New questions about whether $408 million in company loans to former WorldCom CEO Bernie Ebbers were properly handled could open new doors for prosecutors, regulators and investors.
A bankruptcy-court report released Monday shines new light on Ebbers, whom prosecutors are eyeing but haven’t charged in the telecom’s admission of more than $9 billion in accounting misdeeds.
The report raises the legal stakes for WorldCom board members who approved the loans and for WorldCom, which faces questions about proper disclosure. If the loans weren’t properly disclosed, Ebbers, some board members and the company could be accused of misleading investors. But former prosecutors say the report is light on evidence.
”Can I as a former prosecutor draft a Securities and Exchange Commission complaint or criminal indictment based on this? Probably,” says Jacob Frenkel of Smith Gambrell & Russell. ”There would be a lot of holes. Those holes are the evidence.”
The report by Dick Thornburgh, a former U.S. attorney general assigned to WorldCom’s Chapter 11 case, says the first loans were authorized by the board’s compensation committee in September 2000 but weren’t disclosed until two months later.
Thornburgh also questioned whether WorldCom should have disclosed that Ebbers used more than $27 million of the loans for personal reasons, including payments for a house, expenses of a family member and payments to his own business.
But it’s not clear that the issues were ”material” to investors, says attorney Thomas Ajamie. Also, ”It could be difficult to show a breach of securities or fraud laws,” he says. ”It’s an issue of intent.”
The report also questioned whether WorldCom was kept adequately apprised of Ebbers’ shrinking net worth, which would affect his ability to repay. That could prompt lawsuits on behalf of shareholders.
What’s more, the report found different accounts about whether the compensation committee should have asked the board to approve the loans. Stiles Kellett, former head of the committee, said an in-house lawyer told the committee that board approval wasn’t required. But the lawyer, P. Bruce Borghardt, says he was never asked his opinion, the report says.
Such rifts might indicate shoddy decisions, but they might not help criminal or civil cases, Ajamie says.
”Directors and officers are allowed fairly wide latitude in judgment,” Ajamie says.
Thornburgh says he withheld evidence in deference to probes by prosecutors and the Securities and Exchange Commission. Mostly, his report criticizes WorldCom as poorly managed and cites a ”culture of greed” that led to fraud as a means to please Wall Street and boost its share price.
Ebbers, the report says, had allegedly personally guaranteed or pledged WorldCom stock as security for more than $1 billion in personal and business loans. As Ebbers’ WorldCom shares tanked, though, the banks demanded payment.
WorldCom gave him several loans in 2000, 2001 and 2002 so he wouldn’t have to sell his stock, which would have further depressed the share price. But that also placed shareholders at risk and ”himself under intense pressure to support the company’s share price,” the report says.