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VOL. 117 | NO. 81 | Thursday, April 24, 2003

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Alaska sues investment firms over WorldCom losses

Alaska sues investment firms over WorldCom losses

The state of Alaska has filed a lawsuit against several major financial institutions to recover money lost in bonds issued by bankrupt WorldCom, state Attorney General Gregg Renkes said Tuesday.

Several state funds lost about $26 million when the value of WorldCom bonds collapsed, Renkes said.

The lawsuit, filed in state Superior Court in Juneau, alleges the financial institutions misled state officials about the WorldCom investments.

Defendants named in the lawsuit are Citigroup Inc., Salomon Smith Barney Inc., J.P. Morgan Securities Inc., Bank of America Corp., ABN AMRO Inc., Deutsche Bank AG, Lehman Brothers Inc., Credit Suisse Group, Goldman Sachs Group Inc., USB Warburg, Nationsbanc Montgomery Securities and defunct accounting firm Arthur Andersen, along with related companies.

These defendants failed to meet their obligation to fully inform potential bond holders about WorldComs true financial condition, Renkes said in a statement. We hope to restore money to the State of Alaskas funds and send Wall Street a message that we will hold them accountable if they abandon honesty for profits.

Renkes said he has hired a California firm that specializes in securities matters to handle the case.

 

Two music labels sue Napster's backers

Universal Music and EMI filed a lawsuit against the venture capitalists who backed Napster Inc., claiming they contributed to the copyright violations by millions of the song-swapping service's users.

The two record labels filed the lawsuit Monday in federal court against Hummer Winblad Venture Partners and two of the San Francisco firm's general partners, Hank Barry and John Hummer.

The suit seeks punitive damages, along with $150,000 per violation. It also is intended to dissuade investment in any of the song-swapping services that have risen in Napster's place.

The suit alleges the venture capitalists knew Napster was providing infringement to its users and that the firm controlled Napster's activities through its $13 million investment in May 2000. Barry served as Napster's chief executive for more than a year and both he and Hummer sat on Napster's board.

Napster filed for bankruptcy protection in June. At its height, Napster boasted 60 million users.

Barry and Hummer anticipated they might be sued and tried to negotiate protection from legal consequences when German media firm Bertelsmann was planning to buy Napster early last year. Those talks foundered, and Bertelsmann itself has been sued for its investment in Napster.

 

HealthSouth manager says safeguards bypassed

Massive fraud that rocked HealthSouth Corp. and led to criminal charges against 10 former executives was accomplished using simple, manual entries in a computer system, according to testimony in federal court in Birmingham, Ala., Tuesday.

Invoices received by the company typically are entered into an advanced software system that conducts a computer audit. The system also creates reports as it generates checks, said Barbara Patton, who manages HealthSouths accounts payable department.

Patton said participants in the fraud waited until monthly operating reports were completed by the computer, allowing them to sidestep the systems checks and balances.

After the reports were completed, the participants typed in false information elsewhere in the computer system that was later merged into consolidated corporate statements.

Its real easy, said Patton, who designed her departments systems of checks and balances but said she was unaware of how the fraud was accomplished until she read media accounts.

Patton testified as U.S. District Judge Inge Johnson considered whether to maintain a temporary freeze on the assets of fired HealthSouth chief executive and chairman Richard Scrushy.

The U.S. Securities and Exchange Commission filed suit last month accusing the company and Scrushy of overstating earnings by $1.4 billion since 1999 to meet Wall Street expectations. The amount increased to $2.5 billion since 1997 as investigators went further back.

Ten former HealthSouth executives have either pleaded guilty or reached plea deals with the government. Scrushy has not been charged, but his attorneys have said he is the target of a criminal investigation.

Under questioning from Scrushy attorney Tom Sjoblom, Patton said she doubted Scrushy would have known about the faked accounting entries she described.

Im not sure he was that detailed, she said. You had to read the general ledger line by line to see it.

While the government claims in the lawsuit that Scrushy directed the fraud, Sjoblom contends Scrushy didnt know about the scheme until two days before the suit was filed.

Founded by Scrushy in 1984, HealthSouth is a U.S. provider of outpatient surgery, diagnostic and imaging and rehabilitative health care services. The company has nearly 1,700 facilities and 51,000 employees worldwide.

 

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