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Pentagon Hands Major Iraq Deal to Scandal-Ridden 0aWorldCom
The Star Online
Thursday 22 May 2003
NEW YORK: The Pentagon made an interesting choice when it hired a 0aUS company to build a small wireless phone network in Iraq: MCI, aka WorldCom 0aInc, perpetrator of the biggest accounting fraud in American business and not 0aexactly a big name in cellular service.
The Iraq contract incensed WorldCom rivals and government 0awatchdogs who say Washington has been too kind to the company since WorldCom 0arevealed its US$11bil (RM41.8bil) accounting fraud and plunged into bankruptcy 0alast year.
"We don't understand why MCI would be awarded this business given 0aits status as having committed the largest corporate fraud in history," said 0aAT&T Corp spokesman Jim McGann.
"There are many qualified, financially stable companies that 0acould have been awarded that business, including us."
"I was curious about it, because the last time I looked, MCI's 0anever built out a wireless network," said Len Lauer, head of Sprint Corp's 0awireless division.
The contract in Iraq is part of a short-term communications plan 0acosting the Defence Department about US$45mil (RM171mil), said Lt. Col. Ken 0aMcClellan.
The Pentagon also plans to have Motorola Corp establish radio 0acommunications for security forces in Baghdad, a deal worth US$10mil to US$25mil (RM38mil to RM95mil) depending on the options exercised, said McClellan, a 0aPentagon spokesman.
The contract with WorldCom -- which plans to adopt the name of 0aits MCI long distance unit when it emerges from bankruptcy -- has prompted 0agrumbling in the telecommunications industry from people who say it was not put 0aup for bids.
"We were not aware of it until it showed up in some news 0areports," Motorola spokesman Norm Sandler said.
McClellan said he had no details on the process that led to the 0adeal, which he said was signed early this month. WorldCom spokeswoman Natasha 0aHaubold declined to comment on details of the contract.
The company is to build a small wireless network with 19 cell 0atowers that can serve 5,000 to 10,000 mobile phones used by reconstruction 0aofficials and aid workers in the Baghdad area.
The network, using the GSM (Global System for Mobile 0acommunications) wireless standard dominant in Europe and the Middle East, is 0aexpected to be running by July.
"This is an interim, quick government solution -- this is not the 0abasis for some national long-term solution for Iraq," McClellan said. "That will 0aprobably have to be undertaken by the Iraqis."
WorldCom is not a commercial wireless carrier. It once resold 0aother wireless carriers' service in the United States but dropped that approach 0arecently.
However, Haubold said her company is fully qualified to perform 0athe Iraq work.
She pointed to the company's work on a wireless system in Haiti 0ain the 1990s and a 2002 contract, in which it served as a subcontractor, to 0aprovide long-distance connections for a wireless network in Afghanistan.
McClellan agreed that WorldCom's experience in Haiti and 0aAfghanistan is "analogous work" to what is needed in Iraq.
Haubold also stressed the company's overall deep relationship 0awith the US military and government.
In fact, a recent review by Washington Technology, a trade 0anewspaper that follows computing-related sales to the government, found that 0aWorldCom jumped to eighth among all federal technology contractors in 2002, with 0aUS$772mil (RM2.9bil) in sales.
It was the first time WorldCom cracked the 0atop 10.
That US$772mil figure refers only to deals in which WorldCom is 0athe prime contractor to federal agencies. The company gets much more taxpayer 0amoney -- exactly how much is not disclosed -- from state contracts and from 0afederal deals in which it is a subcontractor.
That infuriates WorldCom critics, who say the government has kept 0athe company afloat while the General Services Administration barred Enron and 0aArthur Andersen from getting contracts after their scandals emerged.
US Govt Bailouts
They also say it shows how little WorldCom would be hurt by the 0aproposed US$500mil (RM1.9bil) fine the company has agreed to pay to settle 0aSecurities and Exchange Commission fraud charges.
"The US$500mil is in a sense, laundered by the taxpayers," said 0aTom Schatz, president of Citizens Against Government Waste.
Although the Iraq wireless deal is minor compared to other 0agovernment contracts WorldCom has won -- including a satellite data pact 0aannounced Tuesday with the National Oceanic & Atmospheric Administration -- 0aSchatz found it questionable.
"Why would you have a company that is not really in that line of 0abusiness providing that service for another country?" he said. "Given the 0acircumstances and the bailout the government seems to be engaged in, that is 0acertainly is not fair to their competitors or the taxpayers."
McClellan declined to comment on whether the WorldCom fraud made 0athe company a bad choice for the Iraq contract.
"That would probably be a question for the lawyers," he said.
Last year, Sprint and Global Crossing Ltd, another WorldCom 0arival, complained to the General Accounting Office about a US$450mil (RM1.7bil) 0acontract awarded by the Defence Information Systems Agency to WorldCom for a 0acomputer network used by Pentagon scientists.
The GAO, the investigative arm of Congress, said the Defence 0aagency "relied on grossly inaccurate financial information in making a 0adetermination that WorldCom was a responsible contractor."
