U.S. stocks set to plummet on WorldCom scandal

Reuters ^ | June 26, 2002 | Elizabeth Lazarowitz

[Dog Gone]

NEW YORK, June 26 (Reuters) - Stocks are set to plunge at Wednesday's open after Wall Street was stung by yet another accounting scandal -- this time from phone group WorldCom Inc., which said it improperly booked nearly $4 billion in expenses.

In what could be one of the biggest cases of accounting fraud in U.S. history, WorldCom (NasdaqNM:WCOM - News), the No. 2 U.S. long-distance telephone and data services firm, said it would restate its results for 2001 and the first quarter of 2002 to show net losses.

The news sent stocks reeling around the globe: Tokyo's benchmark Nikkei average (^N225 - News) slumped 4 percent, and the pan-European FTSE Eurotop 300 index (^FTEU3 - News) was off by a similar amount about 1-1/2 hours ahead of Wall Street's opening bell.

"There are further issues as far as fraudulent activity at corporate boards, and it's just going to shake out a lot of the people that were waiting for a bounce in the marketplace," said Jack Schwetje, senior equities trader at Deutsche Bank Securities. "It just shakes the confidence in corporate governance right now."

U.S. stock futures were pointing to a sharply lower start for Wall Street. Standard & Poor's 500 stock index futures for September were down 23.70 points at 950.80, and Nasdaq 100 futures for the same month were down 42 points at 985.

WorldCom announced late on Tuesday that it had fired Chief Financial Officer Scott Sullivan and accepted the resignation of David Myers as senior vice president and controller after the discovery of the irregularities.

The company, which could face a cash-crunch or even bankruptcy next year, also planned to cut 17,000 jobs, or more than 20 percent of its work force, starting on Friday.

The company's shares slumped to 18.5 cents in pre-open trading from Tuesday's close of 83 cents.

The allegations dealt yet another blow to investors' trust in Corporate America, which began to erode following the implosion of energy trader Enron Corp. (Other OTC:ENRNQ.PK - News) months ago.

That, along with a gloomy batch of earnings news from companies like No. 2 computer memory-chip maker Micron Technology Inc. (NYSE:MU - News), could overshadow the Federal Reserve's impending decision on interest rates.

The central bank wraps up its two-day policy-setting meeting on Wednesday, and the Fed is widely expected to keep interest rates unchanged amid a backdrop of patchy economic growth and trouble on Wall Street.

The Fed is scheduled to issue its verdict on rates at around 2:15 p.m. (1815 GMT). While the interest rate decision may elicit little more than a yawn from Wall Street, investors will be listening carefully for what the top U.S. central bankers have to say about the health of the economy.

There is also a dose of economic data to deal with, including a report on durable goods at 8:30 a.m. (1230 GMT) and new home sales at 10 a.m. (1400 GMT).

The earnings news was not pretty. Micron on Tuesday reported an unexpected fiscal third-quarter loss, continuing a string of money-losing quarters, citing a sudden decline in memory-chip prices.

General Mills (NYSE:GIS - News), the maker of Cheerios and Wheaties cereals, on Wednesday said its quarterly earnings fell due to costs associated with integrating its acquisition of Pillsbury.

One bright spot was network equipment maker 3Com Corp. (NasdaqNM:COMS - News), which rose after the close on Tuesday after it posted a sharply narrower fourth-quarter loss through cost-cutting even as revenues dropped by more than 25 percent.

WorldCom's woes sent a shudder through world stock markets. Tokyo stocks closed at a four-month low, led downward by technology stocks like Advantest Corp. (Tokyo:6857.T - News) in the wake of WorldCom's plunge.

European equities were similarly battered, slapped by WorldCom's massive case of improper accounting and a shock profit warning from French telecom equipment maker Alcatel (Paris:CGEP.PA - News). Alcatel's shares fell nearly 20 percent in Paris.

Oil was in focus after the OPEC cartel agreed to keep tough oil output limits in place for another three months, raising fears that strengthening crude prices might shoot toward $30 a barrel later this year.

U.S. stocks sank on Tuesday, with the tech-laden Nasdaq market finishing a hair above the low carved out after the Sept. 11 attacks, on worries Corporate America's profits won't recover soon.

The Tuesday bout of selling, which intensified late in the session, came despite pleasant earnings news surprises from industry heavyweights like DuPont Co. (NYSE:DD - News).

The technology-laced Nasdaq Composite Index (NasdaqSC:^IXIC - News) fell 36.35 points, or 2.49 percent, to 1,423.99.

