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Financial

Reports: It Began With Bernie

The results of two independent investigations of WorldCom comprise an interesting and cautionary tale. Good reading, but not surprising -- and also not likely to hinder the reemergence of newly renamed MCI (Nasdaq: MCIT), sources say.

The reports have been widely read and reported on since their release Monday. One was generated by William McLucas, a former director at the Securities and Exchange Commission (SEC), who worked with Wilmer Cutler & Pickering and PricewaterhouseCoopers. A second report came from former U.S. Attorney General Richard "Dick" Thornburgh, who was appointed by WorldCom's bankruptcy court to create his report, with help from lawyers Kirkpatrick & Lockhart LLP and forensic auditors J.H. Cohn LLP.

Both reports come to similar conclusions, chief among these being that WorldCom's problems emanated from the top down, but were fostered by a wide ranging group of corporate onlookers and participants who failed to act. Here's a list of key points shared by the reports:

  • Bernie Ebbers led the charge. Both reports say former CEO Bernie Ebbers was key to the WorldCom mess. "The fraud was a consequence of the way WorldCom's chief executive officer, Bernard J. Ebbers, ran the Company," the McLucas report states. "Though much of this Report details the implementation of the fraud by others, he was the source of the culture, as well as much of the pressure, that gave birth to this fraud." Thornburgh's report describes "the remarkable concentration of power and authority in one man." McLucas's report describes Ebbers as driven by "building and protecting his own personal financial empire," at whatever risk to the company he oversaw.

  • Checks and balances collapsed. The reports clearly state that WorldCom's fraud was propagated by CEO Bernie Ebbers and implemented by CFO Scott Sullivan. But the company's board, auditors, staff members, lawyers, analysts, and others failed to stop the dishonest activity, resulting in what Thornburgh's report calls "a virtual complete breakdown of proper corporate governance." WorldCom accountants, for example, balked at using non-recurring items to increase revenue entries. Some even looked for new jobs. But none effectively stood up to Sullivan or Ebbers.

  • Intimidation ruled. Rather than make waves, employees and others aware of what was going on at WorldCom looked the other way. Why? Fear of losing jobs, business, or influence with what was viewed as a telecom powerhouse. In Mississippi, WorldCom's status as one of the highest-paying and most prestigious employers was a key factor in keeping employees locked in to the malfeasance, McLucas's report says. WorldCom execs, most notably Sullivan, also gave money to key employees as personal gifts or loans, discouraging them from acting against their directives.

  • Cost figures were fudged. The cost of transmitting voice or data over WorldCom's network was its highest expense, and when it started to compare unfavorably with revenue figures, management cooked the books by capitalizing line costs or turning them into accruals.

  • Acquisitions were problematic. "In the 1990s, the principal business strategy of... [Ebbers]... was growth through acquisitions," states the McLucas report. "The currency for much of that strategy was WorldCom stock, and the success of the strategy depended on a consistently increasing stock price." Unfortunately, acquisitions were often made at Ebbers's whim, with company directors kept mostly in the dark, or fed so little information they couldn't make a solid decision. Standing out sorely is WorldCom's purchase of Intermedia for $6 billion -- a buy that drew a flood of criticism (see WorldCom's Woes Mount). Ebbers pushed it on through with about an hour and a half of due diligence, despite shareholder litigation. "[A] vigilant Board of Directors would have rejected Management's actions," Thornburgh concludes.

  • Debt became currency. As WorldCom's woes mounted, Ebbers and Sullivan traded on their fraudulent revenue figures to obtain massive amounts of money, with no one stopping them. By July 2002, debt had mounted to over $36 billion by July 2002 -- still short of the $41 billion the carrier showed before its bankruptcy protection filing in November 2002.

There's more, and it makes for great reading (copies of the reports can be accessed on FindLaw, a legal information Web site). But what will come of it?

Maybe not much. For its part, MCI is stressing the role of the reports in helping separate the current management from the mean Mr. Ebbers and his henchmen (see MCI Responds to Reports). A hearing scheduled by the bankruptcy court of the Southern District of New York is set for this afternoon (June 11), and consensus seems to be that the judge will opt to accept the SEC's proposed $500 million civil penalty for the carrier (see WorldCom Plans Re-Emergence and MCI Settlement: What's Next?). Scott Sullivan's still facing charges and maintaining his innocence. And Ebbers has lost money but remains untouched by civil or criminal charges -- a condition that's likely to persist.

"If anything were going to happen regarding [Ebbers's] involvement, it would have happened by now," says Curtis Price, program director at Stratecast Partners. MCI's likely to reemerge this fall, albeit with its own set of challenges, he thinks.

Bernie's lawyers agree. They say the reports don't contain any evidence damning Ebbers, despite all the media attention they're getting. "We remain confident that the government investigators examining this case will conclude that Mr. Ebbers engaged in no criminal or fraudulent conduct during his tenure at WorldCom," state Reid Weingarten and other attorneys representing Ebbers, in a statement released June 9.

— Mary Jander, Senior Editor, Light Reading

materialgirl 12/4/2012 | 11:56:06 PM
re: Reports: It Began With Bernie Bernie and Ken Lay go free, while Martha gets skewered for 4k shares. The real rot is at the top.
atmguy 12/4/2012 | 11:56:03 PM
re: Reports: It Began With Bernie
It depends on who you supported in the last
election; Comapred to Bernie Ebbers and Ken
Lay, Martha's crimes are insignificant, but
that is justice for you.

atmguy
materialgirl 12/4/2012 | 11:56:01 PM
re: Reports: It Began With Bernie That is my point. Now they want to know what books you are reading. I suppose if you read the wrong thing, or vote the wrong way, you will get an IRS audit from hell, or jail time for some trumped up charge. It feels great to know you live in a free country, with justice for ALL.
billy_fold 12/4/2012 | 11:55:53 PM
re: Reports: It Began With Bernie I'm not sure that the fat lady has sung on the Bernie case yet. Sometimes the wheels of justice roll very slowly. I predict that we have more to hear from Scott Sullivan.


-billy
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