Sullivan scheduled for a perp walk:
Criminal charges seen for WorldCom execs
By Deborah Solomon,
Jared Sandberg and Laurie P. Cohen
THE WALL STREET JOURNAL
msnbc.com
July 25 — Federal prosecutors in New York plan to seek indictments against two former top financial officers of WorldCom Inc. as early as next week for their roles in the company’s accounting scandal, according to people with knowledge of the matter.
THE JUSTICE DEPARTMENT also is considering indicting WorldCom as a corporation, these people said. The move could threaten the survival of the nation’s second-largest telecommunications company. WorldCom filed for protection under the U.S. Bankruptcy Code earlier this week, meaning any fines could divert money from its creditors.
An indictment of former Chief Executive Bernard Ebbers also is likely, people familiar with the matter say. Prosecutors first want to put pressure on his former subordinates to produce evidence against him. Mr. Ebbers resigned under pressure in April.
Scott Sullivan, the fired WorldCom chief financial officer, and David Myers, the company’s former controller, are expected to face a variety of charges by the Justice Department, including securities, mail and wire fraud. Prosecutors believe Mr. Sullivan to be the architect of the alleged fraud, while Mr. Myers has admitted to WorldCom audit staffers that he knew about the questionable accounting treatment, according to people with knowledge of the matter.
WorldCom publicly revealed on June 25 that it hid $3.85 billion in expenses and falsely posted profits over a five-quarter period beginning in early 2000. The Securities and Exchange Commission has already filed civil fraud charges against WorldCom and is continuing to investigate the company, as are both houses of Congress. Internal documents provided to the Securities and Exchange Commission and Congress show that Messrs. Sullivan and Myers were told two years ago that the accounting treatment they were using was questionable. Two WorldCom employees raised the concerns, the documents show.
An indictment of the company “is flatly inconsistent with what federal prosecutors have communicated directly to us,” said WorldCom spokesman Brad Burns. The Department of Justice declined to comment on the matter. An attorney for Mr. Sullivan declined to comment; Mr. Sullivan maintained to the board before his ouster that his accounting was proper. Mr. Myers’s attorney couldn’t be reached for comment.
If proven, the corporate fraud would be the largest in history. WorldCom, the parent of MCI, carries half the nation’s Internet traffic and voice and data for major governmental agencies including the Federal Aviation Administration and the Departments of Defense, Labor, Commerce and Agriculture. The company has 20 million residential customers and $35 billion in revenue, but even before the scandal has been under pressure from falling revenue in the long-distance business.
Prosecutors have set a deadline of next Wednesday to file the indictment against Messrs. Sullivan and Myers, according to people familiar with the WorldCom probe, though the deadline could be extended and either could still reach an agreement with the government.
‘COLLATERAL CONSEQUENCES’
Indicting WorldCom is more complicated. The Justice Department has stringent guidelines for deciding whether to criminally charge companies. In a 1999 memo to U.S. Attorneys from former Deputy Attorney General Eric H. Holder Jr., said that “an indictment often provides a unique opportunity for [corporate] deterrence on a massive scale.” But the document, now known as the “Holder Memo,” cautioned prosecutors to keep eight factors in mind. They include the company’s willingness to cooperate and “collateral consequences” of bringing criminal charges against a company.
Such consequences don’t rule out a prosecution, however. “Virtually every conviction of a corporation ... will have an impact on innocent third parties and the mere existence of such an effect is not sufficient to preclude prosecution of the corporation,” the memo states.
In the case of WorldCom, the consequences could be significant. If WorldCom were to be driven out of business, it could lead to higher prices for consumers for long distance or data traffic. The government can obtain a fine of up to only $500,000 against a bankrupt company, which could harm its debtors. “A government indictment could affect the company’s ability to pay people who line up in bankruptcy court.” Mr. Holder said in an interview. If cases can be made against high-level WorldCom officials, he suggested, it might not be worthwhile to charge the company. “Just because you can do it doesn’t mean you should,” he said.
With the alleged fraud revealed just a month ago, the deadline set to indict Messrs. Sullivan and Myers suggests prosecutors are under pressure to take speedy action. That would be partly because of the government’s more slow-moving case against Enron Corp., whose own large accounting scandal became public late last year. Though the Justice Department brought criminal charges against Enron’s outside auditors at Arthur Andersen LLP, no charges have yet been brought against Enron or any of its executives. Enron hasn’t acknowledged wrongdoing, and deciphering Enron’s books is expected to be far more complex than WorldCom’s.
Prosecutors have been gathering evidence about the alleged fraud. In recent weeks, federal prosecutors have interviewed Cynthia Cooper, WorldCom’s internal auditor who discovered the alleged accounting fraud. They have also interviewed Max Bobbitt, the head of WorldCom’s audit committee. Both Ms. Cooper and Mr. Bobbitt have provided testimony that can be presented to the grand jury, according to people familiar with the matter.
Ms. Cooper hasn’t implicated Mr. Ebbers in the alleged fraud, according to those people. Mr. Ebbers, who couldn’t be reached for comment, has said before Congress that “no one will conclude that I engaged in any criminal conduct or fraud.” His attorney, Reid Weingarten, has said, “Bernie Ebbers did not know anything about Scott Sullivan’s decision to reallocate expenses on WorldCom’s books.”
Internal documents provided to Congress and the SEC and released by investigators show that there was some internal debate over the accounting methods that Mr. Sullivan and Mr. Myers had used prior to Ms. Cooper’s discovery. Mr. Sullivan booked some normal operating expenses, primarily fees paid to other telephone companies, as capital expenditures.
ANGRY EXCHANGE
Mr. Myers had an angry e-mail exchange with a London WorldCom executive who brought the accounting questions to the attention of Arthur Andersen LLP, WorldCom’s auditors, in 2000. The executive, Steven Brabbs, questioned why a U.S. colleague had reduced his division’s expense figures by $33.6 million. Mr. Brabbs was told the change was made because of a directive from Mr. Sullivan. Unsatisfied, Mr. Brabbs co-wrote a letter to Arthur Andersen, WorldCom’s then-accountant, and to WorldCom’s senior financial management asking them to make sure the change was accounted for appropriately.
Typically, prosecutors indict companies to curb their bad behavior, monitor them closely and impose stiff fines. Some experts say a move to indict WorldCom could be useful to send a symbolic warning to businesses. “Symbols have meaning,” adds Joseph Grundfest, a professor of law and business Stanford Law School and former commissioner of the Securities and Exchange Commission. But, citing an old legal adage that “the company has no body to kick and no soul to damn,” he questioned the value of criminally indicting a company already in Chapter 11 proceedings.
“You’re not punishing management” by filing a criminal indictment against the company, says Stephen M. Ryan, a former federal prosecutor and now a partner at Manatt, Phelps & Phillips. “You’re punishing the creditors who have already been hammered.”
If the Justice Department were to indict the company, that might spook consumers and one of WorldCom’s most crucial accounts. The U.S. government pays WorldCom as much as $2 billion a year, according to analysts.
If indicted, the company could face suspension or “debarment” — in effect getting blacklisted by the government and prevented from bidding on any new lucrative government contracts. Existing contracts could continue but the government officials have the right to terminate them. However, some firms have persuaded government agencies to continue their contracts under such circumstances.
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