U.S. TO PROBE WORLDCOM ABILITY TO HOLD FEDERAL CONTRACTS

Following civil fraud charges filed by SEC last week, Bush Administration said Mon. that General Services Administration (GSA) now was assessing ability of WorldCom to sign contracts with federal govt. in future. Federal acquisition regulations, which govern contracting with govt. agencies, stipulate general standards of conduct for contractors, including “satisfactory record of integrity and business ethics,” said spokeswoman for Office of Management & Budget. Due to SEC civil complaint and allegations involving WorldCom’s financial practices, GSA will examine company’s qualifications to sign future contracts with U.S., she said. One of largest contracts for which WorldCom is in running is $2 billion FAA Telecommunications Infrastructure contract. One potential outcome of govt. inquiry could be company’s suspension from conducting new business with federal agencies. GSA took that step in March when it suspended Enron from doing new business with govt. for at least 12 months based on finding that energy giant had engaged in misconduct and internal control irregularities.

GSA spokeswoman confirmed agency was conducting review of all “WorldCom government contracts and other related information for purposes of determining present responsibility” related to those contracts. Spokeswoman wouldn’t elaborate, but in March when accounting firm Arthur Andersen was suspended from federal contracting work along with Enron, GSA said that under federal law, indictment for criminal offense of type filed against that company was “adequate evidence of misconduct to support suspension of a government contractor.” Indictment against Andersen alleged that firm intentionally destroyed documents related to its work for Enron. Move by federal govt. to assess future contract status of WorldCom comes after tough rhetoric over weekend from SEC Chmn. Harvey Pitt. Talking about WorldCom on NBC’s Today show, he said that “criminal charges may be too good for the people who brought about this mess.”

Several federal contract experts said review process wasn’t expected to affect existing contracts, including $1.5 billion FTS 2001 contract that WorldCom shared with Sprint. Less clear is impact on $450 million Defense Research & Engineering Network (DREN) contract that Defense Information Systems Agency (DISA) recently awarded to WorldCom. DISA had rescinded original contract award to Global Crossing earlier this year after rival bidders such as AT&T, Sprint and WorldCom protested and agency opened 2nd round of bidding. DISA ultimately determined that Global Crossing, which filed for Ch. 11 protection in Jan., was ineligible for award as result of its “current financial situation.” DISA award to WorldCom for this contract, which covers network to connect Defense Dept. supercomputer users, since has become final. DISA spokeswoman said Mon. that agency has been made aware of WorldCom’s financial situation: “We are currently conducting a legal analysis on the DREN contract.”

One industry source said one factor that might set DREN contract apart from others from federal govt. was that financial viability information that WorldCom would have presented to agency would have covered period for which SEC is investigating accusations that WorldCom manipulated earnings (CD June 28 p1). “If financial statements given to DoD as backup to their bid would be found to be fraudulent, that would be a problem, absolutely,” industry source said. FTS 2001 contract, by contrast, was awarded by GSA to Sprint in late 1998 and to WorldCom in early 1999, giving govt. agencies option to choose between 2 companies, or another provider. Several sources said that length of time that had passed since then and extensive transition process that govt. had undertaken to place federal agencies on that contract made it less likely that FTS would be affected by any contracting probe.

However, Sprint spokesman said Mon. company had seen “a definite spike” in interest from federal agency customers that didn’t now have Sprint as provider on FTS 2001 but might be interested in switching. “We welcome any customer migration, if there is a flight to safety from people who are looking for a stable situation,” spokesman said.

WorldCom spokeswoman wouldn’t comment specifically on federal contracts but reiterated company’s stance that it remained committed to serving all customers. “Our CEO has said our commitment to customers remains unwavering,” spokeswoman said, referring to recent comments by CEO John Sidgmore. “This news has no impact on our ability to provide services to our customers,” she said. As for GSA contracts for telecom services, several industry observers said that barring federal action that would affect future contracting abilities of WorldCom, Ch. 11 filing by itself wouldn’t derail those agreements. Several gave example of Winstar, which holds nearly $4 billion in GSA Metropolitan Area Acquisition (MAA) contracts and entered Ch. 11 protection earlier this year. Winstar has continued to provide service to federal agencies in cities where it holds MAA agreements.

“My best guess is that WorldCom will be okay on their current base of contracts,” consultant Warren Suss said, noting that govt. decision to terminate existing agreement typically concerned contractor performance. “My bet is that regardless of how the WorldCom situation plays out, they will make sure they are able to perform on most of their current contracts.” He said that for contracts such as FTS, most difficult transition phase already had been completed. DREN contract could represent different situation, he said. One outcome could be that contract could be terminated at convenience of govt., which wouldn’t involve any penalties, he said. Suss said there were some in govt. who would like to see govt. itself take more direct responsibility for running such networks, instead of outsourcing such work. “The WorldCom financial problems and the issues in terms of the behavior of their executives might give weight to those who favor building their own railroad, so to speak,” Suss said.

WorldCom’s revelation that it “hid nearly $4 billion in expenses” is “another deeply troubling accounting scandal,” President Bush said Sat. Devoting his entire weekly radio address to scandal and role of SEC in taking action, Bush said “the government will fully investigate reports of corporate fraud, and hold the guilty parties accountable for misleading shareholders and employees. Executives who commit fraud will face financial penalties and, when they are guilty of criminal wrongdoing, they will face jail time.” President outlined his proposal, first made in March, on how SEC should handle such scandals, including ensuring that “corporate officers who personally benefit from false accounting statements should lose all the money gained by their fraud.” Bush’s SEC reforms also would prevent such executives “from ever serving again as officers or directors of publicly held corporations.” SEC has sought to recover profits from senior executives of 4 different companies, Bush said, noting that on Thurs. the SEC said it would require CEOs and CFOs of 945 top companies personally to certify in writing, under oath, and for publication, by Aug. 14 that their most recent reports filed with SEC were complete and accurate.

SEC said any CEOs or CFOs “who make false certifications will face personal liability.” SEC Chmn. Harvey Pitt said: “This is an unprecedented step to help restore investor confidence.” List of 945 companies includes who’s who of high-tech and telecom companies, including: 3Com, Adelphia, Adobe Systems, AOL Time Warner, AT&T, Avaya, BellSouth, Cablevision Systems, Charter Communications, Cisco Systems, Clear Channel Communications, Comcast, Cox, Dell, E-Trade, EchoStar, Gannett, Gemstar-TV Guide, Intel, IBM, Intuit, Lucent Technologies, Microsoft, Motorola, Nextel, Qualcomm, Qwest, SBC, Sprint, Sun Microsystems, Verizon, Viacom, Walt Disney, WorldCom and XO Communications.

In June 27 letter, House Commerce Committee ranking minority member Dingell (Mich.) asked Chmn. Tauzin (R-La.) to “investigate the impact of WorldCom’s collapse on the broader telecommunications market, including the effect on prices and service quality for both residential and business users of telecommunications services.” Dingell said investigation should include “a specific determination of whether changes are needed to the government’s existing telecommunications competition policy.” He cited WorldCom’s “numerous” acquisitions in last several years and interests it now owned, including UUNet, Brooks Fiber and MFS. “The Committee should evaluate whether it is healthy for one company within the telecommunications sector to consolidate to the point where it can influence the stability of the market as a whole,” letter said.