Former WorldCom CEO Bernard Ebbers was indicted on federal fraud and conspiracy charges Tuesday, accused of orchestrating the biggest accounting shell-game in corporate history. His chief financial officer, Scott Sullivan, will testify against him in a plea deal.
The charges push Ebbers, who amassed a personal fortune exceeding $1 billion while building the giant telecommunications company now called MCI, into the swelling ranks of corporate chieftains facing criminal prosecution and possible jail time for financial misdeeds.
The indictment, expanded to include Ebbers as a defendant with Sullivan, portrays Ebbers as a hands-on administrator who “carefully scrutinized” every internal financial report at WorldCom as it tried to hide its worsening finances from the public beginning in September 2000.
According to the charges, Sullivan advised Ebbers of the deteriorating conditions and urged him to issue an “earnings warning” to alert the public. But Ebbers refused, the indictment said, and both men then agreed to enlist subordinates on a campaign of fraud to conceal the company’s true financial condition.
The two men agreed to instruct underlings “to falsely and fraudulently book certain entries in WorldCom’s general ledger” to puff up profits and hide expenses, it charged. A company investigation would eventually put the total fraud at $11 billion.
Ebbers, 62, of Brookhaven, Miss., was scheduled for arraignment Wednesday.
Sullivan, 42, of Boca Raton, Fla., pleaded guilty Tuesday and agreed to testify against Ebbers to trim a potential 25-year prison sentence that could result from charges of conspiracy to commit securities fraud, securities fraud and falsely filing with the Securities and Exchange Commission.
Sullivan admitted that he and others gave unduly optimistic guidance to security firms, analysts and to the investing public.
“I took these actions, knowing they were wrong, in a misguided effort to preserve the company to allow it to withstand what I believed were temporary financial difficulties,” Sullivan told U.S. District Court Judge Barbara Jones.
In a steady voice, he said he was motivated to plead guilty by “sincere remorse and a deep sense of contrition.”
WorldCom, the nation’s second-largest long distance telephone provider, filed for bankruptcy protection in July 2002, about three months after Ebbers resigned amid a swirl of questions about the company’s finances.
WorldCom changed its name to MCI last April and moved its headquarters from Mississippi to Ashburn, Va.
Four former company executives, including controller David Myers, have pleaded guilty in the Justice Department’s fraud investigation and are helping prosecutors.
Ebbers’ attorney, Reid H. Weingarten, said no “fair-minded jury” would conclude that his client acted with criminal intent.
“We know the evidence in this case, we know our client and we know that Bernie Ebbers never sought to mislead investors, never sought to improperly manipulate WorldCom’s numbers, never improperly took any money and never sought to hurt the company he built,” he said in a statement.
Ebbers amassed a fortune estimated at $1.4 billion, using huge loans from his company to buy properties including a 500,000-acre ranch in Canada, as he aggressively expanded WorldCom’s operations and bought up other companies.
U.S. Attorney General John Ashcroft announced the indictment and plea, saying “America’s economic strength depends on the integrity of the marketplace.”
“No one,” Ashcroft said, “stands above the law.”
Others, too, saw lessons for those powerful executives who might hide crucial information from investors.
“No matter how high executives climb on the corporate ladder, they will never be above the law,” added Stephen M. Cutler, director of the SEC’s Division of Enforcement, as he announced Sullivan had also settled civil charges in the case.
A little more than two years after the wave of business scandals began breaking, the criminal investigations that ensued are reaching their final phases and into the top ranks of the companies involved. Jeffrey Skilling, a former CEO of Enron Corp., was indicted Feb. 19 on charges of misleading investors in the collapse of the energy trading giant in 2001.
Former Tyco Inc. CEO L. Dennis Kozlowski is on trial now on massive theft charges, as is Adelphia Communications Corp.’s former chief, John Rigas, accused of fraud and conspiracy. The fraud trial of Richard Scrushy, ex-CEO of HealthSouth Corp., is scheduled to begin this summer.
Sullivan’s sentencing was set for June 2, though the date is likely to be postponed until his cooperation is finished.