Prosecutors indicted two WorldCom Inc. executives Wednesday and signaled three others would plead guilty and cooperate with investigators, giving momentum to the criminal probe of the nation’s largest accounting scandal.
A seven-count indictment filed in federal court in Manhattan charges Scott Sullivan, 40, the firm’s former chief financial officer, oversaw a long-running conspiracy to hide operating expenses in order to boost earnings reports.
The charges against Sullivan were filed after an apparent breakdown in plea negotiations between his lawyer and prosecutors.
But in court papers, prosecutors indicated three of Sullivan’s subordinates are prepared to plead guilty and provide information about their former bosses.
Their expected cooperation increases the pressure on Sullivan to strike a deal with investigators and tell what he knows about his boss, former CEO Bernard Ebbers. Lawyers for Ebbers, who was not mentioned in the indictment, have said he had no knowledge of the accounting decisions in question.
“We will prosecute the CFOs and controllers who give the orders from the top to commit white collar crimes,” U.S. Attorney James Comey said in a statement. “But we will also prosecute corporate officials at all levels who knowingly carry out criminal schemes which defraud the investing public.”
Prosecutors signaled that three executives may prove important in the investigation: former Controller David Myers, who was charged in an earlier criminal complaint, but not in Wednesday’s indictment; and former accounting executives Betty Vinson and Troy Normand, who were named unindicted co-conspirators.
Marvin Smilon, a spokesman for the U.S. attorney, declined to say whether the three are cooperating with prosecutors.
But newly filed documents show Myers, Vinson and Normand are preparing to waive their right to be indicted by a grand jury and instead come to court to answer a criminal information.
A criminal information is used by suspects who plead guilty under an agreement with authorities.
The indictment also names a new defendant, Buford Yates Jr., WorldCom’s former director of general accounting, in the alleged scheme to artificially boost the telecommunications giant’s bottom line.
“Sullivan, Yates, and their co-conspirators were able to assure that WorldCom’s reported earnings exceeded its actual earnings for the period from October 2000 through April 2002 by approximately $5 billion,” the indictment said.
Sullivan’s attorney, Irv Nathan, has said his client was a victim of “a rush to judgment.” Calls to other defense attorneys were not immediately returned.
Sullivan allegedly instructed the executives to hide WorldCom’s increasing expenses by improperly shifting costs from operating to capital accounts.
The moves allowed WorldCom to claim to investors that their line costs were roughly 40 percent of their revenue between 1999 and 2000 â€” when the true figure was roughly 50 percent. The indictment charges the conspirators illegally manipulated credits and debits entries in WorldCom’s ledgers.
“Neither Sullivan nor Myers provided Yates, Vinson, or Normand with any supporting documentation or any proper business rationale for the entries,” the indictment charges. “As Sullivan, Myers, Yates, Vinson, and Normand well knew, there was no justification in fact or under generally accepted accounting principles for these entries.”
Attorney General John Ashcroft said the charges showed the Justice Department’s commitment to “prosecuting corporate law breakers and protecting the savings and pensions of Americans.”
WorldCom, which owns MCI, the nation’s second-largest long-distance company, filed for Chapter 11 bankruptcy July 21 after disclosing the accounting abuses. It was the biggest such filing in U.S. history. Since then, the company has disclosed an additional $3.3 billion in inflated profits.
Sullivan, who is free on $10 million bail, could get up to 65 years in prison if convicted on charges of securities fraud, conspiracy and filing false statements with the SEC. But federal guidelines call for a sentence of 10 years or less.
The arraignments of Sullivan and Yates were not immediately scheduled.
The company, once considered a potential target itself, has not been charged. It has said that it is cooperating with the investigation.