Bernie Ebbers borrowed more than $1bn against the value of his stock in WorldCom, and then persuaded the company to bail him out when the share price plunged, according to a report into the telecoms group’s collapse.
The report, released on Monday, concludes that the former chief executive’s loans from banks placed him under huge pressure to maintain the company’s share price.
The company’s board lent him hundreds of millions of dollars when the falling share price prompted the original lenders to demand additional collateral.
The details of Mr Ebbers’ personal finances are among the new disclosures in the report which portrays WorldCom’s chief executive as the domineering influence at the head of a company characterised by incessant dealmaking, lax financial controls, and an obsession with managing and meeting Wall Street expectations.
The report’s author, Richard Thornburgh, who was appointed by the bankruptcy court to examine possible fraud and mismanagement and WorldCom, stressed his findings were only preliminary and that a number of areas would require further investigation.
Nonetheless, the 122-page document represents the first official attempt to set out the failings that led to WorldCom’s $7bn fraud and its subsequent collapse into the largest bankruptcy in corporate history. It also offers a first glimpse into the possible outcome of the multiple regulatory and criminal investigations into the behaviour of the company and its former executives.
The Department of Justice has brought charges against Scott Sullivan, WorldCom’s former chief financial officer, and a number of other finance executives. No charges have been brought against Mr Ebbers, whose lawyer could not be reached for comment.
Mr Thornburgh, a lawyer at Kirkpatrick & Lockhart in Washington DC, sets out how WorldCom’s compensation committee agreed to lend Mr Ebbers more than $400m over three years after personal loans he had secured with his WorldCom shares were undermined by the company’s falling share price.
The original loans paid for Mr Ebbers’ real estate purchases and other business transactions, including a $100m pledge to his alma mater, Mississippi College.
The report is also highly critical of Stiles Kellett, the WorldCom director responsible for approving Mr Ebbers’ loans, who in early 2001 was given permission to lease one of the company’s corporate jets at heavily reduced rates.
Mr Thornburgh describes WorldCom’s relationship with Salomon Smith Barney, its main investment banking adviser, as “unusually close and problematic”. He adds that Jack Grubman, the bank’s star telecom analyst, attended at least four WorldCom board meetings and also proposed asking previously prepared questions on investor conference calls so that executives would have an opportunity to give favourable answers.
The report also suggests that the accounting fraud at WorldCom stretches back as early as the beginning of 1999 and that the company may yet have to issue further restatements. He also points out that WorldCom’s attempted acquisition of Sprint, the long-distance telecom group, was at least partly designed to trigger large merger-related charges which would have allowed the company to hide its rising costs.
When the deal was blocked by the US government, Mr Sullivan reclassified line expenses as capital spending, boosting earnings by $3.8bn.