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Markets jolted; SEC smacks WorldCom with fraud charge
By HELEN HUNTLEY, Times Staff Writer
© St. Petersburg Times
Stocks slid to new lows for the year Wednesday as investors absorbed the WorldCom debacle, yet another blow to their confidence. The Dow Jones Industrial Average tumbled 200 points in early trading as investors focused attention on the latest accounting scandal and fretted over the trustworthiness of other companies' financial statements. The blue chip average fell below 9,000 for the first time since October before recovering on a wave of computer-generated buying. It finished the day at 9,120.11, down 6.71 points. The Standard & Poor's 500 Index was off 2.61 points to close at 973.53. The Nasdaq Composite Index made it into positive territory, closing at 1,429.33, up 5.34 points. WorldCom announced Tuesday night that its last five quarters' financial results were achieved through accounting trickery. After the markets closed Wednesday, the Securities and Exchange Commission filed fraud charges against the company. Coming on the heels of other scandals at Enron Corp., Tyco International and Global Crossing, the news shocked investors. "We've got a bigger concentration of scoundrels in corporate America than we ever thought," said David F. Scott Jr., finance professor at the University of Central Florida in Orlando. "This period will go down in American commercial history as a bigger negative story than Teapot Dome or any other period of scandal." He said he has been astounded by the simultaneous failure of every level of oversight -- auditors, directors, investment bankers, commercial bankers, lawyers, securities regulators and Congress. "Until corporations begin to generate cash flow numbers that investors believe, this drag on the equity markets is going to continue," he said. "It's not only mom-and-pop investors. Institutional investors don't know where to go." Clearwater money manager Gloria Blackburn said it is difficult to know what information can be trusted. "We were talking about a company, thinking of doing some research on it, and we threw up our hands and said "What good does it do to do any research? What's being written about these companies is useless,' " she said. "But you have to try anyway." Blackburn said the WorldCom announcement was particularly disappointing because she had thought the market was ready to turn around. "It looked like everything was in order for us to start on a slow, steady recovery in the market," she said. Investors who own WorldCom shares or bonds are the biggest victims. Their stock, which traded at more than $60 a share in 1999, closed at 83 cents Tuesday before the announcement. Trading in the stock has been suspended. The Florida State Board of Administration, which administers the state pension fund, said its losses on WorldCom are between $85-million and $90-million, representing less than 1 percent of the $90-billion fund. Most of the current holdings, which were worth $1.5-million at Tuesday's price, are in index funds that track the market, not managed funds like most of the more than $300-million the state fund lost on Enron. WorldCom's outstanding notes and bonds, which have a face value of $28-billion, plummeted in value to about $4.2-billion. The company's credit had been rated investment grade as recently as last month. Prices also fell on other corporate bonds as investors fled from risk. Telecommunications companies were among the big losers in Wednesday's selloff. Equipment suppliers in particular were hit hard on the expectation that WorldCom will not have much money to spend on its networks. Juniper Networks Inc. said about 10 percent of its sales come from WorldCom. That stock fell $1.16 to close at $5.13. Investors in Z-Tel Technologies Inc. of Tampa also felt the reverberations of WorldCom's announcements. Shares in the telephone company fell 15 cents, or 19.2 percent, to close Wednesday at 63 cents. Z-Tel has a contract to provide local phone-service support for a new marketing initiative by WorldCom unit MCI. Dubbed "The Neighborhood," the program offers unlimited local and long-distance service for one fixed monthly fee in select markets. "We can't make any predictions about what's going to happen (at WorldCom)," said Sarah Bialk, Z-Tel's director of investor relations. "Operationally we're sound and the Neighborhood program's been very successful to date." WorldCom spokesman Peter Lucht said the company is "committed to continuing" with the Neighborhood package and response to it has been "very strong." Bank stocks also fell based on concern that some of the biggest banks will lose money on WorldCom loans. Citigroup and Bank of America are among the company's major lenders. Investors paid little attention to a couple of upbeat reports on the economy and the Federal Reserve Board's decision to leave interest rates unchanged as expected. New home sales jumped 8.1 percent in May and factory orders for durable goods improved. Some investors say positive signs like those make a fearful market a great place to go hunting for bargains. "It's an incredibly undervalued market because it's tied up in emotional problems," University of South Florida financial economist Steven Bolten said. "Earnings will follow the economy and we will have a tremendous increase in earnings and that will lead to an increase in stock prices." He said he is putting every penny he can into the market, even buying some stocks on margin. "The pessimism and fear are overdone," he said. "Given a reasonable time horizon, these are values that cannot be passed up." -- Times staff writer Lou Hau contributed to this report, which includes information from Times wires. Helen Huntley can be reached at huntley@sptimes.com or (727) 893-8230.
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