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TheStreet Open House

The Five Dumbest Things on Wall Street This Week

1. What in the WorldCom?

You know, we at the Five Dumbest Things research lab thought we had built up a tolerance for Dumbness. Because we're studying Dumb things week in and week out, you'd think we'd seen it all. You'd think nothing could surprise us anymore.

Yeah, that's what we thought. Until WorldCom (WCOME).

As the world learned this week, the Securities and Exchange Commission has accused WorldCom of a scheme to wildly understate expenses and overstate earnings. Over the five quarters ended March 31, the company didn't earn $2.6 billion before income taxes and minority interests, as reported; instead, says the SEC, WorldCom lost $1.2 billion.

The Dumbness of the alleged misdeeds overwhelms us. We're talking World-Class Dumbness here. Dumber than Enron Dumbness. Face it: When Thomson Financial Investment Banking/Capital Markets (the former Securities Data) gets around to ranking all-time Dumbness, this development at WorldCom will be No. 1 with a bullet.

Given the magnitude of the Dumbness here, it's hard for us to pick out a specific element of the WorldCom mess to single out for particular scrutiny. But we'll give it a shot.

A little background. What WorldCom did, according to the SEC, was diddle with the largest expense on its profit-and-loss statements: line costs, which amounted to 42% of revenue last year -- as originally reported, at least. The SEC says these line costs generally represent fees paid to other telecom network providers for the right to access their networks.


So where's the Dumb part? Why, it's the press release issued by Andersen, WorldCom's auditor during the quarters in question. "Important information about line costs was withheld from Andersen auditors by the chief financial officer of WorldCom," bleats Anderson in a statement issued Tuesday. "The WorldCom CFO did not tell Andersen about the line cost transfers nor did he consult with Andersen about the accounting treatment."

Uh, guys? That's the excuse? That the alleged fraud was hidden from you? Oh, come on. We're not talking a dollar here, a dollar there. At issue here was $3 billion in 2001 alone -- more than 8% of revenue. Isn't this supposed to be your job -- verifying that all the billions on a financial statement are sitting where they're supposed to be?

And we're not talking about arcane and mysterious financial transactions. These aren't Enronian contrivances designed to go boldly where no accountant has gone before. These are meat-and-potatoes elements of the telecom industry, stuff like paying other companies to carry your network traffic. Heck, that's so simple, even a reporter could understand it.

Yes, complains Andersen, WorldCom concealed it from them. Gosh, we're sympathetic.

By the way, we've got a riddle for you. Q: How many WorldCom auditors does it take to screw in a light bulb?

A: Only one. But don't expect him to find the socket by himself.

2. Briefly Noted

Last week, you may recall, we explored the sexual suggestiveness of female cellists featured in advertisements for Morgan Stanley (MWD), OppenheimerFunds and Alitalia.


It gets worse.

Yes, this week we were alarmed to see another incarnation of the female cellist phenomenon, this one a commercial for the Acura unit of Honda Motor (HMC).

The focus of this commercial for Acura "certified" used cars was actually a guy playing the violin in a string quartet, the point of the ad being that a hand-me-down Acura is as classy as a hand-me-down violin produced by the artisans of Cremona , Italy.

But what we couldn't help noticing was that the string quartet included not just one, but two female cellists.

Hmmm. Considering our prior research indicating that (a) all ads, especially automobile and finance ads, are about sex, and that (b) the cello symbolizes a human body that one strokes, we'd have to conclude...

...Well, maybe we shouldn't conclude that here in front of the children. Suffice it to say that the Acura this man drove appeared to be larger than a two-seater.

An Acura spokesman declined to comment on the significance, if any, of the women and the cellos. "Really," he said, "the focus of the ad is not the cello, it's the violin."

3. The Magnificent Severance

Face it: This WorldCom debacle is just too big to squeeze into one Dumb Thing. So here's a second.


As you may already know, any day now WorldCom is expected to lay off about 17,000 employees, or somewhere under one-quarter of its workforce.

What you may not know is how WorldCom plans to make severance payments to its departing employees. One of our spies inside WorldCom does. And, points out that source, the procedure departs from past WorldCom procedure in certain ways that will likely delay complete payment.

Now, given the risk that WorldCom may be forced to file for Chapter 11 bankruptcy protection as a result of its troubles, any delays likely diminish whatever chance remains that the departing WorldCom serfs will in fact receive their severance pay.

Don't think they haven't figured that out.

