When the answer came back confirming what they had only half-jokingly asked, shock spread across both of their faces.
Seok-won looked at the two of them with a steady gaze and spoke.
"Why do you think Enron, which had been rising smoothly and grown into the seventh-largest company in the United States, collapsed?"
"W-Well, isn't it because they deceived investors by secretly manipulating their books, greatly inflating profits and hiding their debts?"
Landon replied, doing his best to hide his flustered state.
"That is the biggest reason, yes. But honestly, if you think about how quite a few companies engage in a bit of accounting fraud one way or another, Enron can't be the only company doing something wrong."
It was an uncomfortable truth, but as Seok-won said, it was already an open secret that quite a few American companies tampered with their books, such as leaving out losses, to make their performance look better.
Even large publicly listed companies whose names everyone would recognize were no exception.
"Ahem."
"Um… that's true."
Since both of them knew this well, they awkwardly cleared their throats and avoided eye contact.
"Of course, that doesn't mean what Enron's management did was justified. What I'm saying is that accounting fraud isn't just Enron's personal deviation. It's a problem that's widespread across American companies in general."
"That's true. People keep quiet about it, but everyone in the industry who knows anything knows about it."
Andrew replied with a slightly stiff expression.
"The reason the Enron scandal finally exploded is because the scale of the accounting fraud grew to a level that the management could no longer handle."
But what Seok-won said next made them tilt their heads in confusion.
"And if you look at the root of the problem, the reason Enron's debt increased so rapidly was the internet arms race."
"?"
Landon, who did not understand right away, asked back with a puzzled expression.
"Did you say the internet arms race?"
"That's right."
With one leg crossed, Seok-won began to explain calmly.
"Because of the dot-com boom, telecom companies expected the number of internet users to grow exponentially, so over the past few years they invested astronomical amounts of money laying fiber-optic cables all across the country. You know that, right?"
"...."
"In fact, since the dot-com boom began in 1997, internet usage has nearly doubled almost every year. So in a way, it was only natural that telecom companies believed this would become a new source of revenue that would surpass their already saturated telephone line business."
As the two of them listened intently, Seok-won continued.
"As a result, just like the railroad companies in the 1880s fought fierce battles, excessive competition broke out among telecom companies, each trying to secure more internet users faster than their rivals and dominate the market."
In fact, from 1998 to 2001, the fiber-optic cable network expanded by a full five times, and through research and development, data transmission capacity increased a hundredfold.
"But the problem is that even though they invested huge sums to lay fiber-optic cables all across the United States, contrary to expectations, internet usage only increased fourfold over those four years."
Catching on to what he meant, Landon let out a low exclamation.
"They poured enormous amounts of money into building the fiber-optic network, but if there aren't enough users, then instead of making profits they'd just be piling up losses. For telecom companies, that's practically a disaster."
Andrew, too, quickly grasped the situation, his eyes sharpening behind his gold-rimmed glasses.
"So just like how the massive debt of its subsidiary, Broadband, worsened Enron's own financial condition, you're saying the existing telecom companies must also be in trouble, right?"
Seeing how reliable the two of them looked, Seok-won interlaced his fingers.
"The company that invested in the internet business far more aggressively than Enron is WorldCom. If that's the case, they must have taken substantial losses. So doesn't it seem strange that they announced results far better than the market expected last time?"
"But unlike Enron, isn't it possible that their profitability just isn't that bad?"
When Landon cautiously pushed back, Seok-won, as if he had expected that response, picked up a folder that had been placed on the side table to his left and set it down on the table.
"I had WorldCom's accounts over the past five years analyzed in detail."
The two of them swallowed hard and looked at Seok-won.
"After going through everything piece by piece, we were able to confirm that at least three billion dollars in losses were left out."
"...!"
At the shocking revelation, both of their eyes went wide.
Landon looked completely at a loss for words, and Andrew, unable to hide his surprise, asked again as if to confirm it.
"So you're saying that WorldCom is hiding more than three billion dollars in losses?"
"That's right. That's the minimum estimate."
Only then did Landon finally come to his senses and speak hesitantly.
"I-I'm not doubting what you're saying, boss, but doesn't it seem impossible that accounting fraud on that scale could go completely unnoticed?"
Andrew seemed to be thinking the same thing and nodded.
"Under normal circumstances, the accounting firm in charge of the audit would have found that the losses were deliberately left out. But if, like in Enron's case, the accounting firm is in on it too, then it's a different story, isn't it?"
"Surely not?"
"When I checked, the accounting firm in charge of WorldCom's financial audit turned out to be Arthur Andersen."
Seok-won cast a meaningful look at the two of them.
"Doesn't that name sound familiar?"
"…It's the accounting firm that was in charge of auditing Enron and actively helped manipulate the books."
Andrew replied in a stiff, rigid voice.
"My God. How could something like that happen?"
Even Landon let out a hollow laugh with a stunned expression.
It wasn't some no-name firm. It was one of the top three accounting firms in the United States, and yet it had suddenly turned into a den of crime.
Seok-won looked at the two of them with narrowed eyes and said.
"Isn't it a little too much of a coincidence to just write it off as chance?"
"...It certainly is."
As Landon nodded, Andrew added,
"Considering that it's a firm with a history of actively going along with accounting fraud, as you said, there's a high chance they committed the same kind of manipulation here too."
"With the Enron scandal bringing accounting fraud into the spotlight socially, and given that Arthur Andersen, which handled the audits, is currently under investigation by the financial authorities, it wouldn't be strange at all for the WorldCom scandal to surface at any moment."
"That seems likely."
