Judge Barber and Worldcom

["bon moun" <sherrynstan@xxxxxxx>]

Asleep at the switch
Neil Weinberg, 07.22.02


WorldCom's book-cooking was laid out chapter and verse in a shareholder
suit more than a year ago. Unfortunately, a judge with knotty political
ties tossed it out, as directors, auditors, regulators--and the
press--snoozed.
WorldCom's board of directors, who were shocked by word in late June that
WorldCom had buried $3.8 billion in costs in one of the biggest accounting
frauds in history, in fact had good reason not to be shocked at all. Over a
year ago, more than a dozen former employees gave statements that outlined
a scandalous litany of misdeeds--deliberately understating costs, hiding
bad debt, backdating contracts to book orders earlier than accounting rules
allow.

But it appears that WorldCom's directors never followed up to investigate
the allegations. They should have. The alleged chicanery served to falsify
hundreds of millions of dollars in profit and sales to give a veneer of
stability and strength to WorldCom, a wobbly amalgam of 70 acquisitions
made over 20 years. Now WorldCom is all but worthless: Its stock is less
than 10 cents a share, and its bonds trade for less than 20 cents on the
dollar. Equity-holders and debt-holders alike could get wiped out. And the
board could face a huge director-liability headache.

"Once the board is put on notice like this, it should investigate," says
Lewis Lowenfels, a securities lawyer in New York. "When you are a director
and the charges are very specific, you have an obligation to get to the
bottom of them."

The unheeded accusations emerged in June 2001 with the filing in U.S. court
of a shareholder lawsuit against WorldCom on its home turf, Jackson,
Mississippi. The complaint was backed by a hundred interviews with former
WorldCom employees and related parties. The allegations were startling in
their breadth and detail. A former New York sales representative told of
WorldCom's cutting bandwidth prices in half for a client, Aubrey G. Lanston
& Co., then booking the order twice--once at the old rate and once at the
new one. A quality-assurance analyst in Tulsa, Oklahoma, said that
WorldCom's balance sheet listed as assets receivables as much as seven
years past due.

The U.S. Securities & Exchange Commission (SEC) finally got around to
looking into WorldCom's accounts nine months after the 113-page lawsuit was
filed. When it did, many of its inquiries read like a page from the
shareholder suit's playbook.

The presiding judge, William H. Barbour Jr., was told of the SEC's interest
in March of this year when the plaintiffs' lawyers asked for time to
buttress their complaint with new information that WorldCom would be filing
with the SEC. Nine days later the judge threw out the shareholders'
lawsuit, dismissing it with prejudice, meaning that he would refuse to
consider an amended filing. In smacking down the class action, he
decreed:"The numbers are so large, the stakes were so high, and the fall of
the dollar value of WorldCom stock so precipitous, that the reader reacts
by thinking that there must have been some corporate misbehavior.. However,
after a thorough examination, it becomes apparent that the Complaint is a
classic example of 'puzzle pleading'" (that is, using an onrush of
"cross-references and repetition" in lieu of real substance).

The judge was an ideal adjudicator for the home team. A resident of nearby
Yazoo City, Mississippi, he and his family reside in a state where WorldCom
was the biggest source of local pride and a major supplier of high-paying
jobs. Mississippi is undergoing a highly charged tort reform battle, with
Republicans squarely on the side of curtailing shareholder lawsuits. A
Reagan appointee to the bench in 1983, Barbour is a first cousin and former
law partner of Haley Barbour, a former Republican National Committee
chairman who is now a high-powered lobbyist in Washington, D.C. He is
mulling running for governor of Mississippi.

Moreover, Judge Barbour's second cousin, Henry Barbour, is the campaign
chairman for U.S. Representative Charles W. (Chip) Pickering, a Mississippi
Republican who was the largest congressional recipient of contributions
from MCI, WorldCom and related individuals, receiving $83,750 from 1989 to
2002; the next-largest received less than half that sum, according to
Opensecrets.org, which cites Federal Election Commission records. Should
Judge Barbour have recused himself from the case? Federal guidelines don't
demand such a recusal.

WorldCom's board may come under more scrutiny for its lack of action. Max
Bobbitt, the former CEO of Asian American Telecommunications, is chairman
of WorldCom's audit committee.Bobbitt referred inquiries from FORBES GLOBAL
back to the company. A spokesman declined to comment other than to say,
"The dismissal of the lawsuit speaks for itself."


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