Reports Reveal Tight Grip of Ebbers On WorldComJun 11, 2003 | The Globe and Mail
When Bernard Ebbers was forced to resign as CEO of WorldCom Inc. on April 29, 2002, the company's directors made it as easy as possible for him to leave.
The board arranged to pay him $1.5-million (U.S.) a year for life and gave him an office at headquarters and a secretary. Directors also did not demand repayment of $408-million in company loans, but accepted a promissory note instead.
Two months later, WorldCom collapsed into bankruptcy protection amid nearly $41-billion in debt and allegations of fraud. Two reports filed in a New York bankruptcy court this week show for the first time how Canadian-born Mr. Ebbers ran the Clinton, Miss., company like a personal fief.
"This was Ebbers' company," said one report filed in court. "The fraud was the consequence of the way [Ebbers] ran the company. He was the source of the culture, as well as much of the pressure, that gave birth to this fraud."
The reports were prepared by Richard Thornburgh, WorldCom's court-appointed examiner, and William McLucas, a lawyer hired by the company's new board of directors.
Mr. Ebbers has denied any wrongdoing and his lawyer said the reports do not prove that his client participated in or knew about any fraud at WorldCom.
According to the reports, Mr. Ebbers built WorldCom into the second-largest telecommunications company in the United States by creating a culture of secrecy and blind obedience.
Executives were encouraged to hide information from directors and auditors and told to simply follow orders, the reports say. Anyone who stepped out of line was denigrated in public. "Show those numbers to the damn auditors and I'll throw you out the f*****g window," one employee was told by a senior executive in an e-mail quoted in the lawyer's report. Mr. Ebbers even dismissed an attempt by the company to draft a corporate code of conduct as "a colossal waste of time."
Mr. Ebbers made sure that he and other senior executives, including Scott Sullivan, WorldCom's former chief financial officer, were among the highest-paid executives in the United States by ordering special payouts to managers and directing the board's compensation committee on how to set executive bonuses.
WorldCom executives also had unfettered use of WorldCom's fleet of seven airplanes because there were no rules on how the planes were to be used, one report says. One director, listed as independent by the company, leased a plane from WorldCom at less than commercial rates. That deal was arranged by Mr. Ebbers and not disclosed publicly.
Mr. Ebbers' control over the board was so complete that at one point in the fall of 2000 when his personal finances were in disarray, a group of directors met the president of Bank of America and urged him to ease off on Mr. Ebbers, citing his crucial role at the company.
At the time, the bank was a major lender to both WorldCom and Mr. Ebbers. When the bank declined, the board approved a series of company loans to Mr. Ebbers that by 2002 totalled more than $400-million.
Both reports allege Mr. Ebbers, Mr. Sullivan and a group of managers doctored revenue figures and costs in order to ensure WorldCom met its targets.
This process, called "closing the gap" at WorldCom, became all consuming for Mr. Ebbers after 2000 when the telecom sector fell into a slump and the company's share price fell, according to the reports.
WorldCom's ability to borrow money was also facilitated by what the examiner describes as massive accounting fraud, as it allowed the company to present itself as creditworthy and "investment grade," when in fact its debt was below that grade.
In the four years preceding its bankruptcy filing, the company issued more than $25-billion in debt securities, including an $11.9-billion bond financing in May, 2001 the largest ever done by a U.S. company.
The examiner's report says the company's handling of a $2.65-billion credit facility raises significant issues. By the spring of 2002, those familiar with the company's situation knew it was strapped for cash, it says. The proceeds from the bond financing were exhausted in eight months, 10 months less than the company had estimated, and its debt was downgraded to junk status on May 9.
But despite the company's public comments that it was not planning to borrow funds under the credit facility, WorldCom executives had been discussing such a possibility for some time, the report says.
On May 15, 2002, the company announced during a conference call with analysts that it intended to borrow the entire $2.65-billion. In a separate conference call with some of the banks that same day, Mr. Sullivan said the money "won't be used for anything." He also said the proceeds would be placed in a segregated account and would be repaid when the company completed a $5-billion financing by June 30.
WorldCom's statements regarding its plans to segregate the proceeds assured certain lenders that the money would be set aside and repaid.
"This appears to have been false," the examiner's report says.
The following are examples of e-mails, voice mails and other communications that illustrate the culture fostered at WorldCom
From: Scott Sullivan
To: Manager and her supervisor in the budget department
'This is complete, complete garbage. What am I supposed to do with this? What have we been doing for the last six months. This is a real work of trash.'
Voice mail from: Scott Sullivan
To: Bernard Ebbers
Sent: June 19, 2001
'Hey Bernie, it's Scott. This mon-rev (monthly revenue) just keeps getting worse and worse. The copy, um the latest copy that you and I have, already has accounting fluff in it all one-time stuff or junk that's already in the numbers. With the numbers being, you know, off as far as they were, I didn't think that this stuff was already in there.
We are going to dig ourselves into a huge hole because year to date it's disgusting what is going on on the recurring, uh, service side of the business.
From: Buford Yales, Jr., director, general accounting
To: An employee who asked for an explanation of a large discrepancy
'Show those numbers to the damn auditors and I'll throw you out the f*****g window.'
Memorandum from: Bernard Ebbers
To: Chief operating officer Ronald Beaumont
Sent: July 10, 2001, a day before the June, 2001, preliminary monthly revenue was internally distributed.
'The first issue, obviously, is that we are getting close to mon-rev coming out for June and as a result the second-quarter numbers. I would ask that you get with Jon McGuire and Mike Higgins and anyone else that works on those issues and see where we stand on those one-time events that had to happen in order for us to have a chance to make our numbers we should know those by now.'