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WorldCom Hearing with House Financial Services Committee

Aired July 08, 2002 - 14:06   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
KYRA PHILLIPS, CNN ANCHOR: Right now, we are going to dip into the WorldCom hearings that have been taking place. Let's listen in.

(JOINED IN PROGRESS)

BERNARD EBBERS, FORMER CEO, WORLDCOM: WorldCom continues to be a valuable company that provides important services to many Americans and to the United States government.

Within the last two weeks, following a restatement of earnings by WorldCom, officials at the Department of Justice, the SEC, various congressional committees, and other law enforcement agencies have launched a number of investigations and proceedings relating to WorldCom. Countless reports in the media have suggested that my conduct as a WorldCom CEO may be examined in these inquiries.

During the last week I retained counsel to represent me in connection with these proceedings. Although I would like, more than you know, to answer the questions that you and your colleagues have about WorldCom, I have been instructed by my counsel not to testify based on my Fifth Amendment Constitutional rights.

After careful consideration, I have decided to follow my counsel`s instruction even though I do not believe I have anything to hide in these or any other proceedings. I have reached this decision because, one, the investigations appear to be open-ended examinations of a variety of activities at WorldCom, details of which have not been provided to me. Second, I have not been advised of the specific conduct of mine that is being called into question. And, third, I understand that preliminary statements can be taken out of context as inquiries such as these become focused over time.

I hope the committee will not draw a negative inference based on my assertion of these constitutional protections on the instruction of my counsel, or attempt to subject me to ridicule by asking inflammatory questions knowing that I will not answer them. I do not believe that I should be subject to legal harm as a result of my exercise of a basic constitutional protection found in the Bill of Rights.

When all of the activities at WorldCom are fully aired and when I get the opportunity, and I`m very much looking forward to it, to explain my actions in a setting that will not compromise my ability to defend myself in the legal proceedings arising out of the recent events, I believe that no one will conclude that I engaged in any criminal or fraudulent conduct during my tenure at WorldCom. Until that time, however, I must respectfully decline to answer the questions of this committee on the basis of my Fifth Amendment privilege.

Thank you, Mr. Chairman.

UNIDENTIFIED MALE: Mr. Chairman, let me ask a question.

OXLEY: The chair is ready to recognize the witnesses. The gentlemen would suspend?

UNIDENTIFIED MALE: Yes, sir.

OXLEY: The - Mr. Sullivan.

SCOTT SULLIVAN, FORMER CFO, WORLDCOM: Mr. Chairman, I have no prepared statement. Based upon the advice of counsel I respectfully will not answer questions based on my Fifth Amendment right to the United States Constitution. I ask that the record be entered for my counsel`s written letter this morning to the committee.

OXLEY: Without objection the letter will be considered part of the record. Mr. Dick?

MELVIN DICK, FRMR PARTNER, ARTHUR ANDERSEN: Chairman Oxley . . .

OXLEY: Please check your microphone.

MAX SANDLIN, (D), TEXAS: Mr. Chairman, if I may ask a procedural inquiry before we go further.

OXLEY: The gentlemen was suspended. The gentlemen from Texas.

SANDLIN: Mr. Chairman, Mr. Ebbers appeared before us today. He took an oath. He then attempted to make an affirmative statement, self-serving statement before this committee. And then attempted to take the Fifth Amendment. It`s my position he has waived the Fifth Amendment. He`s subject to the jurisdiction of this committee. He must testify.

I`m asking the committee hold him in contempt, that it be submitted to the floor of the House that the U.S. Congress hold him in contempt. And he be required to testify, to come up here and say that he has engaged in no criminal activity and to set forth his affirmative statements in his defense and then to refuse to testify is an outrage.

It`s not in conjunction with the United States Constitution. I suggest that he consult with his attorneys and then that we hold him in contempt, until such time as he elects to go along with the subpoena of the committee and testify before us. He did not take the Fifth. Mr. Sullivan did it properly. Mr. Ebbers is required to testify and we should make him do that, hold him in contempt until he decides to become forthcoming.

