Bernard Ebbers was the CEO of WorldCom, he had built the company into one of the most successful telecommunications companies at the time (“Bernard Ebbers”). At one time, WorldCom was the second largest long distance carrier in the United States behind AT&T. In 2002 Ebbers resigned from the company with accusations of fraud and conspiracy clouding his position. In 2004, U.S. Attorney General John Ashcroft announced at a press conference that Ebbers had been indicted on charges of securities fraud, filing fraudulent statements with the U.S. Securities and Exchange Commission (SEC), and conspiracy to engage in securities fraud (Langorce). Ebbers was ultimately convicted and sentenced to twenty five years in federal prison in 2005, and is serving his sentence still at Oakdale Federal Correctional Complex in Louisiana.
Bernie Ebbers was born in Edmonton, Canada, in 1941. His father was a traveling salesman, so Ebbers found himself moving a number of times during his childhood, including California and New Mexico. After attending Mississippi College on a basketball scholarship, he ran a number of hotel chains around the state of Mississippi (“Bernard Ebbers”). In 1983, Ebbers was introduced to a number of investors that planned on taking advantage of the forced AT&T divestiture (Padgett). During a then, fortuitous meeting at a local diner, the group developed plans to establish Long-Distance Discount Services (LDDS). Once the company was established, Ebbers became CEO in 1985, and was on a mission to grab as many independent telecommunications companies as possible, in the end, accumulating over 60 companies. His goal – to achieve economies of scale (Padgett).
WorldCom purchased or merged with Advanced Communications Corp. in 1992, Metromedia Communication Corp. in 1993, Resurgens Communications Group in 1993, IDB Communications Group, Inc in 1994, Williams Technology Group, Inc. in 1995, and MFS Communications Company in1996 ("MCI WorldCom, Inc.”). WorldCom, in an intensely complex maneuver, also bought online icon CompuServe from its parent H&R Block. The company kept the CompuServe Network Services Division, but sold the online service to America Online, and in exchange obtained AOL's network complex, ANS. The Digex acquisition in 2001, another complex transaction, allowed WorldCom to acquire Digex's parent, Intermedia Communications. In the end, WorldCom sold Intermedia's non-Digex components to the company Allegiance Telecom. Ebbers and his group had acquired enough companies to become home for many of the nation’s largest corporations. In 1995, once they purchased IBD, the company changed its name to WorldCom (Hiraoka). The acquisition of MFS Communications, Inc. and UUNET came next, one of the largest Internet access companies along with AOL’s networking component. This acquisition was, at the time, one of the largest in U.S. history at $12 billion. Ebbers did not stop there, he was able to outbid British Telecom and acquired MCI in 1997, by using his WorldCom stock in the exchange. His stock had increased by 7,000% during the 90s (Padgett). MCI was purchased for $40 billion. In 1999, Ebbers planned to purchase rival Sprint Communications, but U.S. and European regulators put the kibosh on the deal, raising antitrust concerns (Padgett).
This event marked the beginning of the end for Ebbers (Padgett). Ebbers had become a very wealthy man due to the ever escalating value of his WorldCom share ownership. However, the advent of 2000 saw telecommunications demand on the decline, the dot-com bubble bursting, and on March 10, 2000, the NASDAQ fell by 78%. WorldCom’s stock price plummeted. Banks started demanding that Ebbers collateralize margin calls on his WorldCom stock used to finance a number of other Ebbers businesses, like his yachting company. Ebbers asked the board of directors to give him substantial guaranteed loans to cover the calls (Padgett). The board agreed to the loans which totaled over $408.2 million, reasoning that it was the better choice, as opposed to him unloading large blocks of shares, since nervous investors would likely all jump ship, further eroding WorldCom shares. Reminiscing, Ebbers acknowledges "We probably shouldn't have done it" (Padgett). The times were not good, and numerous telecom companies, like WorldCom, could not stop the bleeding. It started to become apparent that Ebbers enjoyed dealmaking and company acquisition more than he cared about integrating and operating the companies once he acquired them. A team of internal auditors worked secretly to unearth the fraud. Once they got to the bottom of it, they notified their auditing committee and the board of directors, who dismissed Sullivan and others. Ebbers resigned as CEO of WorldCom in April of 2002. On July 21, 2002, WorldCom sought Chapter 11 bankruptcy protection (Markon and Sandberg).
