WorldCom probe shifts to ousted CEO Ebbers
More financial irregularities expected
By Jared Sandberg, Deborah Solomon and Nicole Harris
THE WALL STREET JOURNAL
msnbc.com
July 1 — Investigators probing the accounting scandal at WorldCom Inc. are turning their attention to the company’s recently ousted chief executive, Bernard J. Ebbers, to determine what role he may have played in the alleged fraud that has brought the giant telecom concern to its knees.
THE FOCUS ON MR. EBBERS comes as officials involved with a myriad of probes become increasingly convinced they will find evidence of improper accounting beyond the $3.8 billion that WorldCom disclosed last week will need to be restated. The Securities and Exchange Commission has brought a civil charge of fraud against the company. Already, WorldCom’s planned accounting restatement is among the largest in U.S. history, six times as large as that of Enron Corp.
Sunday, William McLucas, a former enforcement chief at the Securities and Exchange Commission who was hired by WorldCom to conduct an internal investigation, began an intense round of questioning with the company’s top executives, including Chief Executive John Sidgmore. Mr. McLucas, a tough-nosed investigator who previously conducted Enron’s internal inquiry, is expected to interview Mr. Ebbers. The SEC also has asked WorldCom about Mr. Ebbers’s potential involvement, and a congressional committee has subpoenaed Mr. Ebbers, along with other WorldCom officials, to a July 8 hearing.
Mr. Ebbers’s tight control of WorldCom has raised questions about how such a large overstatement of profits could have occurred on his watch without his knowledge. Mr. Ebbers, who assembled WorldCom through a string of 70 acquisitions, was ousted in April for a series of missteps that had led to a 90% decline in the company’s stock value.
Mr. Ebbers has shunned the public eye since WorldCom disclosed the improper accounting last week. But Sunday, at his church in Brookhaven, Miss., Mr. Ebbers made his first public comments about the firestorm in an appearance before his congregation. Mr. Ebbers appeared at Easthaven Baptist Church as usual to teach Sunday school and attend the morning worship service. At the end of the service, he walked to the front of the church and addressed the congregation. “I just want you to know you aren’t going to church with a crook,” he began
Clad in blue jeans and a white shirt, Mr. Ebbers continued, “This has been a strange week at best. ... On Tuesday I received a call telling me what was happening” at WorldCom. “I don’t know what the situation is with all that has been reported,” he said. “I don’t know what all is going to happen or what mistakes have been made. ... No one will find me to have knowingly committed fraud,” he said, teary eyed. “More than anything else, I hope that my witness for Jesus Christ will not” be jeopardized. The congregation erupted in a standing ovation. Mr. Ebbers declined further comment.
Federal prosecutors would “like to get Bernie because he’s the big man,” said one person familiar with the matter. To get information about his role, they will likely “squeeze” Scott Sullivan, WorldCom’s former chief financial officer, who was fired last week for doing the accounting that led to the restatement, this person said.
Whether Mr. Ebbers knew about WorldCom’s questionable accounting could have broad significance. Experts say that if the accounting misdeeds were more widely known within WorldCom, this could strengthen investor lawsuits against the board, the company’s lenders and any banks that underwrote offerings during the period of alleged fraud. It could also influence the U.S. Attorneys’ Offices in New York and Mississippi as they decide whether to bring criminal charges, which could be leveled against WorldCom as a corporate entity or just a few rogue executives.
ADDITIONAL PROBLEMS
Just days after WorldCom disclosed its $3.8 billion restatement, which hit financial markets around the world, it is becoming clear that the multiple investigations into WorldCom’s accounting are expected to uncover additional irregularities, according to people familiar with the situation. There also is growing concern that other telecommunications companies such as Global Crossing Ltd. could have hidden expenses by employing a similar accounting tactic.
WorldCom is facing criminal and regulatory probes by the Justice Department and the SEC. The company’s auditor, KPMG LLP, also is pushing to do a broad review of its financial statements that would go back further than the past five quarters of inflated profits already reported, these people said.
