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Ex-CEO of WorldCom Indicted

March 03, 2004|James S. Granelli and Walter Hamilton | Times Staff Writers

NEW YORK — Bernard J. Ebbers, the onetime milkman and basketball coach who built a global communications empire out of WorldCom Inc., was indicted Tuesday on charges of masterminding the nation's biggest corporate accounting fraud.

The federal indictment came as WorldCom's former chief financial officer, Scott D. Sullivan, 42, pleaded guilty to the same three fraud counts and agreed to testify against his former boss.

Prosecutors allege that the pair inflated revenue, hid expenses and failed to disclose the worsening financial condition of the No. 2 long-distance company, which filed for Chapter 11 bankruptcy in July 2002.

WorldCom, poised to emerge from bankruptcy next month as MCI Inc., has admitted it overstated profit by $11 billion under Ebbers and Sullivan.

Ebbers' lawyer, Reid H. Weingarten, said he and his client were "deeply disappointed" and predicted a jury would clear Ebbers, who resigned as WorldCom chief executive in April 2002.

Tuesday's indictment of Ebbers, 62, joins the plethora of prosecutions stemming from corporate scandals that have bilked investors and lenders out of billions of dollars and prompted stronger corporate governance rules.

"This is the beginning of the end of the big corporate cases," said Jacob Frenkel, a Washington lawyer and former Securities and Exchange Commission enforcement officer.

Sullivan entered his plea 10 floors above the Manhattan courtroom where lawyers on Tuesday presented closing arguments in the trial of Martha Stewart on charges of obstruction of justice. Across the street, the criminal trial of John Rigas, former head of cable company Adelphia Communications Corp., was in progress in another federal courtroom.

In a nearby state court, a fraud trial is winding up against former Tyco International Ltd. Chairman L. Dennis Kozlowski, who is accused of pocketing hundreds of millions in unauthorized compensation and profits on inflated stock.

Meanwhile, former HealthSouth Corp. Chief Executive Richard Scrushy is awaiting trial on charges of orchestrating a $2.7-billion accounting fraud.

Last month, former Enron Corp. CEO Jeffrey K. Skilling was indicted, the latest of nearly 30 indictments of Enron energy traders, accountants and finance executives. The only high-profile executive left uncharged is former Enron Chairman Kenneth L. Lay.

Prosecutors build major corporate fraud cases one indictment at a time. Defendants facing long jail terms -- Sullivan is looking at up to 25 years in prison -- are encouraged to turn on their bosses.

Ebbers built WorldCom from a small, Mississippi-based long-distance company through ever larger acquisitions culminating in the 1998 purchase of MCI for $47 billion. WorldCom developed a global network second only to that of AT&T Corp. and included such customers as the Department of Defense and other federal agencies.

In the late '90s, changes in the telecommunications industry hit WorldCom hard. A glut of fiber-optic cable laid by new competitors such as Global Crossing Ltd. led to sharp price drops.

Sullivan said during his 25-minute court appearance Tuesday that he knew he shouldn't have falsified WorldCom's books but did so to help the company through what he thought was a temporary strain. He sounded a contrite tone, but seemed to go out of his way to stress that he was not seeking financial gain.

"I do not seek in any way to justify these actions," Sullivan said in prepared remarks. "I took these actions knowing they were wrong in an attempt to preserve the company."

Sullivan added that he feels "sincere remorse and a deep sense of contrition."

Ebbers and Sullivan were charged with one count each of securities fraud, conspiracy to commit securities fraud and filing false information to the SEC. In addition to prison, both face millions in fines. Sullivan's punishment could be reduced significantly, depending on his cooperation with the government.

The indictment, handed up in U.S. District Court in Manhattan, charges that Ebbers "insisted that WorldCom publicly report financial results that met analysts' expectations." Sullivan made adjustments to the books each quarter to keep revenue and expenses in line, according to the indictment, which alleges that the two officers knew what they were doing was fraudulent.

Through the scheme, the co-conspirators "inflated and maintained artificially the price of WorldCom common stock," the document alleges. Once an internal audit turned up improper accounting, the company's stock plummeted more than 90%, resulting in shareholders losing $2 billion of stock value.

When WorldCom filed for Bankruptcy Court protection, it listed assets of $107 billion -- about $40 billion more than Enron's -- making it the largest bankruptcy in U.S. history.

Ebbers is expected to turn himself in to authorities in New York today and to be arraigned before U.S. District Judge Barbara S. Jones.

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