Global Policy Forum

Ex-WorldCom Chief Is Indicted


By Barnaby J. Feder and Kurt Eichenwald

New York Times
March 3, 2004

Federal prosecutors yesterday charged Bernard J. Ebbers, the former chief executive of the telecommunications giant WorldCom, with helping to plan and execute the biggest accounting fraud in the history of American business. The company's former chief accounting officer, Scott D. Sullivan, who was also named in the indictment, pleaded guilty hours earlier and said he would cooperate with prosecutors. Legal experts say Mr. Sullivan's decision to reach a plea agreement paved the way for the indictment of Mr. Ebbers and will be crucial to the government's chances of convicting him.

The move to try Mr. Ebbers, 62, for securities fraud, conspiracy to commit fraud and participation in filing false corporate records with the Securities and Exchange Commission was announced in New York by Attorney General John Ashcroft. Mr. Ebbers is expected to turn himself in and be arraigned in federal district court in New York today. If he is convicted, he could be sentenced to as much as 25 years in jail under federal sentencing guidelines that could also lead to millions of dollars in fines and restitution.

As in the Enron accounting scandal — that company's chief executive, Jeffrey K. Skilling, was recently indicted — WorldCom's bookkeeping problems led to billions of dollars in losses for shareholders and ultimately to bankruptcy, costing thousands of people their jobs. "It shook the world's faith in the integrity of our financial markets," said Stephen M. Cutler, director of the enforcement division of the Securities and Exchange Commission, who joined Mr. Ashcroft at yesterday's news conference.

Mr. Ebbers could not be reached for comment. But his lawyer, Reid H. Weingarten, said he did not believe that a jury would conclude that Mr. Ebbers had acted with criminal intent. If Mr. Ebbers pleads not guilty, as currently expected, the stage will be set for the presentation of two sharply contrasting renditions of the WorldCom story. Mr. Ebbers's version is likely to emerge as the tale of an entrepreneurial leader who built one of the world's largest telecommunications companies from dozens of acquisitions, only to be blindsided by the unexpected collapse of the telecommunications market and by the illegal activities of subordinates that were presented to him as lawful accounting moves.

But in the version laid out in the indictment, which was returned by a federal grand jury late Monday and unsealed yesterday, it is the story of two senior executives, Mr. Ebbers and his trusted associate, Mr. Sullivan, who chose to lie to investors and regulators rather than admit that they had missed the growth projections they made to Wall Street. Given the huge debts that WorldCom had accumulated as it grew — $41 billion when it filed for bankruptcy in July 2002 — a sharp slowdown in growth would have signaled to the financial world that the company was headed for trouble.

And so, according to the indictment, Mr. Ebbers and Mr. Sullivan turned to illegal accounting moves like reclassifying regular operating costs as long-term capital investments and arbitrarily transferring reserves to revenues. As a result, the indictment said, WorldCom not only misstated revenues but inflated earnings by hundreds of millions of dollars in many quarters. The indictment covers the period from September 2000 to June 2002.

The S.E.C. continues to conduct its own civil investigation into WorldCom, and Mr. Ashcroft and S.E.C. officials said that more charges or complaints might be filed in the WorldCom case. Yesterday's indictment of Mr. Ebbers grew from a strategy change by Mr. Sullivan and his lawyer, Irvin B. Nathan, who a government lawyer said began serious negotiations two weeks ago to avoid going to trial on the 15-count indictment that had been brought against Mr. Sullivan in August 2002.

Mr. Sullivan had long maintained that Mr. Ebbers was not involved in the accounting scandal. But he is now suggesting otherwise, after agreeing to cooperate with the government as part of his guilty plea on the three counts that replaced the previous charges against him. Mr. Sullivan did not mention Mr. Ebbers by name yesterday in confirming to Judge Barbara S. Jones in Federal District Court his reasons for reaching a plea agreement. But Mr. Sullivan, reading from a statement, told Judge Jones that the deceptions he participated in involved "management at the highest level."

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