“Having identified the issue, taking it to the SEC and hiring an external investigator, we’re certainly looking forward to getting to the bottom of this,” said Brad Burns, a WorldCom spokesman. WorldCom is required Monday morning to provide the SEC with a statement explaining how the irregularities occurred.
On Tuesday, WorldCom fired Mr. Sullivan, saying he inflated profits by transferring more than $3.8 billion in “line cost” expenses to its capital accounts. Line costs are one of the telecom company’s biggest expenses and include things such as access fees paid to other telecom concerns.
Now, investigators are learning that the expenses that Mr. Sullivan capitalized extended beyond access fees to other operating costs, such as maintenance and repair costs, according to people close to the situation.
Each quarter, these people said, Mr. Sullivan would move operating costs to its capital accounts in a systematic method intended to keep WorldCom’s profits high. Mr. Sullivan’s goal was to keep line costs to 42% of WorldCom’s revenue — the normal range of such costs for the company, these people said. Any costs that went beyond that 42% mark were transferred to the capital accounts, where they were written off over a period of time. Such movement allowed the company to keep its costs down and its profits artificially high. Mr. Sullivan could not be reached for comment. But people close to him have said he firmly believes that his accounting procedures were correct.
One person familiar with the situation said WorldCom “backed into the number needed.”
The SEC began a separate investigation of WorldCom in March, probing issues relating to overbooking of sales, overbilling and disputed sales commissions.
LOOKING FURTHER BACK
WorldCom has said the alleged fraud began in the first quarter of 2001, based on what Mr. Sullivan told the company’s audit committee. But people close to the company said additional improprieties may well exist in years prior to 2001, when the company did most of its acquisitions. Of particular interest is the period right after WorldCom bought the former MCI Communications Inc. for $37 billion in 1998. The merger, which catapulted WorldCom into the big leagues of telecommunications by making it the nation’s second largest long-distance carrier, boosted its revenue significantly but also increased its expenses.
Over the past few years, WorldCom has consistently hit Wall Street’s optimistic targets for operating earnings. The company was a steady performer and few noticed in 2000 when the company made its target two quarters in a row by tiny fractions of a cent. “When you see that they’re making it by one one-hundredth of a penny you know the odds of that happening twice in a row are very slim,” said Brad Rexroad, an analyst at Center for Financial Research and Analysis, a watchdog firm in Maryland. “It indicates they’re willing to stretch to make the quarter.”
Now, WorldCom’s fate rests in the hands of its bank lenders, who have told the company they are considering loaning more money or just sitting tight. The lenders want WorldCom to identify a dollar amount it wants to borrow. Nearly 30 banks have loans outstanding to WorldCom with a combined value of $2.65 billion, but not all of them are willing to participate in a new lending facility. It is expected that a new group would split off from the original group, which is now chaired by Citigroup Inc. and Deutsche Bank.
BANKRUPTCY SEEN POSSIBLE
Some bankers continue to forecast that WorldCom could file for bankruptcy protection under Chapter 11, which would be the largest such filing in U.S. history. Still, the idea of debtor-in-possession financing, which would rank senior to existing debt, hasn’t been formally introduced. The banks also believe that they may have a legitimate way to sue for the $2.65 billion because of the alleged fraud.
At a conference Friday in federal district court in New York, related to the SEC fraud charges, Judge Jed Rakoff ordered WorldCom not to destroy or alter any documents relating to the case. The judge also ordered the appointment of a monitor to oversee many matters at WorldCom and to have free access to the company’s books and accounts.
Separately, other companies are beginning to eye WorldCom’s assets. Newark, N.J.-based IDT Corp. said Friday it has made an informal $3 billion to $4 billion offer for WorldCom’s local-phone business. IDT Chairman and Chief Executive Howard Jonas said he has approached the company’s banks about a deal and hopes to meet next week with Mr. Sidgmore.
— Jerry Markon, Carrick Mollenkamp and Shawn Young contributed to this article.
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