Reports Say Ebbers and Others
Conspired in WorldCom Fraud
By REBECCA BLUMENSTEIN and SUSAN PULLIAM
Staff Reporters of THE WALL STREET JOURNAL
Former WorldCom Inc. Chief Executive Bernard J. Ebbers, and numerous top underlings and employees conspired together beginning in the late 1990s to carry out massive and systematic fraud at the company, according to two external investigations.
The long-awaited reports, released Monday, conclude that WorldCom's management worked to falsify financial results in increasingly desperate bids to keep its sagging fortunes concealed from investors. The reports blast not only top management, but also fault a breakdown in the cornerstone of the company's corporate governance structure, including failures by its external and internal auditors, lawyers and board members. Despite at least 40 people knowing about the fraud, it remained hidden from public view because employees were too afraid to speak out.
What emerges is a startling picture that contrasts with the initial image of the fraud as the brainchild of one top manager, Scott Sullivan, the company's chief financial officer, and his immediate lieutenants. While the reports provide extensive detail about Mr. Sullivan's role -- handing out $10,000 checks, for instance, to at least seven employees, some of whom were involved in the fraud -- they build a case that many participated in deliberate and repeated steps, quarter after quarter, to fabricate WorldCom's results. If the conclusions of the reports are substantiated, both would provide a potential road map for prosecutors to bring criminal charges against other employees, particularly Mr. Ebbers, WorldCom's founder and longtime chief, who brought the company seemingly out of nowhere and became one of the most celebrated executives of the stock-market boom. WorldCom has been operating under protection of the U.S. Bankruptcy Court since the fraud, which now tops $10 billion, was discovered in June 2002.
The reports' conclusions that the company had a culture that lent itself to the fraud are likely to add ammunition to the arguments of those who oppose the emergence of the company, now named MCI, from bankruptcy later this year and those who are fighting the company's proposed $500 million settlement with the Securities and Exchange Commission. A hearing on the proposed settlement is scheduled for Wednesday, and the settlement is being opposed as too small by a coalition of unions, competitors and some politicians.
In perhaps the most damaging evidence about Mr. Ebbers to date, the report by William McLucas of the law firm William Cutler & Pickering details a memo that he wrote to Ron Beaumont, the company's chief operating officer, on July 10, 2001. It was during this time that company executives were seeking out one-time revenue items to prop up the company's sagging revenue from 8% to 12%, an exercise that became so routine in quarter after quarter it became known internally as "Close the Gap."
The document from Mr. Ebbers was a rare find by investigators because he didn't use e-mail and kept his written correspondence to a minimum. In the memo, Mr. Ebbers asked Mr. Beaumont about the progress of identifying such one-time items. "I would ask that you get with Jon McGuire and Mike Higgins and anyone else who works on those issues and see where we stand on those one-time events that had to happen in order for us to have a chance to make our numbers -- we should know those by now."
The memo from Mr. Ebbers suggests that he not only knew about the one-time items, but also understood they were being used to "close the gap." The allegations in the report provide an indication of how prosecutors, who have been asking witnesses in recent weeks about Mr. Ebbers' role in the effort to improperly boost revenue at WorldCom, could charge Mr. Ebbers for his role in the fraud. Mr. Higgins later wrote in an e-mail on July 13 a message that he had gone over the numbers with Mr. Ebbers and others, but cautioned them not to forward the monthly revenue reports that included the two sets of numbers. "Please do not forward because Bernie is extremely concerned with forwarded or passed on mon rev results," Mr. Higgins said in the e-mail. The company later reported its earnings on July 26.
The McLucas report also says Mr. Ebbers participated in meetings about boosting the company's revenue from 6% to 12% during the third quarter of 2001 with a host of one-time items when the "Close the Gap" exercise peaked inside WorldCom. The third quarter raises additional issues of disclosure because company officials specifically said there were no such one-time items.
Mr. Ebbers's attorney, Reid Weingarten, said in a statement that after tens of millions of dollars and nearly a year, the investigation doesn't "point to a single piece of paper or any witness demonstrating that Bernie Ebbers participated in or knew" of the fraud. He added "the best the investigators can do is nitpick about the process and substance of isolated business decisions."
