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MSFT Says SEC Investigating Accounting Policies; Net Takes Rate Hike in Stride

Juniper continues streak, catapulting 29% in Wednesday's session.

SAN FRANCISCO -- Just when it looked like

Microsoft

(MSFT) - Get Microsoft Corporation (MSFT) Report

was safe, the company announced a little bombshell.

On a hastily arranged analyst conference call, CFO Greg Maffei said the company planned to make some accounting changes and, oh, by the way, the

Securities and Exchange Commission

is reviewing the company's accounting policies regarding its financial reserves.

Oops.

Maffei downplayed the incident and reassured analysts that the software giant is cooperating with the SEC in its review. The review was apparently sparked by a five-paragraph article in the

Wall Street Journal

. Maffei said, however, that the SEC regularly looks at companies and this was not unusual.

Although the investigation was initiated in January, Maffei said he learned of it "some months ago," but he couldn't remember exactly when.

According to the

Journal

article, a former Microsoft internal auditor charged in a 1997 wrongful-discharge suit that Microsoft manipulated revenue reserves totaling hundreds of millions of dollars to make its profits appear steady. Microsoft insisted that it follows accepted accounting practices and submitted 1,600 pages of documents in the case about its reserves, the newspaper reported. The parties settled the case.

It is unlikely that the investigation will cause Microsoft to restate its earnings, but it is just another round of bad publicity as the

Justice Department

trial winds down.

As for fiscal fourth-quarter earnings, which will be released on July 19, Maffei said analysts' consensus earnings estimates are on the mark. Microsoft is expected to earn 36 cents a share, based on a 27-analyst

First Call

estimate.

--

Kambiz Foroohar

The following report was originally published at 5:15 p.m.

"Thank you sir, may I have another?"

That wasn't quite the reaction from the Internet sector following news that the

Federal Reserve

raised interest rates by 25 basis points. But Net stocks took news of the anticipated rate increase in stride and rallied around the announcement that the Fed had moved away from its tightening bias.

Rising interest rates contributed to the recent setback in Internet stocks, as some investors see rising interest rates making high-valuation Net stocks less

attractive as a long-term investment. But the feeling was that the Net sector had gone a long way to pricing in a rate hike, and the Fed's move from a tightening bias to a neutral directive raised hopes that the policy-making committee would not go on a protracted tightening cycle. Also, many traders were waiting for the Fed to be out of the way before buying ahead of what is expected to be a positive earnings season for the sector.

But note that the market still faces some key economic data this week with the

NAPM

TheStreet Recommends

report tomorrow, and the

employment

report on Friday. They follow a strong Chicago manufacturing report

today and could reignite fears of additional rate hikes if they too are strong.

TheStreet.com Internet Sector

index closed up 20.09, or 3.4%, at 616.66. It was trading about 5 points higher before the Fed announcement.

And as would be expected, many of the big-cap Internet names rallied with the most gusto.

Yahoo!

(YHOO)

finished up 12 1/4, or 8%, at 172 1/4.

Amazon.com

(AMZN) - Get Amazon.com, Inc. Report

closed up 9 1/16, or 8%, at 125 1/8;

eBay

(EBAY) - Get eBay Inc. Report

ended up 10 1/4, or 7%, at 151; and

priceline.com

(PCLN)

finished up 8 1/16, or 7.5%, at 115 9/16.

Inktomi

(INKT)

also was a big gainer, closing up 12 3/8, or 10%, at 131 1/2.

Pacific Crest Securities

began coverage of the stock with a buy rating, saying it was "one of the few Internet companies that is a unique infrastructure play in a fast growing industry."

Exodus Communications

(EXDS)

also kept its rally cap on. It closed up 13 15/16, or 13%, at 119 15/16. And

National Discount Brokerage

(NDB)

continued to ride the coattails of Tuesday's strong buy recommendation from

Deutsche Banc Alex. Brown

. It finished up 12 1/2, or 28%, at 57 3/4.