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WorldCom Malfeasance Revealed

The record collapse of WorldCom was marked by imperious top executives who browbeat underlings for questioning their authority, according to two reports with an insider's look into the corporate culture that fueled an $11 billion accounting scandal.

In one incident investigators cited, accounting executive Buford Yates warned an underling who questioned the company's books to not show auditors the numbers or "I'll throw you out the (expletive) window."

The outlines of WorldCom's financial wrongdoing have been known for a year, but the reports released Monday — exceeding 500 pages — offered some of the most explicit details yet.

WorldCom's accounting scandal led to the largest bankruptcy filing in U.S. history last July.

Portions of one of the reports emerged last week, revealing that former Chairman Bernard Ebbers had been in meetings in which company officials discussed ways to artificially inflate revenue.

The 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."

Ebbers' lawyer, Reid Weingarten, said despite the thorough investigation, "the best the investigators can do is nitpick about the process and substance of isolated business decisions." He said the conclusion that Ebbers must have known about the wrongdoing makes a leap in logic that would be insufficient for a criminal case.

A message left for Sullivan's attorney, Irv Nathan, after business hours Monday was not immediately returned.

The McLucas report offered searing accounts about how ex-chief financial officer Scott Sullivan and other key finance executives cooked WorldCom's books to hide that the real numbers were falling short of Wall Street's expectations.

A voicemail Sullivan left for Ebbers on June 19, 2001, more than a year before WorldCom acknowledged its accounting fraud, 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 released Monday, 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,

Thornburgh said the lack of governance made many people, rather than a few, responsible for driving WorldCom into bankruptcy, CBS MarketWatch.

The authors of both reports indicated they were hampered by their inability to question Ebbers and Sullivan. Sullivan has been charged with fraud in federal court; Ebbers has not been charged.

Sullivan, who has denied wrongdoing, is free on $10 million bail while he awaits trial next year. Yates and three other ex-WorldCom executives have pleaded guilty and are helping prosecutors.

WorldCom hopes to emerge from Chapter 11 protection this fall, renamed MCI and headquartered in Ashburn, Va.

Its ability to exit bankruptcy largely hinges on acceptance of a proposed $500 million fine negotiated with the Securities and Exchange Commission. While that fine is by far the largest of its type ever imposed by the SEC, many of WorldCom's competitors and critics say it is woefully inadequate, considering that WorldCom's collapse wiped out about $180 billion in shareholder value.

The McLucas report, which the SEC reviewed before agreeing to the settlement, concludes that those principally responsible for the fraud are no longer employed by WorldCom, as the company asserts.

But the Thornburgh report takes a broader view of the wrongdoing. For example, the company's general counsel and treasurer remain in place even though the report finds fault with their actions.

The McLucas report faulted WorldCom's auditor, Arthur Andersen, for not catching some of the fraud. Even though WorldCom was uncooperative in providing important material to Andersen, the accounting firm should have at least alerted the company's audit committee, the report said.