Bernie Ebbers may have violated state and federal securities laws by spending nearly $28 million in loans from WorldCom on personal business ventures and a $1.8 million home, a legal expert said.
During the ’90s, WorldCom’s former president and chief executive officer borrowed more than $1 billion from banks by pledging his WorldCom stock as collateral. As the value of the shares dropped, banks began demanding he sell his stock to raise the cash to support those loans.
WorldCom loaned Ebbers $408 million between 2000 and 2002 to cover the investment losses. At the time, the company said it loaned the money so Ebbers would not have to sell his stock â€” an action that could have depressed the value of WorldCom shares.
Of the $408 million loan, $36.5 million went to pay pledges backed by WorldCom stock that Ebbers made to Mississippi College.
But a report filed Monday by Dick Thornburgh, a former U.S. attorney and former Pennsylvania governor monitoring WorldCom’s bankruptcy case, noted that Ebbers spent nearly $28 million in loan proceeds for personal expenses that had nothing to do with his stock.
The distinction between borrowing to repay loans and borrowing for personal uses could be a significant one, said 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.
By using the loans for something other than their stated purpose, Ebbers may have violated securities laws, he said.
Prosecutors investigating Tyco International executives have argued that borrowing money from a company under questionable pretenses is harmful to shareholders and is illegal, Frenkel said.
“Mr. Thornburgh’s findings may well create an opening for Mississippi prosecutors or even federal prosecutors to seek criminal or civil charges against (Ebbers),” Frenkel said. The possibility of charges will depend on how much evidence Thornburgh has to back up his claims, he said.
The legal questions will revolve around whether WorldCom properly disclosed the possible uses of the loan proceeds and whether Ebbers deceived the company in receiving the loans.
Thornburgh’s report said it is unclear whether the company properly informed shareholders of the loans.
Board members appeared surprised when they learned Ebbers had used the loan proceeds for purposes other than repaying his debts, the report said.
Mississippi Attorney General Mike Moore said Ebbers’ loans already had been a point of concern for investigators.
“He said he needed the loans to keep the company’s stock afloat, but it seems he was more interested in keeping himself afloat,” Moore said. “This will fuel the fires of the investigations against (Ebbers).”
Reid Weingarten, Ebbers’ attorney, told The Associated Press that he had not read Thornburgh’s report and declined to comment on it.
In addition to a $1.8 million home, Ebbers used the loan proceeds to give $2 million to a family member for personal expenses, $1 million in loans to a WorldCom officer and other friends, and he spent $22.8 million on other personal business interests for a total of $27.6 million, the report said.
In addition to those personal uses, $36.5 million in loans from WorldCom went to pay financial pledges Ebbers made to his alma matter, Clinton’s Mississippi College.
Ebbers donated the money to the school under a complex arrangement under which the school sold bonds that Ebbers pledged to pay off when they matured, according to Bo Roberts, Mississippi College senior vice president for administration and the school’s chief fiscal officer.
Ebbers pledged stock to the Bank of America to act as collateral for the bonds.
The financial structure allowed the school to get the money immediately. It also allowed Ebbers to hold onto his stock under the belief he would be able to earn enough to pay back the bonds over time.
But when WorldCom stock dropped in value in 2000 and 2001, Ebbers’ shares were no longer sufficient collateral for the bank.
As it did with the loans backed by Ebbers’ stock, WorldCom loaned money to Ebbers to prevent him from selling his shares. For the Mississippi College bonds, the company simply gave Bank of America the $36.5 million in cash.
Michael J. Missal, an attorney with Thornburgh’s firm, said, effectively, WorldCom took over Ebbers’ donation to the school.
The Mississippi College pledge drive raised more than $100 million for the school. Ebbers was widely believed to be the silent benefactor who provided about $40 million of those funds, but he repeatedly refused to acknowledge his contributions.