But the GAO said it lacked the jurisdiction to rule on the 0acomplaint. -- AP
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Critics Decry SEC's Corporate 0aSettlements
By Marilyn Geewax
The Atlanta 0aJournal-Constitution
Monday 26 May 2003
WASHINGTON -- This past week, the Securities and Exchange 0aCommission reached settlements with both WorldCom Inc. and 0aPricewaterhouseCoopers LLP, forcing the companies to pay penalties for 0awrongdoing.
But some victims of corporate misdeeds ask: Why isn't the SEC 0ahauling the scofflaws into court to let jurors decide the punishments?
"The SEC should be enforcing the law to its fullest extent," not 0anegotiating compromises, said Mitch Marcus, a former WorldCom manager who 0afounded BoycottMCI.com to lobby for stiff punishment. Compared with the 0asuffering of investors, WorldCom ended up with "a very, very insignificant 0afine."
But the SEC says a settlement offers several advantages. By 0anegotiating an agreement, the government can impose swift punishment that forces 0achanges in corporate behavior to prevent future crimes, said Thomas Newkirk, 0aassociate director of the SEC's enforcement division.
"You get things much more quickly than would otherwise be the 0acase," Newkirk said. "The typical litigation case probably takes between two and 0athree years," he said. "One needs to balance the benefit of getting remedial 0aprovisions into place now, as opposed to getting them three years from now."
WorldCom agreed last week to settle fraud charges by paying $500 0amillion, the largest penalty ever proposed for accounting fraud. In New York, 0aU.S. District Court Judge Jed Rakoff is expected to decide in June whether to 0aapprove it.
Also last week, the SEC announced that PricewaterhouseCoopers LLP 0aagreed to pay $1 million to settle allegations of improper conduct related to 0aits audits of SmarTalk TeleServices, a now-bankrupt provider of prepaid 0atelephone cards and wireless services.
With the lure of a settlement, the SEC 0acan force almost immediate changes to protect shareholders and others from 0afurther victimization, Newkirk said.
For example, after the WorldCom accounting fraud was revealed 0alast June, "we got a monitor put into place to make sure we didn't have another 0aEnron-type situation where the managers were giving themselves big bonuses on 0athe way out of the door," Newkirk said. "We also got controls put into place to 0afix what was wrong with their record keeping and the accounting."
In the PricewaterhouseCoopers case, the firm agreed to establish 0anew document-retention policies.
J. Boyd Page, a securities attorney in Atlanta, agreed that 0asettlements typically offer more benefits than long court battles.
"Settlements can make sense because white-collar crime is 0aofttimes very, very complicated," Page said. "It can take weeks on end simply to 0apresent a case" to the jury after years of investigative work.
As the case drags on, costs mount, he said. "There is a huge cost 0aof going to trial, just in terms of absolute dollars, to retain lawyers, pay 0aexperts and pay employees to sit in a courtroom instead of doing their own 0ajobs," he said. "Furthermore, trials, whether you win or lose, can be quite 0adevastating simply because of adverse publicity."
But Page said the reluctance to go to trial can harm shareholders 0awho want to sue.
"From a plaintiff's perspective, I prefer to go to trial because 0aduring the course of that, there is a lot of testimony developed, a lot of 0adocumentary evidence made public," he said. "That type of evidence often 0abolsters the claims of individual investors who have lost their life 0asavings."
The settlements also fail to help victims of corporate wrongdoing 0aby allowing the perpetrators to avoid admissions of guilt. The WorldCom 0asettlement allowed the company to declare that it does not admit guilt.
Page said companies insist on that provision because typically, "they remain subject to a number of class-action civil lawsuits. An admission of 0aguilt would pretty much stop them from fighting those lawsuits."
Charlie Cray, a corporate reform expert for Citizen Works, a 0aRalph Nader group, said quick settlements allow companies to get off too 0aeasily.
At WorldCom, where company officials overstated earnings by about $11 billion since 1999, a punishment of $500 million won't amount "to a penny on 0athe dollar," Cray said. "The number sounds impressive at first because it's the 0alargest ever levied in history, but you take into count all the factors, and it 0alooks pretty weak."
Moreover, because the company didn't have to admit a crime, "it 0adoesn't help people in lawsuits," he said.
If the court accepts the SEC proposal, the settlement could help 0aWorldCom Chief Executive Michael Capellas lead WorldCom out of the largest 0abankruptcy case in history.
WorldCom's revelations last June of massive 0aoverstatements of earnings came on the heels of similar announcements by Enron 0aCorp., Tyco International Ltd. and others.
The SEC accused WorldCom with committing fraud "in connection 0awith several securities offerings" and violating record and bookkeeping laws. 0aFormer Chief Financial Officer Scott Sullivan, who was fired after the earnings 0amisstatements were discovered, has pleaded not guilty to criminal fraud charges. 0aEx-CEO Bernard Ebbers has said he was unaware of the disguised expenses and has 0anot been charged.
Four other executives have pleaded guilty to criminal charges 0afiled in New York and are cooperating with investigators.