OXLEY: Gentlemen, the suggestion will be taken under advisement. We now turn to the witness, Mr. Dick.

DICK: Chairman Oxley, Congressman LaFalce, members of the committee. I am Mel Dick. I`m a graduate of the University of South Dakota. Upon graduation in 1975 I joined Arthur Andersen and a staff auditor. I was a partner at Andersen until I left Andersen on June 1st of this year.

I have spent the majority of my career working with diverse telecommunications companies. Beginning with WorldCom`s fiscal year ended December 31, 2001, I became the engagement partner responsible for Andersen`s audit of WorldCom.

In addition to the year-end audit, Andersen`s work included quarterly reviews for the first, second and third quarter of 2001 and the first quarter of 2002. On June 1, 2002, I resigned from Andersen. I am presently serving as executive vice president and chief financial officer for an apparel company.

One week ago today, on July 1, while I was on a business trip, I was contacted by counsel for the committee and invited to attend today`s hearings. Through my attorney, I offered my full cooperation with the committee`s work and I agreed to attend this hearing voluntarily.

The chairman`s letter of invitation refers to the disclosure by WorldCom on June 25th at approximately $3.1 billion in expenses were improperly booked as capital expenditures in 2001, and an additional $797 million of expenses were improperly booked as capital expenditures in the first quarter of 2002.

The newspaper reports that I have read allege that senior financial management at WorldCom improperly transferred line costs to capital accounts in the company`s accounting records.

Let me state clearly, and without any qualifications, that prior to June 21st, 2002, when Andersen was first contacted about this matter, neither I, nor any - to my knowledge, nor any of my team members had any inkling that these transfers had been made.

In fact, in connection with our quarterly reviews and our year- end audit, the Andersen audit team specifically asked WorldCom senior financial management whether there was any significant top side entries. On each occasion, the management represented Andersen that there were no such items.

The fundamental premises of financial reporting is that the financial statements of a company, in this case WorldCom, are the responsibility of the company`s management, not its outside auditors. WorldCom management is responsible for managing its business, supervising its operational accounting personnel and preparing accurate financial statements. It is the responsibility of management to keep track of capital projects and expenditures under its supervision.

The role of an outside auditor is to review the financial statements to determine if they are prepared in accordance with generally accepted accounting principles and to conduct its audit in accordance with generally accepted auditing standards, which require that auditors plan and perform and obtain the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

Our audit and our reviews of WorldCom were performed by experienced audit professionals. Our audit plan was the product of a deliberative and diligent evaluation of a global telecommunications company with over $100 billion of assets.

As with any audit, we planned our audit of WorldCom in general reliance on the honesty and integrity of management of the company. One of the key elements of evidence of all auditors rely upon is management`s representations. As all auditors do, we also tested and based on our tests concluded that we could rely on management`s processes and internal controls, including the internal audit function.

We relied on the results of our testing and the effectiveness of these systems in planning and performing our audit. At the same time, we approached our work with a degree of professional skepticism, alert for potential misapplication of accounting principles.

Additionally, we performed numerous analytical procedures of various financial statement line items, including line costs, revenues and plant and service in order to determine if there were any significant variations that required additional work. We also utilized sophisticated auditing software to study WorldCom`s financial statement line items which did not trigger any indication that there was a need for additional work. In performing our work we relied on the integrity and professionalism of WorldCom senior management, including Scott Sullivan, WorldCom`s CFO, and David Myers, WorldCom controller and their staff.

If the reports are true that Mr. Sullivan and others at WorldCom improperly transferred line costs to capital accounts so as to misstate the company`s actual performance, I`m deeply troubled by this conduct. In addition, if reports are true that WorldCom`s internal auditors discovered these entries, I would be very interested to know how and when they discovered these entries.

I do not know the specifics of what Mr. Sullivan did or directed others at WorldCom to do and I have not had an opportunity to review the entries at issue here. I understand that Mr. Sullivan has acknowledged that he never told Andersen about the accounting he is said to have employed. At this point, however, while I can explain our general approach to the WorldCom audit and explain generally the work we did, I do not have enough information to comment on the entries that WorldCom senior financial management are said to have made or how they were hidden from Andersen auditors. Mr. Chairman, I will answer any questions you or the members of the committee may have for me. Thank you.

