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The Rise And Fraud of WorldCom

Sep 8, 2003 | WWW.MSN.COM These days, the WorldCom name brings to mind accounting scandals and deceitful Wall Street analysts.

But they're only a small part of the story. The real story of WorldCom begins and ends in small-town Mississippi, where in little more than a decade a gym teacher named Bernie Ebbers took a tiny company and turned it into a telecom empire.

Today, Ebbers is fighting charges in Oklahoma that he violated the state's securities laws by defrauding investors, among other things. Federal authorities haven't charged him. His attorney says Ebbers committed no crimes.

WorldCom, now called MCI, remains in Chapter 11 bankruptcy proceedings, which it entered in 2002 after disclosing accounting fraud that eventually totaled $11 billion, the biggest ever. Scott Sullivan, the company's former chief financial officer, faces federal charges stemming from the company's accounting fraud.

Ebbers repeatedly declined interview requests. But as we were taping the final pieces of "The Big Lie: The Rise and Fraud of WorldCom" in tiny Brookhaven, Miss., where Ebbers lives and WorldCom was born, he drove up in his pickup truck. Ebbers, who even declined to answer Congress' questions about the scandal, at first again wouldn’t talk. But he did agree to take a walk, and that walk turned into a discussion about WorldCom.

'A lot of people got hurt'

"When you put your life into something like that and something like that happens, there's really not a lot to say except it's just terribly sad, terribly sad," Ebbers says. "A lot of people got hurt in the thing. It didn't have to happen."

He also says WorldCom plunged into bankruptcy because business dried up. "The big thing that really hurt us was the growth that we typically had in sales to our existing customers," he says. "Instead of that going up $160 million a quarter, that was going down $100 million a quarter and that is the issue in the company."

Still, Ebbers, who spends his days with lawyers plotting his defense, stops short of going into great detail. "For the sake of the people that built the company, not for my sake, I'd (like) for the facts to be known," he says.

It was only in March 2000 that Ebbers was at the pinnacle of the telecommunications industry. WorldCom was widely viewed as the world's dominant player. When WorldCom opened a new network operations center, President Clinton was on hand.

"Mr. President we're very pleased to welcome you to ground zero of the communications explosion," Ebbers said at the time. "We're in 65 different countries now and expanding as fast as we can."

WorldCom always expanded as fast as it could. The same thing was happening to Ebbers' wealth. His WorldCom stock holdings, his 500,000-acre ranch in Alberta, Canada, and numerous homes, contributed to a net worth estimated at more than $500 million.

A behemoth

During that spring of 2000, WorldCom boasted 88,000 employees and owned 60,000 miles of telephone lines around the world. Its revenues were on track to exceed $40 billion. It was also in the midst of buying Sprint (FON, news, msgs) in the biggest acquisition ever, a deal that would cement it as the industry's behemoth and catapult it past AT&T (T, news, msgs) in many key areas.

"WorldCom went from being a competitor to being the competitor," says Michael Armstrong, who was AT&T's chairman and CEO at the time.

But what Armstrong didn't know was that WorldCom's success was a lie.

The company was a place where the distinction between fact and fiction didn't exist, where lies were not only tolerated but embraced.

One of those was among the biggest ever told in the business world, and it dealt a death blow to the new economy. Tom Stluka inadvertently gave life to that lie.

In 1997, when he was an employee of WorldCom's Internet service provider UUNet, Stluka created a best-case scenario for the Internet's growth.

"I had built a model in an Excel spreadsheet that translated what our sales forecast was into how much traffic we would expect to see," he says. "And so I just assigned variables for those various parameters, and then said we can set those variables to whatever we think is appropriate."

The best of all worlds

Stluka's model suggested that in the best of all possible worlds Internet traffic would double every 100 days. That scenario would greatly benefit WorldCom, whose lines would carry it.

About a year later, "analysts were saying it, it was on the Web," Stluka says. "Other companies were touting it. I think I heard a presidential candidate say it. It's in WorldCom's 1998 annual report that the Internet has been growing 1,000% a year."

But it wasn't true. "I don’t recall traffic in fact growing at that rate," Stluka says.

Still, WorldCom's lie had become an immutable law.

"I tried sending messages up the chain of command to say that I don't think we're reporting the right thing," he says. "That's when I started saying the emperor has no clothes because nobody wanted the truth."

But businesses around the world, even AT&T, made important decisions based on the belief that traffic was doubling every 100 days.

"For some period of time I can recall that we were backfilling that expectation with laying cables, something like 2,200 miles of cable an hour," Armstrong says. "Think of all the companies that went out of business that assumed that that was real."

At WorldCom, few things were real. It was a company whose business model was built on a lie, a lie that said WorldCom was simply better at its business than any of its competitors. Of course WorldCom was doctoring its financial statements, which made its results look better than they actually were.

Struggling to understand
Armstrong and former Sprint CEO Bill Esrey struggled for years to understand how WorldCom could beat them so handily.

"We would look at the conduct of WorldCom in terms of their pricing, revenue growth, margins, in terms of their cost structure and the price leader almost every quarter was WorldCom," Armstrong says.

Adds Esrey, "We couldn't figure out how they were pricing as aggressively as they were. How could they be so efficient in their costs and expenses?"

AT&T and Sprint began cutting jobs in an effort to push down their costs to WorldCom's level.

"The market said what a marvelous management job WorldCom was doing and they would look over to AT&T and say, 'these guys aren't keeping up.' So my shareholders were hurt. We laid off tens of thousands of employees in an accelerated fashion and I think the industry was hurt," Armstrong says.

"It just wrecked the whole industry," says Esrey.

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