Tuesday, March 2, 2004 | 9:21 a.m.
BLOOMBERG NEWS
NEW YORK -- Bernard Ebbers, the former chief executive and co-founder of WorldCom Inc., today was charged in an indictment with directing one of the biggest frauds in U.S. history, misstating $11 billion in revenue and expenses at the long-distance company.
Scott D. Sullivan, the former WorldCom Inc. chief financial officer accused of implementing the fraud, agreed to plead guilty to the crime and related charges and is expected to enter a plea today in federal court in New York, people familiar with the matter said.
Sullivan, 41, who would have faced as much as 25 years in prison if convicted at trial, will probably cooperate with federal prosecutors in their ongoing investigation of Ebbers, 62, who has denied any wrongdoing, lawyers said.
"It's certainly not good news for Ebbers," Mike Simons, a former federal prosecutor, said. "Whenever someone who is close to you decides to cooperate, particularly when it seems apparent that you are the target the government is after, the government doing a cooperation deal is not good."
Ebbers's lawyer Reid Weingarten and Sullivan's lawyer Irvin Nathan didn't return calls for comment on the indictment, which was released in New York by the U.S. Attorney's office. Ebbers and Sullivan were charged in the indictment with conspiracy to commit securities fraud, securities fraud and filing a false statement with the U.S. Securities and Exchange Commission.
The SEC is expected to sue Sullivan today, accusing him of civil fraud, a person familiar with the investigation said. The SEC, in announcing its settlement of a civil fraud suit against WorldCom in 2002, called it the biggest fraud the agency had investigated in its 70-year history.
Ashburn, Va.-based WorldCom, which plans to change its name to MCI Inc., is seeking to exit bankruptcy later this year. WorldCom is the No. 2 U.S. long-distance company after AT&T Corp.
Ebbers's arrest is the culmination of a two-year investigation by the U.S. Department of Justice and federal prosecutors in New York, who used plea agreements with former WorldCom subordinates to build a case against the former CEO.
"To indict him is the capstone of the investigation," said Robert Cleary, a former U.S. attorney who said that prosecutors wouldn't have charged Ebbers without having strong evidence. "If you're going after as significant a player as Bernard Ebbers, you're going to make sure you have a head shot."
Ebbers, a former milkman and bouncer who in 17 years built a small discount telephone-company into a long-distance giant, dominated decision-making on salaries, bonuses and acquisitions, court-appointed bankruptcy examiner and former U.S. Attorney General Richard Thornburgh said in a report released in June.
Ebbers resigned in April 2002 following an 83 percent plunge in company stock and the announcement of a federal investigation of his company. In the same month the company lent him $408 million. WorldCom filed for bankruptcy three months later, the largest in U.S. history.
A native of Edmonton, Alberta, Ebbers, who was also a high school basketball coach, co-founded the phone company in 1985 in a Mississippi diner. Ten years later, the company changed its name to WorldCom.
Ebbers, who named his yacht "Aquasition," bought dozens of smaller companies, such as the fiber-optic cable firm WilTel Network Services and MFS Communications Inc., an Internet-service provider, to expand WorldCom. In 1998, he bought rival MCI Communications Corp. for $47 billion, outbidding British Telecommunications Plc.
In March 2002, the SEC announced that it was investigating the company's finances. In April, WorldCom said it had overvalued its goodwill by as much as $20 billion and later increased that figure to $50 billion. In June, WorldCom admitted it had hidden $3.9 billion in revenue and expenses. That figure would eventually increase to more than $11 billion in misstatements going back to 1999, the SEC said.
Once the carrier of about half all Internet traffic, WorldCom listed $107 billion in assets and $41 billion in debt when it filed for court protection.
Federal prosecutors and the SEC in 2002 began investigating loans to Ebbers from WorldCom totaling $408.2 million. The first loans were made to Ebbers in 2000 to guarantee a margin loan by Bank of America, with his WorldCom stock being used as collateral.
The government has negotiated plea bargains with former WorldCom accounting chief Buford Yates, ex-controller David Myers and former accounting officials Betty Vinson and Troy Normand. They all pleaded guilty in 2002 to charges of securities fraud and are cooperating with prosecutors.
Two reports released by Thornburgh and Washington D.C. attorney William McLucas, a former SEC enforcement director hired by WorldCom to review the company's collapse, fault Ebbers and Sullivan for WorldCom's misstatements.
Ebbers created a climate in which the board bowed to the two executives' whims and subordinates were afraid to question accounting discrepancies, McLucas said, calling the fraud that resulted "spectacular" in terms of "dollar amount and conduct."
The SEC charged WorldCom with fraud June 2002 after the company admitted that it had misstated $3.85 billion in revenue and expenses.
The SEC settled its securities fraud lawsuit against WorldCom Nov. 26, 2002. In New York, U.S. District Judge Jed Rakoff approved a $750 million agreement between WorldCom and the SEC to settle the agency's civil fraud suit in July 2003.
WorldCom shareholders, bondholders and employees have sued the company and its officers, accusing them of artificially boosting revenues and intentionally misleading customers about rates, switching customers' long-distance service without their consent, refusing to follow customer instructions to cancel service and recognizing revenue from closed accounts.
The investors' suit claims that WorldCom's officers and directors, its investment banks and the company's former auditor, Arthur Andersen, committed securities fraud by misrepresenting WorldCom's financial condition and issuing WorldCom stock and bonds based on the false information.
Securities lawyers have alleged that WorldCom has engaged in revenue-boosting practices since 1999 that included double- billing clients, backdating contracts, carrying uncollectible receivables and delaying payment of expenses until after quarterly reports were tallied.
U.S. District Court Judge Denise Cote denied motions by Ebbers, WorldCom's underwriters and Arthur Andersen to dismiss the litigation. She has also refused to dismiss a parallel suit against Ebbers and WorldCom 401(k) plan trustee Merrill Lynch & Co. brought by WorldCom employees who lost money on WorldCom stock in their 401(k) plans.
All of the defendants in civil suits have denied wrongdoing.
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