OXLEY: Thank you, Mr. Dick.

Mr. Grubman. JACK GRUBMAN, TELECOM ANALYST, SALOMON SMITH BARNEY: Thank you. Thank you, Mr. Chairman.

My name is Jack Grubman. I`m a telecom analyst at Salomon Smith Barney. I appreciate your invitation to appear before this committee today and I voluntarily did so.

Let me say I am saddened by why we are here. I am saddened that people lost money. I am saddened that people lost jobs. I am saddened that a major company is a enmeshed in a major scandal. But I want to commend you and everybody on this committee for acting quickly to try to find out what went wrong here.

WorldCom is a company that I believed in wholeheartedly for a long time. It fit my long held, honestly held investment thesis that the newer, more nimbler companies would create value. It evolved into a company that had an unparalleled array of global network assets and a huge customer base after its merger with MCI.

That view of the company made me believe it was best positioned to grow within this industry. However, beginning in March of this year, we began a series of downgrades of our views due to a variety of reason, SEC inquiry, changing CEOs, continued guidance, changes downward of earnings, continued rating agency downgrades.

On March 18th we increased our risk profile to high from medium. On April 21st I and others downgraded WorldCom stock from buy to hold based on new company guidance. We increased our risk rating again on May 9th to speculative, our highest risk rating. And finally on June 21st we did a one notch downgrade to market underperform.

With respect to that last June 21st downgrade, I am aware that there is speculation that I had advanced knowledge of this fraud. That speculation is categorically false. I had no advanced knowledge whatsoever of this fraud. The June 21st downgrade was normal course of business. We were doing our end of quarter reviews for all our companies.

Before our downgrading, on Monday, June 17th, S&P downgraded the debt two more notches. A day before our downgrade Moody`s downgraded the debt two more notches. In addition, we were concerned about yet lowering numbers again. We were concerned about continued softness in corporate America and what that meant for telecom spending. We were concerned about the bank facility and the negotiations around that.

The June 21st downgrade was just the latest in a series of downgrades that we have done over the past three months and we were not alone in that. Many firms on Wall Street, including Sanford Bernstein, who is a pure research house, with no investment banking, downgraded WorldCom`s stock opinion several times and several had buy ratings till the bitter end, including Stanford Bernstein.

As far as the topic of this hearing today, the fraught at WorldCom, of course, it influenced our analysis. The company`s public financial statements are a starting point for our work. If the public statements are fraudulent, I and other analysts have flawed information to go on. If we had a truer picture of WorldCom`s financial results earlier, no doubt our opinion would have changed. An equity research analyst has a job to make judgments, to make forecasts about the industry and companies they follow.

You use publicly available information and you augment that by regular relationships and conversations with company management, suppliers, customers, regulators, et cetera. Audited financial statements are very important in how we do our work. That`s the starting point of our work, but we are not auditors, internal or external. Our judgments are only as good as the public statements.

Two other quick topics before I end my statement. As far as my relationships with managements of WorldCom and other companies, I value close relationships with management. It gives me the ability to put context around the numbers and assess whether management can execute their business plans.

As far as investment banking conflicts with analysts, it goes without saying in full-service firms that research is a product used by the bank. If a research analyst has stature and credibility with investors and happens to have a favorable view of a company, that will help get banking business. If, on the other hand, you have an unfavorable view, that will hurt. In all instances, the life blood of an analyst`s reputation and credibility is integrity and honestly held research and opinions with investors and that is something that I have always practiced.

I have certainly made mistakes. I clearly did not call the collapse of the telecom space over the last two years. All of my beliefs have been honestly held and I look forward to answering all of your questions.

Thank you, Mr. Chairman.

OXLEY: Thank you, Mr. Grubman. The chair will begin the questions.

