KPMG 'could face Worldcom action'

WorldCom has reinvented itself as MCI

Bankrupt telecoms giant Worldcom has grounds for legal action against its former tax advisors KPMG, according to a report submitted to a US court.

Worldcom, due to emerge from financial restructuring under the name MCI, could also sue ex-boss Bernie Ebbers as well as its former bankers, it says.

The report, prepared for a US bankruptcy court, describes KPMG's tax advice to Worldcom as "flawed".

It says nine states are still mulling a claim for back taxes against the firm.

At issue is a KPMG-designed strategy aimed at reducing Worldcom's state tax bill by moving income from high-tax states to low-tax ones.

Unforeseen

The income transfer was achieved by treating the "management foresight" of Worldcom executives as an asset that the firm licensed to its subsidiaries in return for some $20bn during the three years to 2001.

The report, drawn up by law firm Kirkpatrick & Lockhart, claims that management foresight could only be considered an asset if it was also sold to third parties.

"We did not find any support anywhere that management foresight was a proper intangible asset that could be deducted for state tax purposes," Michael Missal, one of the report's authors, told the BBC's World Business Report.

Mr Missal said Worldcom could yet face a bill for "hundreds of millions of dollars" in back taxes.

KPMG insisted that its tax work for Worldcom was above board.

"The examiner's conclusions are simply wrong. Independent reviews of the tax position taken by Worldcom conclude that it is fully supported by the tax laws," the firm said in a statement.

Worldcom said it would study the report, but stressed that it currently had "no plans to pursue claims against KPMG."

Duty

The Kirkpatrick & Lockhart report also questions the relationship between Mr Ebbers and Worldcom's investment bank, Salomon Smith Barney (SSB).

It says Mr Ebbers may have breached his duty to Worldcom by accepting allocations of shares in highly sought-after stock market flotations from SSB during the late 1990s.

SSB may also be liable for "aiding and abetting" this breach of duty, Mr Missal said.

Mr Ebbers has not been accused of any part in the accounting irregularities that brought about the collapse of Worldcom in July 2002.

His lawyers have always denied any wrongdoing by their client.

SSB's parent company, Citigroup, has said the services it provided to Worldcom and its executives were executed in good faith.