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Archives: 2005

 

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Jury convicts Ebbers on all counts in fraud case; Former CEO of WorldCom could face 85 years; attorney vows appeal

March 15, 2005 – New York City: Bernard Ebbers, the WorldCom CEO, who built the company into a telecommunications giant, was convicted Tuesday of directing the biggest accounting fraud in U.S. corporate history, leaving thousands of investors empty-handed.  A federal jury in Manhattan deliberated eight days before dismissing his testimony that he knew nothing of the details behind the $11 billion securities fraud, which drove the company into the nation's largest corporate bankruptcy in 2002.  The jury convicted him on all charges: one count each of conspiracy and securities fraud and seven counts of false regulatory filings.  Ebbers, 63, faces up to 85 years in prison.  Sentencing was set for June 13.  Ebbers made no comment as he left court, but his attorney Reid Weingarten vowed to appeal, saying the case was riddled with reasonable doubt.  

The conviction came more than two years after an internal auditor began asking questions about curious accounting at WorldCom, touching off a scandal that eventually unearthed $11 billion in erroneously declared revenues and expenses.  Prosecution testimony at the six-week trial portrayed Ebbers as obsessed with keeping WorldCom’s stock price high and panicked about $400 million in personal loans backed by his shares in the company. 

The tall, bearded Ebbers gambled by taking the witness stand late in the trial, insisting he was unfamiliar with the accounting details and knew nothing about the fraud.  The conviction completes a staggering fall for Ebbers, who took a small long-distance company in Mississippi and merged with or acquired ever-larger companies, making him a Wall Street superstar and earning him the nickname "Telecom Cowboy."

The star witness was the former CFO Scott Sullivan, who claimed Ebbers repeatedly ordered him to “hit our numbers,” a command, Sullivan said, to falsify the books to meet Wall Street expectations.  Sullivan, who pleaded guilty to fraud, admitted he essentially masterminded the scheme, but said he did it on the clear instructions of Ebbers, who ignored his repeated pleas that the adjustments were wrong.

With the entire telecom industry in serious decline, the fraud was driven by soaring “line costs,” the fees WorldCom paid to smaller local telephone carriers to use their networks.  Prosecutors said the fraud stretched from late 2000 until early 2002, sometimes amounting to nearly $1 billion per quarter in hidden expenses and improperly recognized revenue.

Pressure from the loans, the money he stood to lose and the power of the CEO’s job combined to form a “perfect storm of corruption” that drove Ebbers to commit fraud, prosecutor William Johnson said in his closing argument.  “He was WorldCom, and WorldCom was Ebbers,” the prosecutor told jurors. “He built the company. He ran it. Of course he directed this fraud.” 

Ebbers disputed the testimony of Sullivan, saying he became aware of the fraud only in the summer of 2002, after he was asked to leave WorldCom.  “He’s never told me he made an entry that wasn’t right,” Ebbers said of Sullivan. “If he had, we wouldn’t be here today.”

Ebbers still faces civil litigation, including from the company, which backed up his $400 million in personal loans when Bank of America demanded more and more collateral as the stock price fell.  Twelve former directors of the company, plus some investment banks that underwrote WorldCom securities and auditing firm Arthur Andersen, also face a civil trial brought by angry investors. That trial is set for late March.

WorldCom, which was based in Clinton, Miss., was driven into the largest bankruptcy in U.S. history in the summer of 2002. It has since re-emerged as MCI Inc., based in Ashburn, Va.  The company struck a $750 million settlement with federal regulators to repay aggrieved investors, a small sum compared to the tens of billions of dollars of market capitalization that evaporated in the scandal.