Both of them agreed that it was a ticking time bomb of a situation.
"Even aside from that, it's hard to keep hiding losses worth tens of billions of dollars without anyone noticing. All the more so now, when the internet boom has cooled off sharply and the fiber-optic networks that companies poured money into in fierce competition have turned into huge piles of bad assets, with losses piling up."
Andrew, catching on to what he was getting at, had his eyes light up.
"If we short it in advance and the accounting fraud is exposed, the stock price will crash just like Enron's did."
In a word, it would be Enron Season 2.
Landon, too, rubbed his palms together with a face full of anticipation and spoke in an excited voice.
"Considering that it tried and failed to go through with a 129-billion-dollar merger with Sprint, and with the industry conditions not being great so its market cap and stock price have fallen sharply, it's still a company valued at 85 billion dollars. If you think about that, this one should bring in a pretty nice profit too."
"How much should we short?"
As if he had fully made up his mind, Andrew asked while slightly pushing up his glasses.
"Like we did with Enron, keep selling without any limits."
At the answer that came out immediately, as if he had been waiting for it, Andrew's eyebrows twitched.
"...Do you think WorldCom is going to go bankrupt?"
"Eh? You don't really think it will go that far, do you?"
Landon, who had been grinning while thinking about the money they would make from the short, looked at him with a shocked expression.
Although WorldCom had shrunk significantly after the dot-com bubble burst, it was still the second-largest long-distance telephone company in the United States, holding assets worth 107 billion dollars.
In terms of asset size, that was almost twice Enron's 63.4 billion dollars.
If it were to actually go bankrupt, it would deal a massive blow not only to the U.S. economy but also to stock markets around the world. The two of them swallowed, their eyes trembling.
But Seok-won spoke with a confident tone.
"Over the years, as WorldCom bulked up through multiple mergers and acquisitions, it took on massive debt worth tens of billions of dollars. Considering that, if an accounting fraud scandal breaks out, it'll be a fatal blow."
"I see. If it's revealed that they manipulated the books, their credit rating will be downgraded at a time when their financial condition is already bad, making it even harder to raise funds. There's no way the company wouldn't start to wobble."
Andrew, who had been resting his hand on his chin and thinking it over, looked at him and asked.
"Then do you plan to set the short-cover price below one dollar per share like last time?"
"There's a good chance it will fall even further than that, but if we get greedy and try to ride it all the way to the bottom, it could backfire. So let's set the target price at one dollar."
Then Landon spoke.
"WorldCom's stock is around 18 dollars right now, so if we short it and close the position at one dollar… whew. Even roughly speaking, that's a return of about 94%."
Landon let out a hollow laugh and shook his head in admiration.
"Other funds consider it a great success if they make a 30–40% return on a single investment, but whenever you get involved, boss, 90% seems like the bare minimum."
"Seriously. Thanks to you, our standards have gotten so high that anything under a 50% return feels underwhelming. That's a problem in itself."
Seok-won let out a short chuckle, then spoke in a serious tone.
"When the WorldCom scandal breaks, it's going to deal a major blow to the entire telecom industry, which has been drowning in debt after years of excessive investment."
"That's probably true."
"I think so too."
Both of them nodded at the same time as they answered.
"If WorldCom goes bankrupt as expected, make sure to acquire their internet business unit, UUnet, no matter what."
"You told us to buy Enron Broadband last time. Are you planning to acquire UUnet as well?"
Seok-won shifted his posture and spoke.
"Because of excessive overinvestment, telecom companies ended up taking on massive debt. But the direction itself was right. The fiber-optic network that provides high-speed internet connections is going to play a core role in the internet era that's coming."
"...."
"They just rushed things and invested far more than necessary, and that's what caused the trouble."
Soon, Seok-won gave a wry smile.
"Or maybe you could say that, thanks to the excessive competition among telecom companies, the fiber-optic network spread across the entire United States in a short period of time, and that actually brought the true internet age forward."
The bubble burst, many people lost money, and dot-com companies collapsed, but thanks to the enormous amount of investment that poured in, the fiber-optic network, the infrastructure needed for the internet, was able to be completed.
"After the rain, the ground hardens, and new sprouts grow on top of it, don't they? From now on, companies that aren't just dot-coms in name but actually make money through the internet will start to appear. When that happens, broadband network services that connect the internet will literally become a goose that lays golden eggs."
Seok-won grinned and curled up one corner of his mouth.
"When telecom companies are gasping under debt because of excessive competition, if we swallow up the fiber-optic networks they worked so hard to build at bargain prices, it's like taking hold of a future gold mine without much effort."
"So the telecom companies do all the hard work, and we're the ones who make the money."
Landon said with an admiring expression.
"To do that, we need to buy up as much of the fiber-optic networks of other telecom companies as possible, not just Enron Broadband or UUNet."
"I understand what you mean."
Landon replied immediately, as if he had gotten the point.
Once he clearly understood the bigger picture Seok-won was drawing, all hesitation disappeared.
Leaning back into the soft sofa, Seok-won wore a deep smile as he imagined holding in his hand the most crucial core infrastructure of the internet era that was about to unfold.
TL/n -
UUNET Technologies, Inc. was one of the very first and largest commercial Internet service providers, founded in 1987 in Virginia, USA.
1987: Incorporated as UUNET Technologies, Inc.
1996: Acquired by MFS Communications, which was itself acquired by WorldCom the same year.
1999: At its peak, UUNET employed about 7,000 people and generated $3.5 billion in sales.
2005: WorldCom (renamed MCI) was acquired by Verizon.
2006: UUNET brand retired; operations merged into Verizon Business.