Here's how it works, according to our source, a longtime WorldCom employee who has been proven reliable in the past. Traditionally at WorldCom, laid-off employees have received severance payment in a single lump sum. But this time around, the money will come in biweekly payments stretching out over at least eight weeks.

Furthermore, the papers that employees will have to sign and return before getting their money will be going out not via overnight private delivery service, as they have in the past, but by U.S. Mail. The payments won't start for two or three weeks until that paperwork is received back at the company.

WorldCom didn't respond to a request for comment.

Our source, who expects to be laid off, is none too happy about the severance arrangements, whose stretched-out nature, says the source, reduces the likelihood they'll be paid at all.

"I got screwed out of my retirement money," grouses our source. "Am I going to get screwed out of my severance pay, too?"

4. Promethean Unbound

Certain companies are like tow trucks: If they're in the neighborhood, chances are good there's a car wreck close at hand.

That came to mind once we took a look at one of the latest deals involving Promethean Asset Management, one-time lender to such well-known clunkers as eToys, Excite@Home and the sub-dollar MicroStrategy (MSTR).

Wheezing and sputtering in the breakdown lane this time around is InterVoice-Brite (INTV), which sells voice-recognition systems and other services to telcos.

Late last month, InterVoice-Brite issued a press release saying it had successfully restructured its debt, in part through $10 million in convertible notes it issued in a private placement. "I'm pleased with these transactions," the CEO said in a statement.

What the company didn't say (although investors might have figured it out from an SEC filing to which the release alluded) is that the convertible notes, issued to Promethean, look an awful lot like what cynical Wall Street types call a toxic convertible or death-spiral convertible.

In such convertibles, the underlying company shares have a floating price. In a worst-case scenario, a company's share price falls after it issues the convert, causing an increase in the number of shares that will be issued upon conversion of the debt. That threat of dilution causes shares to fall further, starting the downward cycle all over again and leading to the death-spiral characterization.

In this particular case, the conversion price is fixed. But what isn't fixed is how many shares InterVoice-Brite might have to issue as it pays off the loan.

See, starting in September, InterVoice-Brite will have pay Promethean about $1 million a month to repay the debt. If it chooses, it can pay in cash. But if it doesn't or can't, InterVoice-Brite will have to issue common stock to make the payment. The lower the stock falls, the more stock InterVoice-Brite will have to issue, and -- well, you get the idea.

The burning question, of course, is whether InterVoice-Brite will have enough cash on hand to make the payments. Chief Financial Officer Rob-Roy Graham says the company believes it can, based on its cash on hand and expected cash flows.

But some short-sellers are betting against it, pointing to factors such as the anemic telco market and the company's $807,000 in negative cash flow from operations, reported Monday, for the three months ended May 31. They also point out that Promethean itself, as discussed in the relevant SEC filing, is able to short the stock.

So far, the short bet on InterVoice-Brite has been a good one. Since May 29, the night before the Promethean deal was announced, the stock has fallen from $3.11 to $1.75, or 44%.

For his part, Jamie O'Brien, managing member of Promethean, doesn't agree with the toxic and death-spiral characterizations of the deal. "They InterVoice-Brite are in complete control whether they're going to use cash, or whether they want, periodically, to use stock," says O'Brien. "We hope the company repays in cash, and the company has publicly stated they expect to repay in cash. It's a very boring instrument, hopefully."

For InterVoice-Brite's sake, let's hope so.

5. Of Course, This Might Explain Charles Barkley

We at the research lab hope that reading down this far hasn't been a complete waste of time for you.

But just in case, we'll try to redeem ourselves.

We call your attention to press releases issued Thursday by CP&L and Florida Power, two subsidiaries of Progress Energy (PGN).

In anticipation of the forthcoming movie Like Mike, Progress advises people to not, in fact, be like the hero of the movie, Calvin, played by rapper Lil Bow Wow.

In one of the film's key scenes, Calvin climbs on a roof during a rainstorm so he can retrieve a pair of basketball shoes hanging from a power line. When lightning strikes, the "energized" shoes give Calvin superhuman basketball skills, resulting in his becoming the first 14-year-old to play in the NBA.

In real life, Progress Energy points out, the likeliest outcome of that particular scene would be a dead Calvin.

What's Dumb? Not the press release. Not the movie, either -- at least, judging from this particular scene.

No, what's Dumb is that in today's society it makes perfect sense for Progress Energy to issue the press release. Kids mindlessly copy the things they see people doing in the media, whether it's lying down in the middle of the road, making a blowtorch from an aerosol can or trading stocks without the help of an investment professional.

Kids, don't try these things at home.

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