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WorldCom Loans Could Haunt Ebbers

Nov 6, 2002 |

Bernie Ebbers has so far been notable by his absence from the parade of ex-WorldCom executives who have appeared in court in relation to the telecommunications group's collapse. But the former chief executive was this week thrust into the spotlight following the publication of details of loans worth $400m he received from the bankrupt group.

In a report published on Monday, Dick Thornburgh, the bankruptcy court examiner charged with chronicling the company's collapse, highlighted several potential problems relating to the loans. The disclosures reveal a potential new line of enquiry for investigators examining Mr Ebbers' role in the company's collapse.

So far, Scott Sullivan, the company's former chief financial officer, and a string of other finance executives, have been charged with orchestrating the $7bn accounting fraud that triggered WorldCom's collapse. But investigators have not produced any evidence that shows Mr Ebbers knew of the fraud.

Mr Thornburgh stressed that his report was not complete and that several areas including the question of the loans - would require further examination. Facts that the Department of Justice and the Securities and Exchange Commission felt might prejudice their investigations are also understood to have been left out of the report.

Nonetheless, at the very least Mr Ebbers is likely to face some very difficult questions over the link between his personal finances and those of the company he founded.

WorldCom first started lending money to Mr Ebbers in September 2000, to cover demands for additional collateral on personal bank loans the chief executive had secured with his WorldCom stock. By the time he stepped down in early 2002, his debt to WorldCom was $408m.

According to Mr Thornburgh's report, however, WorldCom's board was never asked formally to approve the loans. What's more, Stiles Kellett, the head of WorldCom's compensation committee, faced serious conflicts of interest when reviewing Mr Ebbers' demands.

In early 2001, Mr Ebbers gave Mr Kellett the use of one of WorldCom's corporate jets for just $1 a month and $400 an hour of flying time - a fraction of the cost of renting a private jet.

It also appears that Mr Ebbers did not use all of the $408m he received from the company to pay off his margin loans. According to the report, Mr Ebbers used $27m of the payment he received to build a house, lend money to his friends and family, and fund his private business interests. A lawyer for Mr Ebbers did not return numerous calls for comment.

The rules on corporate loans to executives have been tightened since the passing of the Sarbanes-Oxley bill on corporate responsibility this year.

But corporate lawyers said that, even before the new legislation was passed, a loan by a company to its chief executive would need to be properly reviewed and disclosed to investors.

"What you expect is that the compensation committee and board would review it," said A Richard Susko, a partner at Cleary Gottlieb Steen & Hamilton, the law firm. "A chief executive acting in his own interest to borrow the money would be more problematic."

Even if Mr Ebbers were to repay the loans, it would hardly make a difference to the company's creditors, who are owed tens of billions of dollars. But, for WorldCom's former chief executive, the loans could haunt him for years to come.

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