Mr. Dick, your responsibilities included the full range of Arthur Andersen`s global technology media and communications service, that is the audit, tax, and consulting. And you were the lead engagement partner at U.S. West from `87 through `96, at Level 3 Communications from 1998 through 2000.

As you know, Andersen billed WorldCom hundreds of dollars per hour for your services and yet you apparently missed the massive fraud perpetrated by the WorldCom executives in 2001, and in the first quarter of this year, which included transfers of expenses to capital expenditures exceeding $600 million in each of the five quarters. The obvious question is, how could your audit team miss that senior financial managers were doing this? And also fail to identify transfers of such a massive amount during the annual audit?

DICK: Chairman Oxley, we performed our audit in accordance with the generally accepted auditing standards. And let me explain what that means. Initially, as we go through that process of designing our audit plans and carrying out our audit plans, we gain an understanding of the company`s business and in the case of WorldCom we did. WorldCom was a company with $100 billion of consolidated assets, $35 billion of revenues for last fiscal year, roughly $15 of line costs and some $40 plus billion of plant in service.

In performing our audit we gained an understanding of the business. We gained an understanding of the transaction processing systems that WorldCom used to produce those financial statements. As you can imagine, a company of WorldCom`s size has literally thousands and thousands of transactions that flow through its systems of processing its billings, collecting its cash from its customers, paying its bills, et cetera.

As we planned our audit and executed our audit we tested those systems, but we didn`t just test those systems. We also looked at the financial statements as a whole. We looked for significant variations between accounts, between year-end. We planned our audit in accordance with results from previous audits. We planned our audits in accordance with the integrity of the management controls and systems that are in place and we carried out our audits in those.

In addition, we used some very sophisticated software that analyzes the financial statement line items and the relationships on those line items to determine if any additional work needed to be done.

In addition to that, we did inquire of WorldCom`s senior management, their financial management, if they made any top-side entries that are purported to have been made. And we did that on a quarterly basis and in connection with our annual audit. In fact, we submitted a written list along with that request and other schedules or analysis that we wanted from the company.

OXLEY: Who did you submit that list to?

DICK: That list would have been submitted to senior financial management, people underneath the direction of Mr. Sullivan and Mr. Myers.

OXLEY: And who is Mr. Myers?

DICK: Mr. Myers is the former controller of WorldCom.

OXLEY: The - and that was - you have records of that - of those - that correspondence?

DICK: We do.

OXLEY: Let me turn to Mr. Grubman.

Mr. Grubman, you`ve been saying that over years you`ve had a personal relationship with Mr. Ebbers, that you forged a close relationship I think over pool games and greasy hamburger joints. In light of this unusually close relationship, did you ever receive inside information about WorldCom that other analysts and investors were not privy to? GRUBMAN: I had a good working relationship with Mr. Ebbers and other managers within the telecom industry. Let me - I will answer your question directly but let me just put this in context. Like I said in my opening remark and in the broader statement I filed with the committee, I think it is very important for analysts to get to know managements.

You have to put context around the numbers, you have to assess their ability to run their business. In some of those occasions, there are social events. When you talk to a management team, there is information that you glean that may not be public but may not be material. For example, if an analyst talks to companies regularly and learns about their views on pricing in an industry, demand trends in the industry, their opinion about regulatory policies, that is appropriate color to get from management and, in fact, Regulation FD contemplated that with their new rules a couple of years ago.

OXLEY: Mr. Grubman, let me ask you this. Did you ever attend a board meeting for WorldCom?

GRUBMAN: There are - yes and there are occasions when an analyst does get material, non-public information. Analysts, including myself, always try to avoid that. It conflicts you. You can`t talk to investors and those instances occur very infrequently and for very short durations.

OXLEY: Well let me ask you, how many times did you attend a WorldCom board meeting?

GRUBMAN: To the best of my recollection, I`ve been to maybe three WorldCom board meetings over the years.

OXLEY: Is it rather unusual for analysts to attend board meetings?

GRUBMAN: It is rare, as it has been for me over the years. When you attend, it`s usually in connection with a specific event.

