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Ebbers: Of Motels & Men

NEW YORK -- Is Bernie Ebbers really just a good-hearted, former basketball coach and country bumpkin who knew very little about accounting -- or is he an outstanding actor?

It looks as if that could be what the jury's decision will come down to, in light of new testimony by Ebbers himself today at his trial for fraud here in U.S District Court.

Lead defense attorney Reid Weingarten surprised some observers by calling the defendant, Ebbers, the former WorldCom CEO, to the witness stand today. (WorldCom has since gone through bankruptcy restructuring and is now MCI Inc..)

The line of questioning and Ebbers's testimony painted a picture of a hard-working former jock and basketball coach, a man who had struggled in college, worked many odd jobs, adopted children, and ultimately started building his telecom empire while living in a trailer and managing the first motel he had bought with $650,000 in debt.

But the real nut of his defense appears to be that while running WorldCom as CEO in the period of 2000-2002 when the fraud occurred, Ebbers said he was not involved in the day-to-day accounting of the company, nor was he alerted by former WorldCom CFO Scott Sullivan of any of the accounting problems that later led to charges of fraud.

Not a Bean Counter
"Never did he [Sullivan] tell me that an entry was not right," said Ebbers, referring to accounting decisions made involving the company's line costs. "If he had we wouldn't be here today."

"Did you know that Sullivan was capitalizing line costs?" asked Weingarten, inquiring about one of the biggest portions of WorldCom's accounting fraud, in which line costs were moved out of regular expenses and considered a capitalized expense that could be amortized over many years.

"No, I did not," said Ebbers.

Sullivan has pled guilty to fraud and testified earlier in the trial. His testimony portrayed Ebbers as a hands-on manager who was aware of the accounting strains and the day-to-day pressures of the company trying to make its numbers.

In general, Ebbers described himself as somebody who knew how to "coach" the company and run efforts such as sales and marketing, but he said he had little to do with accounting or the technical sides of the business, even though Sullivan reported to him.

"I know what I don't know... and to this day I don't know technology and I don't know finance and accounting."

The apparent contradiction between Sullivan's and Ebbers's views of things could mean the jury's verdict will be based on a judgment of who's telling the truth, say some experts.

"Here's a guy with a billion dollars who bought company after company, and he's trying to say, 'I'm just a basketball coach, I didn't know what was going on,' " says Jacob H. Zamansky, a securities attorney with Zamansky and Associates who has been observing the trial. "We'll see if that plays out in cross-examination. It's going to come down to Scott Sullivan versus Bernie Ebbers."

Hoops & Bread
And yes, there was the basketball. And delivering bread. And living in a mobile home. There was plenty of local color in Ebbers's testimony, as he told the tale of his eclectic upbringing -- sometimes gesturing with is hands directly to the jury.

There was the promising basketball career, which, as described by Ebbers, was curtailed by thugs. This was followed by a career as a warehouse manager and then some soul-searching which led him to launching his business career, which featured a pattern of rapid-fire acquisitions that started in the lodging business and eventually led to a multibillion-dollar telecom empire.

Here's a snapshot of some of his more entertaining testimony:

