bankruptcy examiner believes WorldCom has claims against Salomon for aiding Mr. Ebbers’ breaches of his fiduciary duties.
Also, the court examiner believes that WorldCom has legal claims against the former Board of Directors for breaches of the directors’ duties, such as when the board agreed to grant Mr. Ebbers more than $400 million in loans from WorldCom at non-commercial interest rates and without checking Mr. Ebbers’ ability to repay the loans.
Even with all these instances of fraud and deception the federal government’s General Services Administration has lifted an exclusion that barred MCI from making bids on new government contracts. This decision, as reported by Shawn Young of the Wall Street Journal on January 7, 2004, came just days before a major contract MCI currently has to provide phone, data, and video services to various government agencies was due for renewal. In less than two years it looks as if all is forgiven. Over $11 billion in fraud perpetrated on the American people and they are already back in business collecting our tax dollars.
Our claim that Arthur Anderson was nothing more than a sacrificial lamb thrown out to satisfy the public’s blood lust, as well as our allegation that Bernie Ebbers was on the take with Citigroup is looking more and more accurate everyday. These stories of deception and fraud fail to even make the front page of the Wall Street Journal anymore. Unfortunately, investors have become desensitized from these acts of malfeasance. The ties between Bernie Ebbers and Citigroup should be of concern to anyone who has an account with Smith Barney or Primerica. Would you continue to go to a doctor that had a cigarette machine in his or her lobby? The major wire houses have continued to demonstrate that they are a serious threat to investors’ financial health. I think it’s time for a second opinion.