Posted on 06/09/2003 11:47:00 PM PDT by Ernest_at_the_Beach
NEW YORK -- Top management at WorldCom Inc. , including former Chief Executive Bernard J. Ebbers, and dozens of employees conspired together beginning in the late 1990s to carry out massive and systematic fraud at the company, according to the findings of two long-awaited external investigations released Monday.
The reports describe how members of WorldCom's management worked to falsify nearly every financial result reported by the company, in an increasingly desperate bid to keep its sagging fortunes concealed from investors. The reports criticize not only top management, but also fault an utter breakdown in the cornerstone of the company's corporate-governance structure, including failures by its external and internal auditors, lawyers and board members to adequately play their role as gatekeepers.
What emerges is a startling picture that contrasts with the initial image of the fraud as the brainchild of one top manager, Scott Sullivan, the company's former chief financial officer, and his immediate lieutenants. While the reports provide extensive detail about the pressure Mr. Sullivan placed on others -- handing out $10,000 checks, for instance, to at least seven employees involved in the fraud -- they build a case that many participated in deliberate and repeated steps, quarter after quarter, to fabricate WorldCom's results.
If the conclusions of the reports are substantiated, both would provide a potential roadmap for prosecutors to bring criminal charges against other employees, particularly Mr. Ebbers, the company's founder and longtime chief who brought WorldCom seemingly out of nowhere to become one of the most celebrated executives of the stock market boom. WorldCom has been operating under bankruptcy protection since the fraud, which now tops $11 billion, was discovered last June.
Company officials say that anyone connected to the fraud has left or been dismissed and that MCI has taken aggressive steps to install more controls.
In perhaps the most damaging document on Mr. Ebbers to date, the report by William McLucas of the law firm William Cutler & Pickering details a memo that he wrote to Ron Beaumont, the company's chief operating officer, on July 10, 2001. It was during this time that company executives were seeking out one-time revenue items to prop up its sagging revenue from 8% to 12%. The exercise became so routine quarter after quarter that it became known internally as "Close the Gap."
The document from Mr. Ebbers was a rare find by investigators because he didn't use e-mail and kept his written correspondence to a minimum. In the memo, Mr. Ebbers asked Mr. Beaumont about the progress of identifying such one-time items. "I would ask that you get with John McGuire and (Mike) Higgens and anyone else who works on those issues that had to happen in order for us to have a chance to make our numbers -- we should know those by now."
The memo from Mr. Ebbers suggested to Mr. McLucas that Mr. Ebbers not only knew about the one-time items, but also understood they were being used to " close the gap." The allegations in the report provide an indication of how prosecutors, who have been asking witnesses in recent weeks about Mr. Ebbers's role in the effort to improperly boost revenue at WorldCom, could charge Mr. Ebbers for his role in the fraud.
Mr. Higgens later wrote in an e-mail that he had gone over the numbers with Mr. Ebbers and others, but cautioned them not to forward the monthly revenue reports that included the two sets of numbers. "Bernie is very concerned about forwarded mon rev reports," said Mr. Higgins in an e-mail dated July 13. The company later reported its earnings on July 26.
The report by Mr. McLucas also says that Mr. Ebbers participated in meetings about boosting the company's revenue from 6% to 12% in the third quarter of 2001 with a host of one-time items. This is when the "Close the Gap" exercise peaked inside WorldCom, as previously reported. The third quarter raises additional issues of disclosure because company officials specifically said there were no such one-time items.
Mr. Ebbers' attorney, Reid Weingarten, couldn't immediately be reached for comment.
Both reports also discuss actions that suggest insider trading by Mr. Ebbers. A second report by the law firm of Kirkpatrick & Lockhart LLP, led by former U.S. Attorney General Dick Thornburgh, along with the report by Mr. McLucas, points to stock he sold for $70 million in late September 2000 that was made public on Oct. 3. Mr. Ebbers made the sale, the reports say, after receiving information about the company's downturn in revenue. WorldCom didn't give investors any negative guidance on this information until Nov. 1. Further, Mr. Ebbers's sale contrasts with an internal policy he had established only months earlier that employees couldn't sell within 30 days of earnings.
