Former WorldCom chief financial officer Scott Sullivan and former controller David Myers surrendered to the FBI to face fraud charges in the latest blow to the now bankrupt telecommunications giant and corporate America.
It was the second time in two weeks top executives of large corporations were arrested after their firms filed for bankruptcy protection.
Announcing the arrests Thursday afternoon, Attorney General John Ashcroft said, "Corporate executives who cheat investors and squander pensions will meet the judgment they fear and the punishment they deserve."
U.S. Magistrate James Francis released Sullivan on $10 million bond and Myers on $2 million bond at a brief hearing in federal court in Manhattan. The defendants and their lawyers were not immediately available for comment.
A criminal complaint alleges that Sullivan directed Myers to conceal about $3.8 billion in expenses by dispersing the debts throughout the company's capital accounts.
As the scheme was unraveling in June, Myers told WorldCom accountants that the company "could not continue with the cost structure at the current levels and that if the cost structure did not change, the company 'might as well shut the doors,"' the complaint said.
Federal agents led the pair out of New York's FBI headquarters in handcuffs at midmorning enroute to the courthouse. The men, both wearing dark suits, did not speak to a swarm of reporters; two passersby clapped.
The seven-count complaint charges them with securities fraud, conspiracy, and filing false statements with the Securities and Exchange Commission. Sullivan and Myers each face up to 65 years in prison, authorities said.
The secret transfers, which began in 2001, "allowed WorldCom to defer recognizing a substantial portion of its current operating expenses, thereby allowing WorldCom to report higher earnings," court papers said.
Sullivan and Myers were dismissed from WorldCom in June after the company admitted it falsely accounted for nearly $4 billion in expenses, allowing executives to continue reporting profits when the company was actually losing money.
The charges put pressure on the pair to tell investigators what they know about their former boss, former chief executive Bernard Ebbers, who also is being investigated by prosecutors.
The SEC has filed civil fraud charges against WorldCom, citing "accounting improprieties of unprecedented magnitude."
The Justice Department has also considered taking the more drastic step of charging WorldCom as a corporation. A conviction of the long-distance phone company could drive it out of business.
WorldCom, which owns MCI, the nation's second-largest long distance carrier, filed for bankruptcy under Chapter 11 on July 21, the largest such filing in U.S. history.
U.S. Bankruptcy Judge Arthur Gonzalez approved $2 billion in financing to keep WorldCom operating as it reorganizes its finances. He also granted the Justice Department's request for an independent examiner to ensure an honest accounting of the company's value and investigate for mismanagement, irregularities and fraud.
In last week's case, John Rigas, founder of cable company Adelphia Communications, and two of his sons were charged in Manhattan with securities and bank fraud for allegedly diverting hundreds of millions of dollars from company accounts for their personal benefit.
Ashcroft said corrupt executives "are no better than common thieves when they betray their employees and steal from their investors."
"When financial transactions are fraudulent and balance sheets are falsified, the invisible hand that guides our market is replaced by a greased palm," he said. "Information is corrupted, trust is abused and the state of the market dissolves into a state of nature where the ruthless and corrupt profit at the expense of the truthful and law-abiding."