  • Ebbers described his upbringing as one of Steinbeckian adventure, a trek that brought him from his native Edmonton, Alberta, to California, where his father worked as an "auto mechanic," and then later to outside Gallup, N.M., where he attended grades 6-10 at a Navajo Indian Reservation, where his parents were involved as teachers. Eventually his family returned to Edmonton when he was in high school.
  • In high school and college Ebbers was a budding basketball star whose career was later cut short by an achilles tendon injury when he was "mugged by hoodlums," he said. This led him to turn to coaching. This became an overaching theme in running WorldCom, he said. "Managing sales and marketing is a bit like coaching."
  • In his initial higher education experiences, at least, Ebbers was apparently not a very good student. "My marks were not very good at the time," said Ebbers of why he left his first attempt at college, University of Alberta, after just one year. He later attended and dropped out of Calvin College in Grand Rapids, Mich., before finally landing at Mississippi College in Clinton, Miss., where he played basketball.
  • "We lived in a two-bedroom house trailer parked behind the hotel," Ebbers said of his earlier experience as a budding hotel magnate.
  • Ebbers penchant for borrowing large sums of money apparently did not start at WorldCom, where he later borrowed hundreds of millions of dollars to acquire timber, boating, and ranch assets backed by his WorldCom stock. He started his business life by borrowing $650,000 to acquire his first motel, he testified. Some of it came from a friend's second mortgage.
  • Ebbers was questioned by his attorney about a dinner at Morton's steakhouse in Washington D.C. at which Scott Sullivan testified he was present. This meeting still remains in contention. Sullivan testifed that the dinner was March 20, 2001, while Ebbers said he was at Morton's on March 21, 2001, and he had the American Express receipt for $268 to back it up. Ebbers also testified that he did not recall who was at the dinner, or whether Sullivan was there. Regardless, he said that he not discuss the accounting treatment of line costs at Morton's. [Ed note: This entry has been updated to clarify Ebbers' testimony about the dinner at Morton's].
  • Early in his hotel days, Ebbers said he developed the unconventional cost-saving practice of distributing towels at the front desk and requiring guests to return them so they wouldn't be charged for taking them.
  • Ebbers's acquisitive nature apparently started in the hotel business, where he eventually parlayed his first acquisition into a group of 7 hotels. He later moved into the telephone business, he said, as a way to fund further acquisitions of motels and hotels.
  • Ebbers testified that discussion in public about his obsession over costs and coffee filters has been overblown. "I was simply acting on a recommendation," he said on his decision to curtail the distribution of free coffee in one of his business units.
  • The whole Internet thing apparently confused him. Ebbers said he was not strong in technical matters and this eventually led him to step aside and yield more responsibility to his COO in 2000. "It became vividly clear to me that I was not technically competent to run WorldCom," Ebbers said of a revelation he had while trying to sell BP $650 million worth of advanced network services -- including VPNs.
Ebbers continues to testify this week, and, when the defense is through, it's expected he will undergo a pivotal cross-examination from the lead prosecutor. If convicted, he faces up to 85 years in prison on nine counts of fraud.

— R. Scott Raynovich, US Editor, Light Reading

DarkWriting 12/5/2012 | 3:25:07 AM
re: Ebbers: Of Motels & Men Or Ronnie's close corollary, "It is better to get forgiveness than permission", which has become the mantra of American business (or American society for that matter) over the last 20 years.

DW
Stevery 12/5/2012 | 3:25:07 AM
re: Ebbers: Of Motels & Men
I do not remember trading arms for hostages.

Haven't seen such an excuse in 20 years.
BlueWater66 12/5/2012 | 3:25:05 AM
re: Ebbers: Of Motels & Men In response to ...."I wish everyone would leave Bernie alone so he can live a quiet peaceful life."

I watched many good, extremely qualified friends suffer through a horrible tech downturn. Many lost their jobs and one even lost his house. Bernie, in a very personal and direct way, made a bad situation much, much worse. He took a general market cycle and tainted it with corruption and greed. I hope he rots in a Mississippi jail.

PS: I have a good friend who worked at MCI well before the meltdown. He characterized the company as corrupt and predicted their meltdown about 36 months before it happened. He bailed at that point, and back then had nothing nice to say about Bernie and his cronies.
optical 12/5/2012 | 3:25:05 AM
re: Ebbers: Of Motels & Men I wish everyone would leave Bernie alone so he can live a quiet peaceful life.
Lite Rock 12/5/2012 | 3:25:01 AM
re: Ebbers: Of Motels & Men Bernie always struck me as an egotesticle control freak and a major league intimidator. If anyone saw the press conference when WC bought MCI, that poor woman reporter didn't know what hit her.

I never saw any signs that Bernie ever bothered to or wanted to integrate any of the 68+ acquisitions. I saw him coming and got out of MCI just before he took over. My bigest mistake was not selling all my stock in the 401k.

For Bernie to have the ego to take the stand and portray himself as ignorant of the details that were "taken care of by others" seems completely in character for him. He seems to have beem much more aware of the technical and financial details than he would want any jury to believe.

Excerpt From May 1999 Red Herring cover story
"The Next Ma Bell"
Beyond reducing its pipeline costs, Mr. Ebbers says that MCI WorldCom has the self-discipline to lower the sales, general, and administrative (SG&A) costs of its service offerings. For a 10-cent-per-minute call, he says that the transport cost is 1 cent, SG&A costs are 2.2 cents, and the access fee paid to a regional Bell operating company (RBOC) is 4 cents for completing the call. With federal regulators likely to do away with some of the access fees in a few years, SG&A will be an even bigger factor in a company's prices and profit margins.

According to Mr. Ebbers, the merger has helped MCI WorldCom whittle its SG&A expenses from 30 percent to 23.5 percent of its operating costs --an expected savings of $900 million for this year.

Oh yes he had to have known what was going on.

All IMHO

GUILTY!!!
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