Both reports also lay out documents and interviews that suggest insider trading by Mr. Ebbers. A second report by the law firm of Kirkpatrick & Lockhart LLP, led by former U.S. Attorney General Dick Thornburgh, along with the report by Mr. McLucas, points to stock Mr. Ebbers sold for $70 million in late September 2000 that was made public on Oct. 3. Mr. Ebbers made the sale, the reports say, after receiving information about the company's downturn in revenue. WorldCom didn't give investors any negative forecast based on this information until Nov. 1. Further, Mr. Ebbers's sale contrasts with an internal policy he had established only months earlier that employees could not sell within 30 days of earnings.
MCI officials have been bracing themselves for months for the release of the reports, which was delayed in March after prosecutors asked for more time to interview witnesses. WorldCom paid for both reports. The independent directors of WorldCom commissioned the inquiry by Mr. McLucas. Mr. Thornburgh was appointed as bankruptcy examiner after WorldCom filed for Chapter 11 bankruptcy protection in July.
MONEY TALK
"This is complete, complete garbage …. What am I supposed to do with this? What have we been doing for the last six months. This is a real work of trash."
E-mail from Scott Sullivan, then WorldCom's chief financial officer, to a financial analyst who had prepared a budget using actual cost estimates and to the analyst's supervisor.
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"I guess the only way I am going to get this booked is to fly to DC and book it myself. Book it right now, I can't wait another minute."
E-mail from David Myers, then WorldCom's comptroller, to David Schneeman, then acting chief financial officer of UuNet, a WorldCom division, asking him to free $50 million in reserves after Mr. Schneeman refused.
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"Show those numbers to the damn auditors and I'll throw you out the f-----g window."
Buddy Yates, then director of general accounting, to an employee asking for an explanation of a large accounting discrepancy, according to an unidentified employee.
Source: Report by William McLucas of the law firm of William Cutler & Pickering
MCI's current chairman and chief executive, Michael Capellas, called the reports "yet another important step in putting the past behind us."
The McLucas report details how WorldCom executives deliberately kept the company's auditors, Arthur Andersen LLP, in the dark by altering key documents and denying the firm access to the database where the most sensitive financial numbers were stored. The McLucas report questions why Andersen didn't complain to the company's board or its audit committee about why it was systematically denied access to crucial numbers by company executives. Still, the accounting firm kept signing off on WorldCom's numbers, which company executives used to silence questions about its numbers to critics.
In one particularly blatant instance in the third quarter of 2001, when WorldCom had boosted its revenue from 6% to 12% with a slew of one-time items, the McLucas report found executive Stephanie Scott altered the documents submitted to Andersen to conceal what company executives had done. Ms. Scott was head of regulatory reporting.
Patrick Dorton, a spokesman for Andersen, said, "It's time we stopped looking at those who were deceived and focus on those who committed the deception."
Since the WorldCom fraud was first disclosed in June 2002, much of the attention has been paid to $3.8 billion of line costs that Mr. Sullivan and others improperly counted as a capital expense, instantly boosting the firm's bottom line by spreading out the cost over many years.
The report by Mr. McLucas shows how officials manipulated a host of other numbers, from the company's revenue, to its depreciation reserves and accounts set aside to cover the company's taxes. The report finds that company officials decided what they wanted their tax rate to be and then drew from the reserves to meet that rate.
The pressure to do what management ordered was at times intense. During the second quarter of 2000, David Myers, the company's controller, wrote to David Schneeman, who was then the acting chief financial officer of UUNet, Worldcom's Internet backbone, asking him to release $50 million of reserves. When Mr. Schneeman refused twice, Mr. Myers responded in an e-mail message: "I guess the only way I am going to get this booked is to fly to DC and book it myself. Book it right now, I can't wait another minute."
The report by Mr. Thornburgh said WorldCom's board often was kept in the dark, particularly when it came to its more than 60 acquisitions. "Several multi-billion dollar acquisitions were approved by the Board of Directors following discussions that lasted for 30 minutes or less and without the Directors receiving a single piece of paper regarding the terms or implications of the transactions," said the report by Mr. Thornburgh.
In addition, the report said, management apparently made material changes to the terms of the company's acquisition deal with Intermedia Communications Inc. without seeking board permission, despite issuing a news release in February 2001, saying the board had approved the changes.
An opportunity for WorldCom shareholders to escape the relentless decline in the company's stock was thwarted in November, 2001, according to the Thornburgh report. Verizon Communications Inc. had made an overture toward acquiring WorldCom for $21 a share, the report says. Although WorldCom shares were trading at $15 each at the time, Mr. Ebbers didn't want to discuss an offer lower than $30. He made a quick and dismissive mention of Verizon's interest at a board meeting, where nobody ventured to suggest that the offer might merit serious consideration. |
