Former WorldCom controller David Myers pleaded guilty Thursday to conspiracy and fraud charges, making him the first person to admit guilt in the company’s $7.2 billion accounting scandal.
The admission prompted civil fraud charges against Myers from the Securities and Exchange Commission.
Myers, a Madison resident, had been meeting with U.S. Department of Justice attorneys, and his guilty plea is widely believed to be part of a agreement under which he will testify against Scott Sullivan, WorldCom’s former chief financial officer and the man the government has accused of being the ringleader of WorldCom’s accounting sham.
Myers’ plea agreement had been expected since early this month when prosecutors asked a grand jury in New York for more time to forge a deal with him. That same grand jury indicted Sullivan and former WorldCom accounting director Buford “Buddy” Yates on fraud and conspiracy charges.
Yates and Sullivan pleaded innocent to those charges.
Prosecutors have said Myers and Sullivan ordered Yates along with WorldCom accounting executives Betty Vinson and Troy Normand to hide billions in expenses to make the company appear profitable while it was actually losing money.
Under the scheme, Sullivan allegedly told Myers to direct accounting executives to reclassify $3.85 billion in day-to-day operating expenses as investment expenses during 2001 and the first quarter of this year. The shift made the company look profitable by lowering the day-to-day expenses, and it made WorldCom look like it would grow faster in the future because it was investing in new equipment.
The charges do not include an additional $3.3 billion in fraudulent accounting that WorldCom announced in August after it filed for Chapter 11 bankruptcy protection.
The indictments against Yates and Sullivan called Myers, Vinson and Normand unindicted co-conspirators. They are also expected to plead guilty as part of cooperation agreements with prosecutors, according to court papers filed earlier.
Pleading guilty does not end Myers’ legal problems. In addition to as many as 20 years in prison, he faces new civil charges from the SEC.
As with the civil fraud charges filed against the company after it announced its false accounting, Myers’ civil fraud case will take place in New York.
The SEC is asking the court to impose fines, prevent Myers from ever serving as an officer of a publicly traded company and force him to rid himself of any gains he made from the WorldCom fraud.
The SEC civil case was likely filed in connection to a plea agreement. SEC officials were reportedly involved in negotiations, and the commission acknowledged the help of the U.S. Attorneys’ Offices for the Southern District of New York and Southern District of Mississippi, and the FBI in helping it prepare the civil case.
Legal experts say the plea agreement to get Myers’ testimony will be crucial if the government wants to make a case against Sullivan or provide Sullivan with enough pressure to plead guilty and testify against former WorldCom Chief Executive Officer Bernie Ebbers.
Ebbers, who has said on several occasions that he did not know about the accounting fraud, has not been charged with any wrongdoing related to WorldCom’s accounting fraud. However, prosecutors have made no secret of the fact they want to prosecute him. To do that, they will need Sullivan.
Jacob Frenkel, a former senior counsel with the SEC’s enforcement division and former federal prosecutor now with the Atlanta law firm of Smith, Gambrell & Russell, said unravelling the chain of command is the hardest part in prosecuting any white-collar crime.
Although Sullivan has been accused of directing a fraudulent accounting scheme, documents released by congressional committees and court filings show he gave few of the orders. Most of the orders to change financial statements actually came from Myers.
In addition, Myers has said he did not believe the accounting changes he made were justifiable. Sullivan, on the other hand, said they were legal and proper. Legal experts say that distinction can be the difference between a criminal mistake and criminal intent.
For those reasons, while Myers was farther down the food chain than Sullivan or Ebbers, he faced a much larger legal dilemma, said Frenkel and others.
“The heaviest hammer has a way of creating the largest incentive to cooperate with prosecutors,” Frenkel said.
With testimony from Myers, Vinson, Normand and other WorldCom executives, the case against Sullivan may be taking shape, something that could encourage the former CFO to plead guilty himself and offer to testify against Ebbers.
“The criminal investigative process in high-profile white collar crime cases is all about pressure,” Frenkel said. The pressure had been on Myers. With his plea, it has shifted to Sullivan.
Sullivan may have a harder time escaping the pressure than Myers, again because of the corporate structure.
Sullivan and Ebbers had a close working relationship that included adjoining offices and lunches together at the company’s cafeteria in Clinton. While Sullivan may be able to say he and Ebbers discussed accounting issues during those meetings, he may have little proof.
“If it comes down to Scott Sullivan versus Bernie Ebbers, the case gets very difficult,” Frenkel said. “As credible as a cooperator may be, the facts of the guilty plea and cooperation become great fodder for cross examination at trial.”
To get a good deal from prosecutors, Frenkel said Sullivan would have to provide tangible proof Ebbers knew of the accounting problems or a corroborating witness. To date, no current or former WorldCom employees have said Ebbers had any knowledge of the accounting, so finding that corroboration would be a challenge.