OXLEY: And were you the only member of the analysts community at those particular board meetings?

GRUBMAN: At the particular board meetings that I attended, it was just myself and other members of my firm.

OXLEY: And - so your testimony is that you attended the board meetings, but that none of the information that you received at that point were, in any way, used in your analysis or recommendations?

GRUBMAN: My testimony is, when I attended those board meetings, which was only perhaps three times over 12 years, it was for a specific transaction that Salomon Smith Barney was advising WorldCom on. At those board meetings I was privy to material, non-public information that was then released and publicly disseminated, usually within one to two days after those board meetings, after which then I was able to conduct my business as normal.

OXLEY: Is it safe to say then you did have a special relationship with Mr. Ebbers and the board?

GRUBMAN: I think I had a good working relationship with Mr. Ebbers. I don`t know I had a special relationship with the board, no.

OXLEY: The gentlemen from New York.

REP. JOHN LAFALCE (D), NEW YORK: It`s my understanding that in November of 2000, investors filed a securities fraud complaint charging that MCI WorldCom, Messrs. Ebbers, Sullivan and other insiders had concealed material false information about its receivable and earnings performance while personally unloading almost $80 million of stock at inflated prices.

It`s my further understanding that ultimately that case was combined with others and plaintiffs filed a consolidated amended class action complaint in June of 2001.

Mr. Dick, Mr. Grubman, as the auditor and as the analyst, were you aware of the gravimen of those lawsuits?

LAFALCE: Mr. Dick?

DICK: I`m sorry, was I aware of the...

LAFALCE: The gravimen, the import of them, the thrust of them, the primary allegations of...

DICK: (OFF-MIKE)

LAFALCE: You were?

DICK: I was aware of the lawsuit.

LAFALCE: And Mr. Grubman, were you aware?

GRUBMAN: I can`t recollect now if I was aware at the time. I`m sure subsequently though, I became...

LAFALCE: Well, sometimes subsequent to November of 2000, when it was initiated, as perhaps the premier analyst for WorldCom -- are you telling me you weren`t aware?

GRUBMAN: I`m saying at the specific moment you asked, I`m not...

LAFALCE: Well, how about sometime between November of 2000, forward?

GRUBMAN: Yes, I probably became aware of that lawsuit.

LAFALCE: OK. Now, the complaint did allege that the company quote, "resorted to a myriad of improper revenue recognition and sales practices in order to report favorable financial results." In March of 2002, the U.S. District Court for the Southern District of Mississippi did dismiss that complaint, but the court said that the reason it was dismissing it is because it couldn`t attain quote, "the heightened pleading standard requirements for this type of case," close quotes. By the way those heightened pleading standards were standards that were enacted by Congress when they passed the PSLRA, the Private Securities Litigation Reform Act. But the court went on to say that in reviewing the complaint quote, "the reader reacts by thinking that there must have been some corporate misbehavior," close quote. Well shouldn`t the auditor, and shouldn`t the analyst have reacted by concluding that there must have been some corporate misbehavior, or is this just something that`s just a federal court judge on a casual reading of a complaint would conclude. Mr. Dick?

DICK: When we performed our audit for 2001, our audit testing and processes included looking at the company`s revenue systems, their billings to their customers, and we tested that and did not find any...

LAFALCE: Well, what didn`t you find that you should have found, and why didn`t you find it?

DICK: Well, as I said when we performed our audit...

LAFALCE: Not when you performed it. Looking back, now, what didn`t you see that in retrospect you should have seen?

DICK: Congressman, I can`t respond specifically to that question. I can only respond to the audit work that we did do, because I do not know that...

LAFALCE: Well, let me ask this. If you`re an auditor for a publicly traded corporation, and serious lawsuits are brought, does that not create some type of heightened requirement on the part of the auditor to at least investigate more carefully what the allegations of wrongdoing are?

DICK: Yes. In connection with their audit, we did do work on WorldCom`s revenue systems, and we also discussed this with WorldCom`s corporate counsel, and their external counsel, representing in this case, and satisfied ourselves as to the appropriateness.