In 2002 WorldCom acknowledged $3.85 billion in use of fraudulent accounting methods, to shield plummeting earnings to bolster the price of WorldCom stock. The $3 billion figure eventually exploded into $11 billion (Markon and Sandberg). On July 8, 2002, Congressional hearings were held by the U.S. House Committee on Financial Services, and Ebbers and Sullivan, the company’s CFO, were subpoenaed to appear (Maloy). When questioned, Ebbers said, "I do not believe I have anything to hide, I believe that no one will conclude that I engaged in any criminal or fraudulent conduct" (Arak). Ebbers and Sullivan then invoked their Fifth Amendment right of non-self-incrimination, on almost every question asked, citing ongoing investigations by the U.S. Justice Department and the SEC, as the hearing became increasingly contentious. Investigators with the House Energy and Commerce Committee learned from company attorneys that Ebbers knew that millions of dollars had been manipulated from ordinary debt to capital debt, and that this information had come directly from Scott Sullivan (Arak).
Sullivan, who was charged with fraud, surrendered to authorities in August of 2002 after requesting not to be arrested at his home (Markon and Sandberg). In a plea deal Sullivan, who was also facing 25 years in jail, testified against Ebbers ("Scott Sullivan"). Ebbers was arrested in 2005, and convicted of nine counts of securities fraud and conspiracy in March ("Former WorldCom”; “Bernard Ebbers”). He is currently serving 25 years at Oakdale Federal Correctional Complex in Louisiana (“Bernard Ebbers”).
The WorldCom board of directors conducted their own investigation of improprieties and issued a 340 page document called the Report of Investigation by the Special Investigative Committee of the Board of Directors of Worldcom, Inc. ("Report of Investigation”). The United States Securities and Exchange Commission filed a lawsuit in the District Court Southern District of New York against WorldCom, Inc. alleging five issues (“United States District Court”). First, that starting on or around 1999 through 2002, WorldCom engaged in behavior that deceived its shareholders. The company agreed that at this time, due to inappropriate accounting methods of which they were not aware, the company over valued its reported income in its disclosure documents by as much as $9 billion. Next, the SEC alleged that the company maneuvered its financial outcome by diminishing its operating expenses through the nondisclosure of various reserves against operating expenses. Further, WorldCom recharacterized expenses as capital assets instead of what they actually were. The actions taken were inconsistent with GAAP accounting standards, and were not disclosed to investors even though the practice was new in relation to other actions they had taken previously. The disclosure methods fraudulently lowered company expenses and consequently had the impact of bolstering the company’s publically reported income during this period. Therefore, the company’s consistent and ubiquitous missteps in not following GAAP practices, and utilizing proper internal controls, led to an un-quantified overstatement of its income. Also, fraudulent accounting entries regarding “line costs” (“United States District Court”) were within the company’s key operating expenses. WorldCom hid its actual line costs by lowering reserve against line costs and by moving line costs to the capital asset ledger. These actions allowed WorldCom to appear to be a profitable business, when in fact, it was not, hiding losses the company had sustained. These practices were constructed to inflate income to coordinate with Wall Street commentator estimates and buoy the price of stock in the marketplace (“United States District Court”).
Next, while adjusting line costs to inflate its income, WorldCom continued selling securities providing deceitful and materially inaccurate financial records in the course of those sales. Finally, by employing such illicit behavior, WorldCom was in violation of SEC’s “anti-fraud, reporting, record-keeping, and internal controls provisions” (“United States District Court”). The SEC sought to enjoin WorldCom’s violations and require the company to pay monetary penalties.
In addition, to the case against the company, numerous individual cases were filed as well ("Spotlight on SEC v WorldCom”). Enforcement actions were filed against Bernard Ebbers; Scott Sulivan, former Chief Financial Officer; David F. Myers, WorldCom Comptroller; Buford Yates, Jr., Director of General Accounting; and Betty L. Vinson and Troy M. Normand, former accountants at the company. The SEC agreed to settle the WorldCom case. Initially, there was a proposed WorldCom settlement (“In WorldCom Case”) and later a supplement to the proposed settlement was prepared ("SEC Files Supplement”). The proposed settlement was filed on May 19, 2003, while the supplement to the proposed settlement, filed on July 2, 2003. The initial proposed settlement required WorldCom to pay $1,510,000,000 in civil penalties. If the company completed the bankruptcy process, with the approval of the Bankruptcy Court, the SEC would accept $500,000,000. The supplement to the proposed settlement added that if a reorganization was approved by the bankruptcy court, the Official Committee of Unsecured Creditors of WorldCom would receive the transfer of common stock valued at $250,000,000, for the benefit of the victims of the fraud, so that they could share in the benefits of owning WorldCom stock once it emerged from bankruptcy ("SEC Files Supplement”).
