[ISN] Bankrupt WorldCom called a security risk

From: InfoSec News (isnat_private)
Date: Mon Jul 08 2002 - 04:19:23 PDT

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    Patrice Hill 
    Published 7/3/2002
    WorldCom Inc. Chief Executive John Sidgmore yesterday said avoiding
    bankruptcy is important for national security because the company's
    networks carry sensitive communications and half of the world's
    Internet traffic.
    His warning at a news conference here came amid signs that the
    government may be greasing the company's skid toward bankruptcy by
    threatening to cut off future federal contracts and implicating the
    entire firm in an accounting fraud much as it did with Arthur Andersen
    this year.
    "WorldCom is a very key component of our nation's telecommunications
    and security infrastructure," said Mr. Sidgmore, noting that the
    sprawling telecommunications giant provides critical services to the
    Pentagon, State Department, homeland security agency and Nasdaq Stock
    "Homeland security is very concerned about cyber-security," he said,
    and other agencies are among many clients that are "nervous" and have
    inquired about the possibility of a WorldCom bankruptcy, which he said
    he cannot rule out "at some point."
    Any bankruptcy filing by WorldCom, plagued by $30 billion in debts
    from an acquisition binge in recent years, would surpass Enron's as
    the largest in corporate history.
    But Mr. Sidgmore said he assured federal clients, as well as business
    and consumer customers, that "the chances of our having a major blip
    in our service level are low."
    The company's UUNET facilities  the so-called "backbone of the
    Internet" based in Reston  will not "go dark under any
    circumstances," he said.
    Secretary of Defense Donald H. Rumsfeld yesterday dismissed concerns
    that WorldCom's troubles could pose a risk to the military, noting
    that the Pentagon's sensitive communications have never been
    disrupted. WorldCom carries about a third of defense communications
    around the world.
    "Certainly, no one likes to see a private-sector entity fail,"  Mr.
    Rumsfeld said at a press briefing. "Will it adversely affect the
    Department of Defense? My best experience and knowledge tells me it
    will not."
    WorldCom in April won a $450 million, 10-year contract to build a
    secure defense-research network, beating out Global Crossing Ltd., a
    bankrupt telecommunications firm that also is under investigation for
    accounting fraud.
    The General Services Administration yesterday threatened to suspend
    any future business deals with WorldCom in light of the Securities and
    Exchange Commission's charge that the company committed securities
    fraud. But its review does not imperil existing contracts, which bring
    in about $2 billion a year for the company, officials said.
    SEC Chairman Harvey Pitt restated on Monday night his intention to
    crack down on the company, declaring that WorldCom's sworn statement
    to the SEC explaining how it came to inappropriately hide $1.2 billion
    in losses was "wholly inadequate and incomplete."
    Mr. Sidgmore in his National Press Club briefing said he had a "highly
    productive" meeting with Mr. Pitt yesterday at which he promised to
    provide more information and "clarification" of the sworn statement,
    which implicates two top finance officers in the accounting scam.
    "We want the bad guys exposed and punished so we can move on with our
    lives," he said. Mr. Sidgmore joined the company after its founder and
    former chief executive, Bernie Ebbers, resigned in April. Mr.  
    Sidgmore forced out the company's comptroller and its chief financial
    officer, Scott Sullivan, last week.
    Mr. Sidgmore suggested that Mr. Ebbers should have been aware of the
    accounting practices under his watch, but he may have relied on Mr.
    Sullivan because of his once-stellar reputation.
    Mr. Sidgmore implied that the government has much at stake in keeping
    the company alive, despite threatening rhetoric from President Bush
    and Mr. Pitt that echoes the strong statements they made against the
    Andersen accounting firm.
    Andersen lost most of its clients this year as a result of a federal
    indictment for its role in the Enron scandal. Last month, it was
    convicted of obstructing the SEC's investigation of Enron, and it has
    agreed to stop auditing public companies.
    Mr. Sidgmore said that if WorldCom goes out of business, consumers
    will have only "one or two choices" for long-distance service,
    alluding to the company's competitors, AT&T and Sprint.
    The most immediate threat to WorldCom's solvency, he said, is its need
    for more loans from bank creditors who have become wary and are
    demanding collateral to back their existing loans to the strapped
    J.P. Morgan Chase & Co., Citibank Corp. and other major creditors this
    week declared the company in technical default on $4.25 billion of
    loans as a result of its admission that it inappropriately portrayed
    $3.8 billion of operating expenses as capital costs in its financial
    Mr. Sidgmore said the company has more than $2 billion in cash and has
    been seeking about $5 billion in additional loans from the banks.
    While the banks have not yet agreed, they have no intention of pushing
    the company into bankruptcy, because they realize that would make them
    worse off, he said.
    "All things being equal, unless some new problem occurs, we can make
    it through with that cash," he said, although the situation could get
    "sticky" if WorldCom loses major business or government customers.
    "Despite all the histrionics," he said, the company has yet to lose a
    major customer.
    WorldCom is trying to restructure and become profitable again by
    selling assets such as real estate and the SkyTel division and by
    unloading unprofitable businesses such as its wireless-resale
    division, which loses $750 million a year, Mr. Sidgmore said.
    Layoffs beyond the 17,000 already announced are possible, he said.
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