LAFALCE: Did you discuss this with the counsel for the investors?

DICK: No, I don`t believe so.

LAFALCE: Do you think that might be a good idea in the future?

DICK: I can`t speak to that, Congressman. I don`t know...

(CROSSTALK)

LAFALCE: You don`t know whether that`d be a good idea or a bad idea.

(CROSSTALK)

Mr. Grubman, as a premier securities analyst, what heightened diligence did you adopt when you did determine that there were these serious allegations of corporate misbehavior? GRUBMAN: As a matter of course, the receivables write-down, of course, we were all aware of because they did it in the third quarter of 2000, and on their publicly disseminated earnings call, you know, went through the reasons for that. As when -- as far as this specific instance, I don`t recall specifically the type of things we did, but broadly speaking, when an inquiry like this comes up...

LAFALCE: Broadly speaking means you just don`t know what you did with respect to WorldCom, is that correct, you can`t remember?

GRUBMAN: No. What I`m saying is, again, we start with the public financial statements. We obviously question all companies including WorldCom about the reasonableness of their numbers, and what`s behind their numbers. But we don`t have nor our companies required to give equity analysis access to invoices, audit trails and the like.

LAFALCE: All right. Let me ask this question of Mr. Dick and Mr. Grubman. Mr. Dick, it`s my understanding the consulting fees for Arthur Andersen were about twice as much or more as the auditing fees. And I`m wondering if you had any responsibility for pursuing consulting fees. And Mr. Grubman, I`m wondering what the investment banking fees were for your company for WorldCom, and whether or not your compensation was in any way related to the amount of investment fees that were generated for your company.

OXLEY: The witness may respond. The gentlemen`s time has expired. The witness may respond to both questions.

DICK: The Arthur Andersen fees for 2001 were approximately $16.8 million, of which $4.4 million related to the annual audit services, $7.6 million related to tax services, another $1.6 million that related to non-financial statement audit services, and then all other fees of $3.2 million, none of which included any fees for work on financial systems design, or implementation.

GRUBMAN: As far as the fees to Salomon Smith Barney, I don`t know the precise number, but I will estimate that from about 1998 through 2001, cumulatively, I want to say roughly $80 million, but I don`t know the exact number. As far as my compensation is a function of many factors, one of which that goes into that factor is banking revenues to the firm. I have no direct tie to banking revenues in terms of a direct percent of banking revenues or fee-by-fee type of thing. And just to try to be a little more responsive to your last question, when things like lawsuits come public for a company, unlike with auditors where there`s one auditor per firm, there are dozens and dozens of analysts and thousands of investors and rating agency folks that follow a company like WorldCom, very widely followed, very widely held. So the entire body of the research community, debt and equity, buy-side and sell-side, in a continuum, continually question the company, especially when something like this happens, but again, we can at least start with what is filed publicly.

OXLEY: The gentleman`s time has expired. The gentleman from Wyoming, Mr. Leach.

REP. JAMES LEACH (R), IOWA: Well, thank you Mr. Chairman. I want to return to a comment of Mr. Manzullo, earlier when he said issues have come down to face us. I represent 3,000 WorldCom employees, in Cedar Rapids, Davenport, and Iowa City, Iowa. Let me tell you, they`re pretty upset. They wandered what happened at the top. They wander about their futures. They`re hard-working decent folk.

I also represent an insurance company that informed me this weekend that they held millions and millions of dollars of WorldCom debt. They have asked us to easily handle this. But they`re fit to be tied. And like everyone on this panel, we represent thousands of people who held WorldCom stock, thousands more who didn`t, but whose stock has gone down because of the loss of confidence in the market because of companies like WorldCom.

And what I would like to get at a little bit, first on the accounting side. We heard from the Enron circumstance that Arthur Andersen followed, in its view, generally accepted accounting practices even though Enron had two or three thousand off-shore entities that clearly booked profits in such a way that they didn't reflect a fair view of the company.

