KlaymanToskes Led the Way in Wake of Telecoms Corporate Accounting Scandal
In the early 2000’s, WorldCom was the world’s largest telecoms company. However, scandal soon embroiled the corporate behemoth. After investigating WorldCom’s accounting, the SEC determined that the company overstated its assets by $11 billion, and the rest was history: a $2.25 billion settlement, executives being indicted on securities fraud charges, and the filing of a Chapter 11 bankruptcy. Perhaps worst of all, Worldcom employees who held stock options were devastated by the company’s fall.
Afterwards, law firms like KlaymanToskes helped lead the way by representing dozens of Worldcom employees to attempt recovery for their investment losses resulting from holding stock options. For instance, in 2002, KlaymanToskes filed suits representing Worldcom employees before the National Association of Securities Inc. against brokerage firms, including Salomon Smith Barney Inc.
According to the claims filed by KlaymanToskes, Salomon failed to recommend to WorldCom employee stock option participants hedging strategies to protect their concentrated position in WorldCom as a result of the exercise of their stock options through the use of margin. The firm’s cases brought the spotlight to KlaymanToskes partner Lawrence L. Klayman, Esq., who was quoted by the New York Times and Wall Street Journal at the time.
KlaymanToskes also represented around 70 WorldCom employees around the time for damages exceeding $50,000,000. The employees participated in the company’s Employee Stock Option Plan (ESOP). At the time, the firm stated that “the suits allege that the firms failed to recommend to WorldCom ESOP participants hedging strategies to protect their concentrated position in WorldCom as a result of the exercise of their stock options through the use of margin. The recent events surrounding WorldCom’s disclosure of accounting irregularities points out the fallacy behind any advice given to clients to concentrate all of their assets in a single stock without any protection.”
What was the WorldCom Scandal?
WorldCom was a Clinton, Mississippi-based company incorporated in Georgia which provided a broad range of communications services to businesses and consumers in more than 65 countries.
WorldCom was a public company whose securities were listed and traded on the NASDAQ National Market System under the symbol “WCOM.”
According to the SEC Complaint at the time, from at least as early as 1999 through the first quarter of 2002, WorldCom misled investors by materially overstating income it reported in its financial statements by approximately $9 billion.
The SEC alleged that WorldCom manipulated its financial results in two ways:
Neither practice was in conformity with generally accepted accounting principles, and neither practice was disclosed to WorldCom’s investors, despite the fact that both practices constituted changes from WorldCom’s previous accounting practices.
As a result, the conduct falsely reduced WorldCom’s expenses and, accordingly, had the effect of artificially inflating the income WorldCom reported to the public on its financial statements from 1999 through the first quarter of 2002.
Lesson Learned from WorldCom: Concentration Risk for Your 401(k)
As FINRA states in its Investor Alert, “if you put too many eggs in one basket, you can expose yourself to significant risk.” As with WorldCom employees in the early 2000s, if you invest heavily in your own company’s stock, you may be at risk of concentration.
Many companies experience fluctuations in both operational performance and stock price. Worse, if your company fails, you are at risk of losing your retirement savings, especially if not properly diversified.
Further, owning too much of your company’s stock may subject you to additional risks like restrictions. For instance, employer-matched stock often comes with restrictions. Some companies require employees to hold the stock until they reach a certain age, or until a specified date. If the stock tanks, you may not have the ability to transact due to the restrictions.
Connect with Us to Learn More about Lessons from WorldCom, and Concentration Risk
KlaymanToskes can help you determine whether an investment loss is the result of securities concentration and/or failure to recommend risk management strategies to protect concentrated position. If an investor suffers losses as the result of the failure to recommend risk management strategies for securities concentration may be able recover their losses in a FINRA arbitration claim for damages.
For more information, contact Lawrence L. Klayman, Esq. at (888) 997-9956, and download our Special Investor Report.
About KlaymanToskes
KlaymanToskes is a leading national securities law firm which practices exclusively in the field of securities arbitration on behalf of retail and institutional investors throughout the world in large and complex securities matters. KlaymanToskes has recovered more than $228 million for investors in FINRA arbitrations. KlaymanToskes has office locations in California, Florida, New York, and Puerto Rico.