Aggressive Accounting**Ring of Thieves
Neil Weinberg, 06.10.02
MCI introduced Walter Pavlo to a world of armed thugs, duffel bags stuffed with cash and phony accounting. Now, sitting in a South Carolina prison, he points a finger back at his former employer.
Walter Pavlo has plenty of time these days to walk the track inside South Carolina's secluded Edgefield prison. He takes a daily stroll with Mark Whitacre, the Archer Daniels Midland whistle-blower who is serving a ten-and-a-half-year sentence for fraud. Surrounded by drug convicts, camp fences and rolling woodlands, they chat about their pasts and draw parallels to the scandals swirling around big corporations now--at Enron, at Arthur Andersen, in telecom.
Pavlo, blond and still boyish at 39, committed his crimes at MCI as the telecom business roared in the mid-1990s. He is in the 15th month of a 41-month sentence for obstruction of justice, money laundering and mail fraud. An unremarkable rank-and-filer in a 25-person billing department, he says he cooked the books, under pressure from higher-ups, to help bolster MCI's growth. Pavlo employed an array of tricks--taught to him, he says, at MCI--to hide hundreds of millions of dollars in aging bad debts and clearly uncollectable receivables owed by a raft of upstart telecom resellers. In the process, he used the same sleight of hand to skim $6 million on the sly for himself and a couple of partners; for that he is doing soft time.
The resellers stoked growth at a time when MCI, lit up by the halo of the Internet frenzy, was prettying itself up for a sale to someone bolder. The company, with Walter Pavlo's copious assistance, granted easy credit to dozens of fly-by-nights looking to lease its lines and resell service to businesses and consumers. It blithely let just about anyone, from raw rookies to pornographers and astrological touts, run up tens of millions of dollars in bills. Then, Pavlo says, MCI kept the receivables on its books long after any real hope of collecting had vanished--with the resellers themselves, in some cases. Banks, eager for high interest and fees, financed it all.
It was his job, he says, to hold these losses to a minimum, even if doing so required deceptive means. His actions benefited MCI. The company filed a proxy with the Securities & Exchange Commission recommending a $20 billion buyout by British Telecom in 1997, just days after management knew it had fraud on its hands, according to a brief filed by a group of banks that sued MCI in 1997. That deal collapsed, and MCI then accepted a $41 billion offer from WorldCom months later.
MCI denied the banks' allegations and has claimed it was duped by its own employees. At MCI only Pavlo and James B. Wilkie, a senior manager, have been punished (along with a third partner, an outsider named Harold R. B. Mann). For five years Pavlo has wondered when someone might take a hard look at the four levels above him, from his boss up to the chief financial officer--Douglas Maine, who later became chief financial officer at IBM and now runs its online arm--and above him to MCI chief executive Bert C. Roberts, who now is chairman of WorldCom.
And so when Pavlo learned one day in March, as he sat reading in the prison library, that the SEC is investigating whether there were any accounting misdeeds at WorldCom, he had one sentiment: "It's about time." He believes the remnants of his stunts are buried in a $685 million pretax charge for bad receivables that WorldCom took in October 2000. The company blamed the big charge ($405 million after tax benefits) on a handful of customers' going bankrupt in the previous quarter. Pavlo argues that the charge was, rather, a way to use the industry downturn to mask the writeoff of receivables that had been rotting for years on the books of MCI and WorldCom, artificially boosting profits.
"This story is bigger than Walt Pavlo heisting money from MCI and going to jail," says Walt Pavlo. "This is about corruption of telecom, with lots of games. I didn't come to MCI knowing how to hide accounts receivable."
Pavlo is a convicted felon and an accomplished liar. But his claims have some supporters. A shareholder lawsuit, dismissed in April and now under appeal, makes the same claim about the October 2000 writeoff. The SEC seems to harbor similar suspicions, and in March it asked WorldCom to list the carriers included in the big charge, how much each owed and how old their debts were. WorldCom says the charge was proper but declines to comment about the SEC's inquiry or events at MCI.
Pavlo seemed an unlikely candidate for scandal. He grew up mostly near Sistersville, W. Va. and Savannah, Ga., with two younger brothers. His father describes Walter Jr. as a hard worker who started at quarterback in high school one season, more out of grit than athletic ability. Pavlo earned an industrial engineering degree at West Virginia University and an M.B.A. at Mercer in 1991. After working at Goodyear Aerospace, where he met his wife, Rhoda, he joined MCI in 1992 at age 29.
He was assigned to head a four-person group in the sleepy carrier finance department in Atlanta, which handled about $240 million a month in billings in 1993. MCI and the entire telecom business were on the cusp of big change. After rising more than thirtyfold in 20 years, MCI's stock lost ground in 1994 and 1995. A year later deregulation promised to upend old monopolies and raze barriers to new competition, and soon MCI was in play. The smell of fast money was in the air.
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