The Justice Department asked the federal judge overseeing WorldCom's bankruptcy proceeding Monday to appoint an independent examiner to investigate the company, a move that would increase scrutiny of its business practices.
Because it is unusual for such examiners to be appointed, bankruptcy experts said the request could signal that the government wants to widen the investigations already under way into WorldCom's accounting practices.
the Justice Department is conducting its own investigation, as is the Securities and Exchange Commission, the House Energy and Services Committee and WorldCom's board. Those inquiries were set off by WorldCom's disclosure late in June that it had improperly accounted for more than $3.8-billion of expenses, masking losses as profits. The disclosure brought WorldCom to the brink of financial collapse before the company filed for Chapter 11 bankruptcy protection on Sunday night.
Judge Arthur J. Gonzalez of the U.S. District Court in Manhattan, who is overseeing the bankruptcy, agreed to the idea of an examiner Monday during a hearing for the company and its creditors. An examiner will be nominated by Carolyn Schwartz, the U.S. trustee who is representing the government in the WorldCom bankruptcy proceedings. The nominee would then require the approval of Gonzalez.
The examiner would have wide leeway to investigate transactions at WorldCom, sidestepping attorney-client privilege.
"This could signal a real lack of confidence in current management," said John Siemers, a lawyer at Burr, Pease and Kurtz in Anchorage, Alaska, who has served as an examiner in other bankruptcy proceedings. "Appointing an examiner is an expensive move that means there is a lot of suspicion about dealings that may have gone on or may still be going on at the company."
The fees for an examiner would be paid for from the assets of WorldCom, which agreed with the Justice Department's request for an examiner. WorldCom's lead bankruptcy lawyer, Marcia Goldstein, a partner at Weil, Gotshal & Manges, said the company welcomed the opportunity to work with an examiner. "The company didn't object, because the company has been cooperating with a number of investigations," Goldstein said in an interview Monday night.
According to court papers, the examiner could hand over findings to the SEC or the Justice Department if asked to do so. The examiner has 90 days after his or her appointment, which is expected in about a week, to report any findings to the bankruptcy judge.
While the request for an examiner was unusual, it was not unexpected, given that WorldCom's bankruptcy filing is the largest in U.S. history and stems from what may have been one of the largest fraudulent accounting maneuvers ever. WorldCom listed $107-billion of assets and $41-billion of debt in its filing, far outstripping other recent bankruptcies of companies like Enron and Global Crossing.
What did come as a surprise to some bankruptcy experts was the speed with which the Justice Department moved to seek an examiner after WorldCom's bankruptcy filing on Sunday night. After Enron's bankruptcy filing last fall, for example, officials waited five months to seek an examiner. The quicker action could signal that federal officials now want to appear more assertive in containing accounting irregularities, according to Bill Rochelle, a bankruptcy expert at Fulbright and Jaworski, a New York law firm.
Certainly that was the impression the Justice Department sought to convey. "This action will provide transparency to the process and enhance accountability," Attorney General John Ashcroft said in a statement Monday. "In turn, this should increase public confidence in the conduct of the case and help preserve value and protect the creditors and shareholders, including small creditors and those whose pension funds are invested in WorldCom."
At Monday's bankruptcy hearing, WorldCom's lawyer, Goldstein, said the company had only $200-million in cash as of the close of business last Friday. Goldstein said that unless the court quickly approved the plan for so-called debtor-in-possession financing from WorldCom's lenders, "the company could not continue to operate," because it and its U.S. subsidiaries have an estimated $200-million in weekly payments they must make to other telecommunications companies.
Under debtor-in-possession financing, lenders who provide the money for continuing operations are first in line among creditors with claims on the company's assets.
Gonzalez gave preliminary approval for financing of up to $2-billion. The courtroom was packed with lawyers, creditors and reporters, as well as some of WorldCom's senior executives. WorldCom's chief executive, John W. Sidgmore, sat with Michael Salsbury, the company's general counsel, and Susan Mayer, its treasurer, in the back of the courtroom.
"I don't know much about these things," Sidgmore said during a brief recess in the proceedings. Sidgmore said the company had asked him to be present, possibly at the request of the judge, he said.
The small amount of cash remaining on WorldCom's balance sheet could be partly explained by the difficulties the company had obtaining financing in the days leading up to the bankruptcy filing.
"Vendors tightened credit or declined to extend terms" after WorldCom disclosed its accounting problems last month, Goldstein said. WorldCom had also used cash to provide additional funding to its 200 foreign subsidiaries, which did not file for bankruptcy, she said.
On Monday morning, Sidgmore, who took over as chief executive in late April after the resignation of Bernard Ebbers, said in a news conference that he hoped for WorldCom to emerge from bankruptcy by the first quarter of next year. He repeated his preference for not breaking up the company or selling its core assets, including the long-distance carrier MCI and the Internet "backbone" company UUNet, during the bankruptcy proceedings.
Meanwhile, Michael Powell, chairman of the Federal Communications Commission, repeated his concern that WorldCom seek to avert service disruptions during its bankruptcy proceedings. In a letter Monday to Sidgmore, Powell said, "We will intervene in bankruptcy proceedings to advise the court if WorldCom or any other party to the proceedings takes or threatens to take steps that would result in an unnoticed termination of service."