WorldCom Inc., the second-largest U.S. long-distance telephone provider, and former Chief Executive Officer Bernard Ebbers were charged by the Oklahoma attorney general with securities fraud, in the first criminal prosecution of the company stemming from an $11 billion accounting scandal.
Ebbers and five other former WorldCom executives, including former Chief Financial Officer Scott Sullivan, were accused in Oklahoma City of plotting to inflate the value of WorldCom stock and bonds by falsifying disclosures with the U.S. Securities and Exchange Commission.
WorldCom and Ebbers have avoided federal prosecution stemming from the accounting scandal that drove the company into the largest bankruptcy in U.S. history and led to a $750 million settlement of an SEC civil lawsuit. Oklahoma Attorney General Drew Edmondson said he acted because the company and its top officials have escaped accountability. He said six states are weighing WorldCom charges.
“State attorneys general, many of whom are elected officials, are under enormous pressure to respond,” said former federal prosecutor Robert Mintz, a partner with McCarter & English in Newark, New Jersey. “What we’re seeing here is more political than legal. From a purely legal perspective it makes sense to allow the federal government to take the lead in this prosecution.
“This represents a power play by the Oklahoma attorney general to force the federal government’s hand. The nightmare scenario for the federal government is that this prompts a wave of state prosecutions. What the state prosecutors are saying is, `If we can bring charges with less evidence and having devoted less time to the investigation, why can’t you?”’
The company and the six individuals were charged with 15 felony counts of violating the Oklahoma Securities Act. Edmondson said maximum penalties for each conviction are 10 years in prison and $150,000 in fines.
“It’s a lack of accountability to date that disturbs the attorney general’s office,” Edmondson said at a news conference, in explaining why he acted. “I think it’s the inadequacy of what’s been done to date — the lack of any serious sanction against WorldCom, either corporately or its individual officers is the most compelling reason.”
WorldCom, which is changing its name to MCI, said it doesn’t believe the prosecution will affect its bankruptcy reorganization, which is scheduled for a court hearing starting Sept. 8. The company said it will cooperate with the Oklahoma investigation.
“Today’s action against the company would only punish our 20 million customers and 55,000 employees 2,000 of which work in Oklahoma,” WorldCom said in a statement. “MCI has made tremendous progress over the past year and we are working hard to put our house in order.”
Edmondson’s complaint accuses the former WorldCom employees of knowingly overstating the company’s 2000 and 2001 financial results in connection with the sale of securities to investors in the state.
The 16-page criminal complaint doesn’t supply any fresh information about Ebbers’s role in the events that led to the company’s June 2002 collapse. It says Ebbers, Sullivan and former company officials David Myers, Buford Yates, Betty Vinson and Troy Normand defrauded investors by deflating WorldCom’s expenses in 2000 and 2001.
Yates, WorldCom’s former accounting chief; Myers, the ex- controller; and ex-accounting executives Normand and Vinson have pleaded guilty and are cooperating with U.S. prosecutors. Sullivan has pleaded innocent to violating securities laws.
Chris Man, a spokesman for the Arnold & Porter law firm, which is representing Sullivan in the federal case, declined comment. Arnold & Porter partner Irvin Nathan, the lead defense counsel, was away from the office and unavailable for comment.
Lawyers for Myers, Normand, Vinson and Yates didn’t immediately return telephone calls for comment. Edmondson said they have a week to appear in court to face the charges.
“It’s very reasonable to assume” that some of the individuals would be imprisoned if convicted, Edmondson said at a news conference. “Our courts are aware that this kind of financial fraud case, white collar crime, that impacts upon the citizenry, is serious. If the amount of the fine is insufficient to get someone’s attention, I think the courts will look very seriously at incarceration.”