Self registration is the filling in of new issues within the Security Exchange Commission that allows participation in the Security Exchange Market Exchange within a period of about two years pending whenever the demand of the new issues arises.
The main purpose of the ‘Self Registration’ is that at the time of filling in the new issue, the demand for the offering had not risen and investors cannot place a bid; therefore they have to wait until the demand arises even before the expiration of the two years.
The defense is based on the 1999 – 2000 audited financial report carried out by Anderson (Worldcom Auditor) ‘who did not uncover any financial fraud until May 2007’. Between 2000 and 2001 WorldCom sold two bond offerings using the Audited financial report as at that time. Evidently, provided an unedited interim report of 2000 and 2001 as at the time of filling in the ‘Self Registration’ at the Security Exchange Commission and the information he presented is similar to the Audited Financial Report prior to the sale of the bond offerings on the said dates.
The due diligence of an investment bank exists for the fact that the ‘investment bank’ as the word implies, cannot invest in a business without carrying out due diligence. The due diligence is carried out in order to determine the success and failure of a business taking into consideration of the past performance, present and in the future.
The due diligence report is carried out in case of purchasing existing business and other investment that require capital. The investment bank may be required by the investor or vendor to provide loan or equity capital. The due diligence report will be based on the past, present and future development to determine the cash flow know as the ‘debt servicing factor’ of the requested loan.
During the due diligence investigation, the following areas are thoroughly explored.
Personnel Review: The staff of the business employed and the individual skills and also to know if the company is over staff.
The labour strength could be reduced if it is overstaff and retaining only the skilled staff
Books of Account: The financial reports of the business becomes very necessary which will picture out the financial strength and weakness of the business. The books include the audited Profit and lost Statement and Balance Sheet for the last three years. The company assets and liabilities will be revealed in theses books of account.
Marketing: The demand of the products and services will be taken into consideration and also to know the customers they are dealing with including creditors as well.
Property or equipment: The type of equipment used if directly purchased or on lease, appreciation and depreciation.
Business operation: They will take into consideration the location of the business, inventories. Insurance policies and other related factors
It was alleged that there was a fraudulent statement during the ‘Self Registration’ excise based on the audited financial statement of 2000 and 2001 available. It was deliberated that the due diligence report was prepared by a none expert or was deliberately prepared an in- house expert and the report failed to reach the required due diligence standard. Consequently, the report did not revealed the financial weakness of WorldCom both in the audited financial statement and at the time of the ‘Self Registration’ exercise in the United State Security Exchange Commission.
It was also deliberated that the defendants were only relying on the representation of Barchris insiders. One of theses insiders was Bran Birnbaurm who was a young Anttony of Barchris’s house counsel, Secretary and members of the board of directors.
Based on the above factors, the summary Judgment was as follows;
The audit financial report of Anderson was proved “unclean” for the fact that his report did not reveal the true financial picture of WorldCom whose executives performed the fraudulent financial deal and consequently, was unable to uncover the financial fraud until in 2002. The Underwriters defendants motion for the summary judgment was dined.
The due diligence defense: There was no set standard as to know the qualified expert who prepared the report. Also “The standard to determine what constitute a reasonable investigation…” is not identified.
The time needed to conduct an adequate diligence report cannot be determined due to the fact that there is no need to hurry when taking over a business; hurrying over to take over a business without an adequate due diligence carried out could bring dome to the business and may result to huge financial loss.
On the other hand, the due diligence report should be readily available by the vendor but may not be taken so serious by the investment bank until an independent due diligence is carried out by independent third party who has no stake in the business.
The investor may decide to give the business a trial period say from within two to there years period in order to see the strength and weakness of the business; if it impresses him, then he can go ahead to sign a detailed sales agreement with the investor(s). So the trial period could bridge the gap between the urgent need and the period an adequate due diligence could be carried out.
A thorough investigation was not carried out before the filling in the “Self Registration” Form S-3. The time required to undertake the process of the due diligence investigation cannot reconcile with the time the “Self Registration” exercise was performed. Consequently, the report was fraudulent although it was prepared by an expert.The due diligence investigation would have been carried out first before the filling in of the “Self Registration” Form S-3 of 2000 and 2001 respectively.
In another development, it was revealed that the investment bank was considered to come in to turn around the weaken financial position of WorldCom before the new offering of 2001. This was an initial suggestion of the Defendants. This would have gone a long way to uncover the financial fraud of WorldCom. The bank was would have carried out the due diligence report before investing into the business either through loan or equity participation.
The bank would have taken the above mentioned step to determine the past, present and future financial position of Worldcom.
The worldcom unhealthy financial position would have been revived if due diligence report was carried out by an independent professional before the issuing of the offering in the Stock Exchange Commission of 2000 and 20001 respectively. The involvement of the investment bank would have turned the situation around but the management did not allow that for the fact that it could lead to the discovery of their fraudulent practices Also there was the need to adopt to the required accounting standard and as well as the due diligence investigation to be carried out by outside professionals.
At the end of the judgment, there is the need to remove all corrupt staff and employed new Staff of Worldcom to enable it takes up in a in a brighter atmosphere. The new management team should have dis-engage outside and inside professional such as Solicitors, Accountants etc that contribute to the WorldCom unhealthy financial situation.
Note: In the internet “Self Registration” has various definitions outside the Security Exchange Commission. It is defined as online registration for services including admissions. It was not related to the any of the Security Exchange in Europe or other part of the world apart from the United States.
As at this time, I have not come across information of self registration in Europe. I am assuming that it is the United States Security Exchange Commission that has the “Self Registration” exercise.