Former WorldCom Inc. accounting director Buford “Buddy” Yates Jr. pleaded guilty today to assisting in a massive accounting fraud that helped drive the nation’s second-largest long-distance carrier into the biggest bankruptcy filing in U.S. history.
Legal experts said Yates’s cooperation with prosecutors could turn up the pressure on former WorldCom chief financial officer Scott D. Sullivan to cooperate in an eventual case against former chief executive Bernard J. Ebbers.
Yates, 46, admitted to two counts of securities fraud and conspiracy. He faces a maximum of 15 years in prison. Yates’s attorney, David Schertler, said the court could impose a lighter sentence because of his client’s cooperation with prosecutors. Schertler said Yates has been aiding the government’s case for two months.
Magistrate judge Andrew J. Peck said he would recommend that the federal judge overseeing the WorldCom case accept Yates’s plea. Two other accounting officials who worked under Yates, Betty Vinson and Troy Normand, are also likely to plead guilty and aid prosecutors.
Last month, former WorldCom controller David F. Myers pleaded guilty in what prosecutors contend was a conspiracy to inflate the telecommunications company’s earnings by $5 billion by accounting for routine operating expenses as long-term capital expenditures.
WorldCom, along with Enron Corp., has become a major symbol of the improper accounting that some companies allegedly used to deceive investors during the stock boom of the late 1990s. The firm is based in Clinton, Miss., but has several thousand employees in the Washington area. It is the parent of MCI, the Arlington-based long-distance carrier, and UUNet, the Ashburn Internet service provider that carries a large portion of the world’s Internet traffic.
WorldCom filed for bankruptcy protection in July after disclosing it had falsely booked $3.9 billion in expenses over the past five quarters. In August, the company reported that it had mishandled an additional $3.8 billion in the form of reserve accounts designed to cushion it from losses.
Prosecutors say Yates helped execute the accounting fraud at the direction of former chief financial officer Sullivan, who was indicted in August and pleaded not guilty.
In his brief court appearance today, Yates expressed remorse and said he knew he was making improper changes to the firm’s books. But he said he made the changes under pressure by top WorldCom executives.
“I came to believe that the adjustments I was being directed to make in WorldCom’s financial statements had no justification and contravened generally accepted accounting principles,” he said, looking down and reading quietly from a prepared statement.
“I concluded that the purpose of these adjustments was to incorrectly inflate WorldCom’s reported earnings in order to meet the expectations of securities analysts and mislead the investing public.”
Schertler said outside the court that Yates had made his concerns clear to WorldCom’s management but was ignored. “He strenuously objected to making those adjustments,” Schertler said, according to Bloomberg News. “When he raised those objections, he was told they had been approved by the highest levels of WorldCom management.” Schertler declined to say whether the “highest levels” included Ebbers.
Ebbers has not been charged, but attorneys following the case said today that in securing a guilty plea from Yates, the government appears to be building toward an eventual case against the former chief executive.
“I’m sure they are trying to go to the top, and Yates is going to be key to getting there,” said University of Pittsburgh law professor Sandra D. Jordan, a former federal prosecutor. “They are going to want Yates to testify before a grand jury, if he hasn’t already. They will probably want him to take a polygraph test, and then of course at any trial” against Ebbers or other top WorldCom executives “they will want him to testify” about what he was told to do and by whom.
Ebbers’s attorney, Reid H. Weingarten, did not return phone calls today.
Sullivan’s attorney, Irvin B. Nathan, did not return a call today. He has said in the past that his client was a victim of a “rush to judgment” in the WorldCom case.
Yates remains free on a $500,000 bond. His sentencing hearing was set for Jan. 9.
Also today, the Securities and Exchange Commission filed a companion civil suit against Yates, charging him with fraud. The agency is seeking return of all “ill-gotten gains” and an order barring Yates from serving as an officer or director of a public company. It is the third SEC action in the case. Previously, the agency filed a civil enforcement against WorldCom itself and a fraud case against Myers.
Schertler said Yates did not personally profit from fraud at WorldCom. “Mr. Yates was in a position of following the chain of command and voicing his objections and protestations to the adjustments that were being made,” he said. “I think his biggest mistake is he didn’t go outside the chain of command.”