A federal judge approved the supplemental agreement, and WorldCom was ordered to pay $750 million to settle the SEC lawsuit (Feder). Judge Jed S. Rakoff of the United States District Court for the Southern District of New York ordered the settlement, ending the financial phase of the case. In addition to the monetary penalties, a non-monetary agreement was established. Richard C. Breeden, formerly, the SEC Chairman, became monitor of the company’s efforts to overhaul itself (Feder).
Arak, Joel. "Investigators: Ex-CEO Was In The Know." CBS News. CBS Interactive, Inc. 18 July 2002. Web. 27 August 2016. <http://www.cbsnews.com/news/investigators-ex-ceo-was-in-the-know/>.
"Bernard Ebbers." Biography. A&E Television Networks, LLC. n. d. Web. 27 August 2016. <http://www.biography.com/people/bernard-ebbers-233081#synopsis>.
Feder, Barnaby. "TECHNOLOGY; WorldCom Agrees to Pay $750 Million In S.E.C. Suit." The New York Times. The New York Times Company. 8 July 2003. Web. 27 August 2016. <http://www.nytimes.com/2003/07/08/business/technology-worldcom-agrees-to-pay-750-million-in-sec-suit.html>.
"Former WorldCom chairman Ebbers arrested." UPI. United Press International, Inc. 8 July 2002. Web. 27 August 2016. <http://www.upi.com/Former-WorldCom-chairman-Ebbers-arrested/53581078325211/>.
Hiraoka, Leslie, S. Underwriting the Internet: How Technical Advances, Financial Engineering, and Entrepreneurial Genius Are Building the Information Highway. New York: M.E.Sharpe, 2005 Print.
"In WorldCom Case, SEC Files Proposed Settlement of Claim for Civil Penalty." Securities and Exchange Commission. 19 May 2003. Web. 27 August 2016. <https://www.sec.gov/litigation/litreleases/lr18147.htm>.
Langorce, Aude. "Ex-WorldCom CEO Bernie Ebbers Indicted." Forbes. Forbes, Inc. 2 March 2004. Web. 27 August 2016. <http://www.forbes.com/2004/03/02/cx_al_0302ebbers.html>.
Maloy, T.K. "Ebbers, Sullivan invoke 5th Amendment." UPI. United Press International, Inc. 8 July 2002. Web. 27 August 2016. <http://www.upi.com/Ebbers-Sullivan-invoke-5th-Amendment/33941026161648/>.
Markon, Jerry and Sandberg, Jared. "Two Ex-WorldCom Officials Charged With Securities Fraud." The Wall Street Journal. Dow Jones & Co. 2 August 2002. Web. 27 August 2016. <http://www.wsj.com/articles/SB1028236507333354040>.
"MCI WorldCom, Inc. - Company Profile, Information, Business Description, History, Background Information on MCI WorldCom, Inc." Reference for Business. n. d. Web. 27 August 2016. <http://www.referenceforbusiness.com/history2/10/MCI-WorldCom-Inc.html>.
Padgett, Tom. "The Rise And Fall Of Bernie Ebbers." Time.com. Time, Inc. 5 May 2002. Web. 27 August 2016. <http://content.time.com/time/magazine/article/0,9171,235450,00.html>.
"Report of Investigation by the Special Investigative Committee of the Board of Directors of Worldcom, Inc.." Securities and Exchange Commission. 31 March 2003. Web. 27 August 2016. <https://www.sec.gov/Archives/edgar/data/723527/000093176303001862/dex991.htm>.
"Scott Sullivan." Biography. A&E Television Networks, LLC. n. d. Web. 27 August 2016. <http://www.biography.com/people/scott-sullivan-235388>.
"SEC Files Supplement to Proposed Worldcom Penalty Settlement; Proposal Subject to District and Bankruptcy Court Review and Approval." Securities and Exchange Commission. 2 July 2003. Web. 27 August 2016. <https://www.sec.gov/news/press/2003-79.htm>.
"Spotlight on SEC v WorldCom." Securities and Exchange Commission. n. d. Web. 27 August 2016. <https://www.sec.gov/spotlight/worldcom.htm>.
"United States District Court Southern District of New York." Securities and Exchange Commission. 5 November 2002. Web. 27 August 2016. <https://www.sec.gov/litigation/complaints/comp17829.htm>.