The Dow Jones industrial average (CBOT:^DJI - News) slipped 155 points, or 1.67 percent, to 9,126.82, after rallying more than 1 percent. The broader Standard & Poor's 500 Index (CBOE:^SPX - News) lost 16.58 points, or 1.67 percent, to 976.14.

[nevergore]

Qwest is next....they followed the same path as MCI Wotldcom....

They just relieved their President and are going through a high level house cleaning as well as cuurent investigations of accounting practices.....

This one could be even uglier than Worldcom.

NeverGore

[Dog Gone]

I didn't know that. It looks like it's going be a brutal day. Sun Microsystems is getting clobbered in overseas trading and IBM is hurting, too.

The only sector which seems to have strength is the gold mining stocks.

[marshmallow]

Crooks.

[jamaksin]

Crooks - YES!!!

Odds on people seeing hard jail time - ZILCH!!!

[dighton]

The company's shares slumped to 18.5 cents in pre-open trading from Tuesday's close of 83 cents.

That was *ages* ago. Now WCOM is trading at about 11 cents.

[magellan]

I just hope the next wave of ethics investigations goes to the so-called "analysts". I saw Tobin Whatshisname on Yahoo Financevision dissing a stock, and he then, I think accidentally, volunteered that he was shorting the stock.

A teenager trader went to jail for pulling the same stunt.

I have noted all of these stock pickers have stopped talking about fundamentals, and are playing the prevailing momentum. It is the same thing as 1997-1999, but in reverse. All of these guys probably are heavily invested in put options, and are using their influence to push the market down.

After seeing Tobin, I think Martha Stewart's broker was a hero. If the insider is stupid enough to violate SEC rules and dump his stock, the broker had every right to provide advice to his clients.

[dnandell]

This whole economic environment is starting to get scary. Almost every corporation seems to be in trouble stemming from ethics issues. And the Democrats think they can use this as a campaign issue. Hmmmm. Let's see, who was president for the past 8 years? Who set a wonderful example of ethics for our children - and now we're learning, our corporate leaders?

This world is very disappointing. Thank God I have my faith in someone who won't disappoint.

[gjpino]

Makes you wonder how much of the "90's Boom" was based on fraudulent accounting.

[TommyDale]

I don't understand why this is just being "discovered", since many of us in the telecom technology industry knew that Worldcom was another Enron. This story, although unpublished, has been floating around for at least 6 weeks, maybe longer. I smell more than just Worldcom.

[L,TOWM]

The whole Telecom sector over built infrastructure, and are now having a hard time dealing with their debt.

Debt in both the business and private is going to be THE issue economically fro the next decade. The 90's party is over. The hangover is just starting.

[Dog Gone]

I smell more than just Worldcom.

That's the problem. Everyone else does, too. Investors everywhere are beginning to suspect that phoney baloney numbers were boosting stocks during the late 90's, and that the good times were actually a fraud.

[Thermalseeker]

That's the problem. Everyone else does, too.

Except the SEC. Where the hell is the SEC?

The stock market is gambling. Gambling just a sure as stepping up to the craps table. I'm out and staying out. All wealth comes from land.........

[dighton]

WORLDCOM FACES BANKRUPTCY (duh!), SHARES HALTED

Last trade on Island was 10 cents.

[Dog Gone]

Not pretty. There is going to be widespread damage to the markets and I don't think investor confidence will return quickly.

[Armando Guerra]

Makes you wonder how much of the "90's Boom" was based on fraudulent accounting.

The '80's were dubbed "the decade of greed" by the media, yet I have never seen anything derogatory mentioned about the '90's economic boom by the same media. With all the speculative bubble trading, dot-bombs, accounting fraud, insider trading and cozy business deals, if it weren't for Clinton being the person given all the credit for what had been perceived as an economic miracle, we would be talking about the "the decade of fraud".

[eno_]

McLaughlin said tem more Enrons. Start buying when teh seventh or eighth is announced. Maybe even a little earlier. This is what will bring capitulation and the final downleg back toward normal P/E ratios. We may even overshoot on the downside. Till then, I have the biggets money market balance I ever had.

[TLBSHOW]

I will tell you what neds to be done. Tax cuts for the rich NOW!

[Elkiejg]

Let's see, who was president for the past 8 years? Who set a wonderful example of ethics for our children - and now we're learning, our corporate leaders?

Look at this http://www.msnbc.com/news/772330.asp?0cm=c40&cp1=1#BODY article on MSNBC. In the last paragraph there's an amazing statement: Shares of Clinton-based WorldCom dropped sharply.........

Does anyone know anything about this comment???

[ken in texas]

It's based in Clinton, Mississippi.