The report also details how WorldCom executives deliberately kept the company's auditors, Arthur Andersen LLP, in the dark by altering key documents and denying the firm access to the database where the most sensitive financial numbers were stored. The report by Mr. McLucas questions why Andersen didn't complain to the company's board or its audit committee about why it was systematically denied access to crucial numbers by company executives. Still, the accounting firm kept signing off on WorldCom's numbers, which company executives used to silence questions about its numbers to critics.
In one particularly blatant instance in the third quarter of 2001, the McLucas report found that executive Stephanie Scott altered the documents submitted to Andersen to conceal what company executives had done. Ms. Scott was head of regulatory reporting.
In a second instance, Ms. Scott congratulated Lucy Wood, head of WorldCom's U.K. operations, for reporting that she was able to withhold financial information from Andersen officials at a meeting. "Pretended ignorance! No month on month analysis ...," Ms. Wood wrote to Ms. Scott and others. "Thanks Lucy, Great job," Ms. Scott wrote back to her. Ms. Wood later told investigators the e-mail was misconstrued. Ms. Scott couldn't be reached for comment.
Both have left the company, along with dozens of others who the reports say participated in the fraud.
The reports' conclusions that the company had a culture of fraud are likely to add ammunition to the arguments of those who oppose the emergence of the company, now named MCI, from bankruptcy later this year and those who are fighting the company's proposed $500 million settlement with the Securities and Exchange Commission (news - web sites) (News - Websites). A hearing on the proposed settlement is scheduled for Wednesday, and the settlement is being opposed by a coalition of unions, competitors and some politicians. MCI officials have been bracing themselves for months for the release of the reports, which was delayed in March after prosecutors asked for more time to interview witnesses. WorldCom paid for both reports and commissioned the inquiry by Mr. McLucas at a cost of $40 million. Mr. Thornburgh was appointed as bankruptcy examiner after WorldCom filed for Chapter 11 bankruptcy protection last July. Since the WorldCom fraud was first disclosed in June 2002, much of the attention has been paid to $3.8 billion of line costs that Mr. Sullivan and others improperly counted as a capital expense, instantly boosting the firm's bottom line by spreading out the cost over many years. The report by Mr. McLucas shows how officials manipulated a host of other numbers, from the company's revenue, to its depreciation reserves and accounts set aside to cover the company's taxes. The report finds that company officials decided what they wanted their tax rate to be and then drew from the reserves to meet that rate. The pressure to do what management ordered was at times intense. In the second quarter of 2000, David Myers, the company's comptroller wrote to David Schneeman, who was then the acting chief financial officer of UUNet, WorldCom's Internet backbone, asking him to release $50 million of reserves. When Mr. Schneeman refused, Mr. Myers balked: "I guess the only way I am going to get this booked is to fly to DC to do it myself," wrote Mr. Myers in an e-mail to the executive. The documents show that Mr. Sullivan was also quick to attack any employees who questioned the numbers. When one financial analyst prepared a budget that reflected actual costs, Mr. Sullivan mocked the employee. "This is complete, complete garbage. What I am supposed to do with this? This is a real work of trash," wrote Mr. Sullivan. The report by Mr. Thornburgh said that WorldCom's board of directors was often kept in the dark, particularly when it came to its more than 60 acquisitions. " Several multibillion dollar acquisitions were approved by the Board of Directors following discussions that lasted for 30 minutes or less and without the Directors receiving a single piece of paper regarding the terms or implications of the transactions," said the report by Mr. Thornburgh. In addition, the report says, management apparently made material changes to the terms of the company's acquisition deal with Intermedia Communications Inc. without seeking board permission, despite issuing a press release in February 2001, saying the board had approved the changes. -By Rebecca Blumenstein, The Wall Street Journal; 212-416-4337. -By Susan Pulliam, The Wall Street Journal; 212-416-2137
Let's see if stockholders are protected from fraud and the bondholders do not gain if there was any fraud or knowledge of the misadventures of executives on their part.
I can't believe the bondholders, who should have been scrutinizing the books as part of their decisions, weren't aware of the shennanigans.
I hope every sleazy little detail comes out on Ebbers, Lay, etc.
May everyone involved in these crimes rot in jail.
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