WorldCom's former CFO and controller face fraud and conspiracy charges UPDATED 6:30PM

August 1, 2002

2 Min Read
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
http://www.lightreading.com

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