TCS Daily

Don't Coddle Criminals

By Duane D. Freese - May 21, 2003 12:00 AM

"WorldCom's fined a record $500M," proclaims the New York Daily News. "MCI agrees with SEC to pay record $500m fine," says the Financial Times.

What does TCS say? Big (expletive deleted) deal.

Sorry, WorldCom shouldn't be fined; it should be put out of business. What its $3.8 billion, $7 billion, $9 billion, $11 billion (the number's a constantly moving target) accounting fraud did to the telecommunications industry and the nation's overall economy is beyond calculation.

WorldCom - or MCI, as it now wants to call itself - destroyed investor trust and loads of wealth in the market, and not just that of its own investors. It has been at the center of much of the accounting fraud and analysts' misstatements that took place in the late 1990s through 2001. It is in the midst of a bankruptcy proceeding that will erase its debts. It stands to gain tax write-offs to give it a further competitive advantage. And now deals for a $500 million fine that doesn't equal what one man - Michael Milken - paid. This is ludicrous.

Let's be clear exactly what World Com/MCI did. It didn't just cook the books. It intentionally deceived competitors about the growth in Internet demand, and then it cooked the books in ways that distorted investment by its competitors, helping diminish their profitability. It further used its fraudulent accounting to steal billions - billions - in government contracts - $1.7 billion in state and local telecom contracts in 2001 alone; another billion in federal contracts last year while it was still under investigation.

As William T. Esrey, former chairman and CEO of Sprint said at Internet World last fall:
"If WorldCom had actually priced to realize the profit it claimed it generated in 2001, and Sprint had priced at that same level, our long distance operation would have generated over half a billion dollars in additional operating income last year. What would we have done with those profits? First, we would have generated a meaningful shareholder return. Second, we would have been able to invest back into the growth areas of the business. ... With this type of investment you create a virtuous cycle. Well thought out investment meets a demand, creates additional investment, and it goes on. And these are success-based capital expenditures, not building a network to serve pet portals. It is capital that is able to create a return for shareholders and add value to customers. For the telecom industry, the cost of these fraudulent transgressions, ill-defined investments and capacity glut was staggering. Two trillion dollars of market valuation lost, more than 500,000 jobs eliminated industry-wide, and trust, the foundation from which business and investment is built, was shattered."

And what will happen if WorldCom gets out of bankruptcy?

J. Gregory Sidak, in an April Yale Journal on Regulation article, "The Failure of Good Intentions," summarized WorldCom's effect on competitors this way: "WorldCom's continued operation after Chapter 11 reorganization would artificially depress prices for long distance and Internet backbone services below their true cost of production. ... If WorldCom, having shed the fixed cost of its debt, emerges from bankruptcy, it could underprice efficient competitors."

In short, it could put them out of business. At the least, it would unjustly punish - for a second time - those telecom companies that played by the rules, were honest with shareholders and didn't cook the books. Not only wouldn't they be repaid the money WorldCom owed them - WorldCom owes AT&T $61 million for line leases, for example; not only would they still be paying off the debts incurred trying to compete with the fraudulent old WorldCom; not only would they still lack the contracts WorldCom low-balled them on, but they would have to go head-to-head with a WorldCom free of its debts and obligations and with billions in tax write offs as well.

What kind of economic logic does that make? What kind of sense does it make that WorldCom gets a $30 million federal contract to put cell phones in Iraq when the government can't verify it is competing fairly. None. It is a perversion of the free market and a slap in the face of good business ethics.

That's why WorldCom deserves not a fine but a swift demise. The remedy for WorldCom's kind of gross misbehavior isn't a free ride and cushy federal contracts but a sale of its assets to pay off its creditors and defrauded investors. Such a cutting through of the knot it has created is the only way to revitalize the telecommunications sector and spur "virtuous" economic growth.

If the bankruptcy court won't do that, then the FCC, responsible for the health of the telecom sector, must. It was asleep at the switch through most of the fraud WorldCom committed; it can't stay slumbering in the face of a destructive WorldCom revival.

It has the power to do so. It can revoke operation licenses from a business for:
  • Violations of the Communications Act of 1933 or FCC rules.

  • Evidence of fraud or misrepresentation in dealing with the FCC.

  • Convictions of fraud before another government agency.

  • Criminal convictions involving fraud, deceit, dishonesty, or false statements.

  • Convictions for violations of antitrust laws.

  • Any felony conviction.

And it has done so in the past. RKO's radio and television licenses back in the 1980s were revoked because of a question of corporate integrity.

Politicians often speak up against coddling criminals, and some are waking up that that is exactly what is happening with WorldCom. Sen. Rick Santorum, R-Pa., for example, has drafted a legislative amendment to shut the tax loophole through which WorldCom/MCI is seeking a $2.5 billion windfall from its fraud.

That's a good start. But if Uncle Sam settles for petty fines and still hands WorldCom/MCI a get out of debt free card through bankruptcy proceedings, it will still be coddling the biggest financial criminal in history.

Record fine? Not for its crime.

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