Ex-WorldCom Chief Ebbers Guilty in $11 Billion Fraud (Update6) ListenListen
March 15 (Bloomberg) -- Former WorldCom Inc. Chairman Bernard Ebbers, the ex-milkman and bouncer who built a small Mississippi telephone company into the second-largest U.S. long- distance provider, was convicted of directing an $11 billion fraud that triggered the largest bankruptcy in U.S. history.
Federal jurors in New York rejected Ebbers's testimony that he didn't know subordinates were cooking the books and convicted him of all charges: conspiracy, securities fraud, and lying to the Securities and Exchange Commission. Ebbers, 63, faces a maximum of 10 years in prison on eight of the nine charges against him.
``The conviction today signals a complete rejection of his testimony by the jury, and it will leave many questioning the wisdom of sending Ebbers to the stand in the first place,'' said Robert Mintz, a former federal prosecutor who is now with the Newark, New Jersey, law firm of McCarter & English. ``The high- risk gamble of taking the stand simply blew up on him.''
The verdict is the biggest success yet for federal prosecutors in the U.S. government's crackdown on corporate fraud that began after the collapse of energy trader Enron Corp. in 2001. WorldCom lost more than $180 billion in market value before its bankruptcy filing in July 2002.
Vows Appeal
Ebbers faces a maximum of 10 years in prison on the securities fraud charge and each of the seven counts of lying to the SEC. He faces five years on the conspiracy charge.
The former WorldCom chief executive was hunched over in his seat as the jury delivered its verdict. His wife was in tears. U.S. District Judge Barbara Jones scheduled sentencing for June 13 and allowed Ebbers to remain free on bail.
Jones said jurors did not want to comment on their verdict. Ebbers declined to comment as he left the courtroom.
``We are extremely disappointed with this verdict,'' defense lawyer Reid Weingarten said. ``We continue to believe there's not one chance in the world he participated in any effort to cook the books. Mr. Ebbers will ultimately be vindicated.''
Weingarten said he would appeal the verdict. He said the judge didn't allow the jury to hear ``important exculpatory evidence'' that would have aided Ebbers's defense.
``Had the jury known of that evidence, it's quite likely there would have been a different result,'' he said.
Not `A Hard Call'
Weingarten didn't second-guess his decision to have Ebbers testify. ``I didn't think it was a hard call at the time,'' he said in an interview. ``I'd do the same today. I thought he did a great job, frankly.''
The case became a credibility contest between Ebbers and Scott Sullivan, his former top deputy. Sullivan, who was chief financial officer at WorldCom, testified that Ebbers directed him to hide expenses and overstate revenue to meet Wall Street expectations.
Sullivan was the only witness to implicate Ebbers directly in the fraud. Sullivan pleaded guilty in exchange for leniency at sentencing.
``This is a very significant win for the government,'' Mintz said. ``They took a huge risk bringing a major case that was built largely on the shoulders of Scott Sullivan. The verdict signals the jury's acceptance of Sullivan's testimony and their buying into the government's theory that Sullivan could not have carried out this massive fraud without the knowledge and complicity of Ebbers.''
Enron
The jury of seven women and five men was in its eighth day of deliberations following a six-week trial.
The verdict may encourage Justice Department prosecutors preparing to try former Enron chief executives Kenneth Lay and Jeffrey Skilling in January on securities fraud charges. The star witness in that case is another ex-CFO who has pleaded guilty in exchange for leniency, Andrew Fastow.
WorldCom's bankruptcy eclipsed Enron's as the largest ever in the U.S. The two companies became symbols of the corporate malfeasance that led Congress to pass the Sarbanes-Oxley Act in 2002. The law makes it a crime to sign false financial statements.
Ebbers was indicted last year and accused of orchestrating one of the largest frauds in U.S. history. Prosecutors contended that he and Sullivan began hiding costs and inflating revenue to camouflage WorldCom's slowing growth following a downturn in the telecommunications market in 2000.
Hid Line Costs
The company began restating earnings after Ebbers was forced to quit in April 2002. He was charged with securities fraud, conspiracy and seven counts of filing false statements with the U.S. Securities and Exchange Commission from 2000 to 2002.
Sullivan testified that he told Ebbers of phony accounting entries made to enable WorldCom to meet revenue and profit targets. Sullivan said Ebbers ordered him to ``hit the numbers,'' which he took as license to conceal $3.8 billion in fees paid to other telephone companies to use their lines.
Sullivan said that beginning in September 2000 he repeatedly urged Ebbers to warn investors about slowing revenue growth and that his boss refused.
``We have to stick with our guidance,'' Sullivan recalled Ebbers telling him in September 2000. ``We have to hit our numbers,'' Ebbers said, according to Sullivan's testimony.
Sullivan said he informed Ebbers in April 2001 that WorldCom would have to mask $771 million in line costs to meet Wall Street expectations for the first quarter. ``I told Bernie we had made an adjustment to line-cost expenses,'' Sullivan testified.
`Bernie Benefited'
Another prosecution witness, ex-Controller David Myers, testified that a month later Ebbers apologized after company accountants were instructed to shift reserves to boost the company's reported profit. Myers pleaded guilty to fraud charges.
Assistant U.S. Attorney William Johnson asked jurors in his closing arguments not to believe Ebbers's defense that he was a hands-off chief executive who focused on strategy.
Ebbers testified that he was a former basketball coach who never took an accounting course in college. ``I don't know finance and accounting,'' he said.
Prosecutors said Ebbers had a personal stake in propping up WorldCom stock because he had outstanding bank loans totaling hundreds of millions of dollars, secured by his WorldCom holdings.
``Bernie certainly benefited from changing the numbers,'' said Thomas Curran, a former New York state prosecutor who followed the trial. ``Why would Scott Sullivan do it on his own? Does it make sense that he would? I don't think so.''
`Never Told Me'
Defense lawyers sought to show that Ebbers didn't know there was a fraud going on. They offered evidence that neither auditor Arthur Andersen LLP nor WorldCom's in-house auditing committee detected the $11 billion fraud.
Before moving to Mississippi, where WorldCom was based, Ebbers worked as a bar bouncer and a milkman while living in Canada in Edmonton, Alberta. He repeatedly denied any knowledge of accounting irregularities that occurred after he joined WorldCom.
Sullivan ``never told me we made an entry that wasn't right,'' the former CEO said under questioning by Weingarten. ``I wasn't advised by Scott Sullivan of anything, ever, being wrong.''
WorldCom's collapse eliminated about 20,000 jobs and as much as $600 million from employee pensions. In April 2004, the company emerged from bankruptcy as MCI Inc. after moving its headquarters to Ashburn, Virginia, from Jackson, Mississippi.
On Feb. 14, New York-based Verizon Communications Inc., the largest U.S. local-telephone company, agreed to buy MCI for $6.7 billion. Qwest Communications International Inc., the No. 4 U.S. local-phone carrier, has made a competing $8 billion bid.
The case is U.S. v. Ebbers, 02-CR-1144, U.S. District Court, the Southern District of New York.
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