WorldCom Bigs Indicted

Bernard Ebbers WorldCom
CBS/AP
The United States on Tuesday indicted the former top two officials at WorldCom for violating federal law in the biggest corporate fraud in American history.

Former chief executive officer Bernard Ebbers and former chief financial officer Scott Sullivan were indicted on charges of securities fraud, conspiracy and false filing with the Securities Exchange Commission.

Sullivan pled guilty Tuesday to all charges. He faces a maximum sentence of 25 years in prison, but has agreed to cooperate with prosecutors, Ashcroft said.

"The rule of law and the people's trust depend on swift, sure justice in the prosecution of crimes that manipulate or contaminate competition, or deceive the public," Attorney General John Ashcroft said at an afternoon press conference announcing the indictments.

Sullivan said in court that he had signed an agreement to cooperate with prosecutors, with the possibility that substantial cooperation could decrease any potential sentence.

Ebbers' attorney, Brian Heberling, declined to comment.

Ebbers resigned from WorldCom in April 2002, well after its stock price had begun a steady decline and soon after questions arose about the company's finances. Two months later, WorldCom announced it had uncovered nearly $4 billion in hidden expenses — the beginning of a spiral that would become the largest corporate scandal in U.S. history. The alleged fraud now is estimated at $11 billion.

WorldCom filed for bankruptcy July 21, 2002. In a bid to mend its reputation, WorldCom changed its name to MCI last April and moved its headquarters to Virginia.

"It is alleged that in or about September 2000, Ebbers, Sullivan and their co-conspirators knew that WorldCom's true operating results were in decline and had fallen materially below analysts expectations," Ashcroft said. "Ebbers nonetheless ordered that WorldCom report results publicly that met analysts expectations."

"Sullivan, with Ebbers' approval, directed his co-conspiracy to make false and fraudulent adjustments to WorldCom's books and records," Ashcroft said. That led to falsely inflated earnings per share, net income, revenue growth and — as a result — analyst and investor expectations, Ashcroft said.

When the fraud was discovered, WorldCom's stock plummeted, causing massive losses to stockholders.

Four former company executives, including controller David Myers, have pleaded guilty to criminal charges in the Justice Department's fraud investigation and are helping federal prosecutors.

Ebbers and Sullivan were also charged with 15 violations of state securities laws in Oklahoma. They are among six ex-WorldCom employees charged there in an accounting fraud that prosecutors say cost state pension funds $64 million.

Oklahoma's attorney general dropped criminal charges against Ebbers in November but has said he plans to refile them this year.

Four former company executives have pleaded guilty to criminal charges in the Justice Department's fraud investigation and are helping federal prosecutors.

Last year a federal judge in New York approved a $750 million settlement between WorldCom and the Securities and Exchange Commission, designed to repay investors who lost money in the fraud.

WorldCom also has agreed to corporate reforms, including a court-appointed monitor and regular audits.

WorldCom merged with MCI in 1997 and planned to merge with Sprint in 1999 until the deal was called off. In a bid to heal its reputation, WorldCom changed its name to MCI and move its headquarters to Ashburn, Va.

In the 1990s, Ebbers was one of the hardest-charging figures in the telecommunications industry as he grew WorldCom with a series of acquisitions.

But investigative reports commissioned by courts and the company have said he steered WorldCom through several questionable moves with the help of a rubber-stamp board.

One report, produced by lawyer William McLucas at the request of the company's new board, faulted Ebbers for fostering a poisonous corporate culture and said he was "aware, at a minimum, that WorldCom was meeting revenue expectations through financial gimmickry."

The McLucas report included a voicemail Sullivan left for Ebbers on June 19, 2001, more than a year before WorldCom acknowledged its accounting fraud. It described monthly revenue reports as "getting worse and worse. ... copy that you and I have already has accounting fluff in it ... all one-time stuff or junk."

A second report, prepared by former Attorney General Richard Thornburgh for a bankruptcy judge in New York, describes a corporate culture dominated by Ebbers and Sullivan, "with virtually no checks or restraints placed on their actions by the board of directors or other management."

Thornburg said Ebbers and Sullivan were given discretion to rack up more than $30 billion in debt and make multibillion acquisitions with minimal input from the board.

Another report by a special committee appoint by the company's board described "a culture emanating from corporate headquarters that emphasized making the numbers above all else."

"This culture began at the top," the report read. "Ebbers created the pressure that led to the fraud. He demanded the results he had promised, and he appeared to scorn the procedures (and people) that should have been a check on misreporting."

The report found WorldCom had inflated profits by simply making up revenues that didn't exist, and depressing expenses by creating "accruals" to offset the cost of transmitting phone calls.

Ashcroft said in the two years since it was created, the president's corporate fraud tax force has charged over 660 violators.

"This investigation remains active and ongoing," Ashcroft said.