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Merger Scrutiny Worried Sullivan

WorldCom's former finance chief testifies that fears of discovery scuttled a Verizon deal.

February 11, 2005|From Reuters

A potential 2001 merger of WorldCom Inc. and Verizon Communications was scuttled by internal concerns over accounting tricks at WorldCom, jurors in the fraud trial of former WorldCom Chief Executive Bernard J. Ebbers were told Thursday.

Onetime finance chief Scott D. Sullivan, who has pleaded guilty to fraud and is cooperating with prosecutors in hopes of leniency, said he became concerned that false accounting would be uncovered when Verizon began taking a closer look at the company's books, a process known as due diligence.

Sullivan talked about the failed merger discussions during his fourth day of testimony in federal court in New York. Ebbers, his former boss, is facing charges of fraud and conspiracy linked to an $11-billion accounting scandal.

Sullivan said he brought his concerns to Ebbers, recommending that he kill merger talks between the two companies.

"I said to Bernie, 'If we get to the next step with Verizon where we start to exchange nonpublic information, the details of our financial statements, I have concerns in the line cost and revenue areas,' " Sullivan testified, referring to two areas in which WorldCom had made questionable accounting entries.

Sullivan said Ebbers replied: "You're right. This probably isn't a good time to be talking to Verizon anyhow because our stock isn't where it needs to be."

Jurors were told that in the months before and after discussions with Verizon, WorldCom's accountants were making billions of dollars' worth of "adjustments" to the company's financial statements to meet earnings expectations on Wall Street.

Sullivan repeatedly testified this week that when he alerted Ebbers to accounting adjustments, his boss replied time and again, "We have to hit our numbers."

Federal prosecutors charge that Ebbers fretted over meeting analysts' earnings estimates because he stood to lose much of his personal fortune if the company's share price collapsed.

Investigators eventually uncovered the accounting tricks, and in 2002 WorldCom filed for bankruptcy protection. Last year the company emerged from Chapter 11 as MCI Inc.

If Ebbers is convicted of fraud, conspiracy and falsifying regulatory documents, he could face up to 85 years in prison.

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