Ex-WorldCom Execs Charged With Fraud

Two former WorldCom Inc. (Nasdaq: WCOME) executives -- chief financial officer Scott Sullivan and former controller David Myers -- surrendered to the FBI Thursday morning at an undisclosed location in Manhattan. Both men are charged with securities fraud, conspiracy, and making false statements to the Securities and Exchange Commission (SEC), according to the seven-count criminal complaint.

Both men were released on bond Thursday afternoon after a hearing in a Manhattan federal court.

If Myers and Sullivan are indicted and convicted, each could receive up to 65 years in prison, according to U.S. Attorney General John Ashcroft, who spoke at a news conference this afternoon. "Corrupt corporate executives are no better than common thieves when they betray their employees and steal from their investors," he said.

Sullivan and Myers were dismissed from WorldCom in June after the company admitted it had inflated profits by falsely accounting for nearly $4 billion in expenses (see WorldCom Goes Boom and WorldCom Finger-Pointing Begins ). On July 21, WorldCom filed for Chapter 11 bankruptcy protection, the largest such filing in U.S. history (seeWorldCom Files for Bankruptcy).

Around July 2000, WorldCom's expenses as a percentage of its total revenue began to rise, and its rate of earnings growth fell substantially, putting it at risk of failing to meet Wall Street analysts' expectations, according to the court papers.

Thereafter, Sullivan "devised a scheme to hide WorldCom's increasing expenses by causing substantial portions of WorldCom's line costs to be transferred from WorldCom's income statement into its capital expenditure accounts," the papers said. "This transfer allowed WorldCom to defer recognizing a substantial portion of its current operating expenses, thereby allowing WorldCom to report higher earnings."

Line costs are the fees WorldCom pays to use or lease facilities belonging to third parties.

While WorldCom had reported that its line costs, as a percentage of overall revenues, remained at less than 42 percent during the three-year period from 1999 to 2001, the complaint alleges that WorldCom's line costs for 2001 were actually about 50 percent of its overall revenues.

Sullivan directed Myers to see that WorldCom's accounting department made the necessary journal entries to "transfer certain line costs from WorldCom's income statement to capital expenditure accounts on WorldCom's balance sheet," the court papers said.

So far, according to a Justice Department spokesman, no warrants have been issued for the arrest of Bernie Ebbers, who was WorldCom's CEO at the time.

— Phil Harvey, Senior Editor, Light Reading
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MP_UK 12/4/2012 | 10:01:22 PM
re: Ex-WorldCom Execs Charged With Fraud ...multi millionaire or not, must be shitting himself right now!
It seems what goes around certainly does come around, now bring on Ebbers, Andersen's, et al.
52616 12/4/2012 | 10:01:21 PM
re: Ex-WorldCom Execs Charged With Fraud I wonder how Bernie and Scott will look in orange?
RJC 12/4/2012 | 10:01:20 PM
re: Ex-WorldCom Execs Charged With Fraud Petty sniping aside, the NPR summary this morning specifically said that the justice dept was hoping to cut plea agreements with these two in exchange for testimony against Ebbers.

Gotta wonder if Bernie is looking at south pacific islands this morning.
Dr.Q 12/4/2012 | 10:01:19 PM
re: Ex-WorldCom Execs Charged With Fraud There are clearly many more who participated in one way or another who should be headed to jail.

- Dr. Q
switchrus 12/4/2012 | 10:01:19 PM
re: Ex-WorldCom Execs Charged With Fraud "Gotta wonder if Bernie is looking at south pacific islands this morning."

IMHO Bernie and some of the others have more to fear from investors who have lost a substantial amount of their retirement than prison time.

Local TV news has had many features on Senior citizens whose retirement savings are gone due to the actions by Bernie and others. I am not condoning or encouraging personal revenge by anyone, just observing that desperate people who have little else to loose, often time take drastic actions.
Rightfielder 12/4/2012 | 10:01:18 PM
re: Ex-WorldCom Execs Charged With Fraud I expect the concept of "plausible deniability" to take on a whole new meaning throughout this entire sordid episode....
StartUpGuy1 12/4/2012 | 10:01:13 PM
re: Ex-WorldCom Execs Charged With Fraud I would like to see Jack Grubman from Goldman Sachs go away in hand cuffs and stand trial with the Sullivan, Myers and Ebbers. The investment community that benefited so much from the M&A orgy at Worldcom now is claiming "we were mislead just like everyone else".
Sorry, that dog just won't hunt. They are as guilty of fraud as the Worldcom execs, even more so since it was on recommendations from "impartial analysts" like Grubman that individual investors bought the stock.

Just a bit of a vent....
52608 12/4/2012 | 10:01:13 PM
re: Ex-WorldCom Execs Charged With Fraud Velio Sales VP Mike Ofstedahl was indicted on criminal and civil charges by the SEC in connection with alleged insider trading while he was VP at Adaptec in 1999 accordingto a story in today's San Jose Mercury News. He reportedly funneled hundreds of thousands of dollars worth of ilicit trading profits through his dentist who has turned State's evidence and is cooperating wth the prosecution.
wilecoyote 12/4/2012 | 10:01:12 PM
re: Ex-WorldCom Execs Charged With Fraud Here's what probably happened: Mike O. may have answered his dentist's question:"how's business?" Mike may have said "very good thanks." Dentist finds out ADPT is reporting the next day, goes and buys the stock. You won't find Mike profiting from the transaction so much ado about nothing. If anyone gets seriously roughed up it'll be the dentist.
Nomoredemo 12/4/2012 | 10:01:02 PM
re: Ex-WorldCom Execs Charged With Fraud I wonder how Bernie and Scott will look in orange?

Dont get too excited, these guys can afford big gun lawyers a la Johnny Cochrane . I wouldnt be surprise if they dont make look like victims of the society at the end of it ...

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