PHILLIPS: You have been watching the House Financial Services Committee as they listen to testimony from executives, accountants and analysts involved in WorldCom's disclosure last month that it improperly disguised more than $3.8 billion of expenses as profits. And we heard from a number of the pivotal players there. Bernard Ebbers, the former chief executive of WorldCom, as expected, invoking his Fifth Amendment right. Also, Scott Sullivan, WorldCom's former CFO, did not prepare a statement, but also exercising his Fifth Amendment right.

And then, right now, you are listening to questions from the committee to Melvin Dick, the former auditor for Arthur Andersen. He has said that he would take questions and he is answering those questions now, and also Jack Grubman. He was expected to invoke his Fifth Amendment right, but he didn't. He gave a statement and he is taking questions. He is the former analyst with Salomon Smith Barney.

We are going to bring in our Louise Schiavone. She has been following what's been taking place thus far. She is on Capitol Hill. A number of interesting questions we can get down and talk about, Louise. But why don't you first give your overall impression of what you have heard so far?

LOUISE SCHIAVONE, CNN CORRESPONDENT: Well, what's interesting, Kyra, for listeners, for investors, for people who participate in the stock market or in this economy in general, which means all of us, is that WorldCom executives have heard the outrage and indignation of members of Congress as they look at this case.

As expected, and as you noted, former CEO Bernard Ebbers, former chief financial officer Scott Sullivan walked into that committee room, sat at the table. When the time came, they raised their hand, they took the oath, and then invoked their Fifth Amendment privilege against self-incrimination.

The misclassification of close to $4 billion in MCI WorldCom makes this the biggest corporate scandal at present. But what is scary, members of both sides of the aisle say, is the possibility that other disasters like this may be in the offing.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: Even after the string of revelations and failures that we have suffered through over the past year and half, the magnitude of WorldCom's deception is staggering. The disclosure that WorldCom had improperly accounted for $3.8 billion in expenses sets yet another new record for the largest corporate financial restatement.

UNIDENTIFIED MALE: The thousands of fired WorldCom employees who face an unknown future and the millions of investors who lost so much of their retirement savings all apparently due to the greed and selfishness of the few rich insiders demand that we engage in the search for truth and justice. And make no mistake, the consequences to this sort of criminal activity, should it be proved, should be severe, and that may mean time in federal prison.

(END VIDEO CLIP)

SCHIAVONE: We also heard the testimony of former -- of Salomon Smith Barney analyst Jack Grubman. He is said to have given WorldCom many, many favorable ratings, and the feeling is that he was way too bullish on WorldCom up to the very end. Also, heard from Melvin Dick, who was the former Andersen auditor. Both of them said that they were shocked and saddened by this turn of events.

Of course, neither of them has said that they participated in any way, and the turn of events that led to the misclassification of $4 billion in MCI WorldCom expenses -- Kyra.

PHILLIPS: All right, Louise. Let's talk about some of the questions that came from the committee. Let's start with Jack Grubman, the former analyst with Salomon Smith Barney. He was asked, point blank, did you have a close relationship with Bernard Ebbers. Ebbers, of course, being the former chief executive of WorldCom, and did you ever receive inside information on WorldCom. He did not really answer that directly, did he?

SCHIAVONE: Well, the question for all of these analysts, whether it be for WorldCom or Intel or Enron or any of these other big corporations and companies that we have not heard about yet and hopefully won't hear about is the relationship between analysts and the companies that they analyze, is it just way too cozy? Did they somehow get something out of giving these companies a way too favorable rating when the rating should be far more realistic? That's what members of Congress are trying to find out.

One of the questions that was put to Mr. Grubman was his compensation at Salomon Smith Barney -- let's remember, he makes $20 million a year -- was his compensation related to sales of WorldCom stock at Salomon Smith Barney? And he said, well, of course, his compensation is related to the general success of Salomon Smith Barney. So, of course, he didn't really put too fine a point on that answer either -- Kyra.

PHILLIPS: All right. Louise Schiavone, no doubt we will be talking a lot this week. Thank you so much live from Capitol Hill there, Louise.

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