Reports on WorldCom link Ebbers, others to fraud

Bernard Ebbers, the man credited with building WorldCom Inc., also had a significant hand in its demise, according to two reports released Monday following investigations into the multibillion-dollar accounting scandal at the giant telecommunications carrier.

The fraud, revealed last year, was a result of the way Ebbers, the former chief executive officer (CEO), ran the company, reported a committee led by William McLucas, a former U.S. Securities and Exchange Commission (SEC) director, and the law firm of Wilmer, Cutler & Pickering. The committee was appointed by WorldCom’s board of directors.

Although many others at WorldCom took part in the fraud, Ebbers “was the source of the culture, as well as much of the pressure, that gave birth to this fraud,” according to the report.

Shortly after the fraud was revealed, WorldCom sought bankruptcy protection and began a series of changes to remake itself, including appointing a new board and CEO. Though its legal name is still WorldCom, the company has adopted the brand name MCI and moved its headquarters from Clinton, Miss., to Ashburn, Va.

A second report, ordered by the bankruptcy court overseeing the WorldCom case, also was released on Monday. It details “deceit, deficiencies and a disregard for the basic principles of corporate governance” at WorldCom, many directly related to the way Ebbers ran the company, especially the many acquisitions he led to create one of the largest telecommunications service providers in the U.S.

Ebbers resigned from WorldCom in April last year, two months before the company said it would restate its results for 2001 and the first half of 2002 by a total of US$3.85 billion. Less than one month later, WorldCom filed for bankruptcy protection and subsequently said it found another US$3.83 billion in accounting irregularities spanning 1999 through April 2002.

Ebbers’ main strategy for building up WorldCom in the 1990s was through acquisitions, which the company paid for in WorldCom shares. To keep the share price high, WorldCom used “financial gimmickry” to meet market expectations, according to the report commissioned by the company’s board. There is “clear evidence” that Ebbers was aware of practices to inflate revenue, according to the report.

The reports could lead to criminal charges against Ebbers. Scott Sullivan, former chief financial officer of WorldCom, was indicted in August by a federal grand jury on charges of securities fraud, conspiracy to commit securities fraud and making false filings with the SEC. Buford Yates Jr., WorldCom’s former director of general accounting, was indicted on the same charges.

Since discovering the fraud, which now tops US$11 billion, WorldCom has gone to great lengths to remake itself. None of the individuals “even arguably associated with the past wrongdoing” still works at WorldCom, according to a written statement Monday attributed to Michael Capellas, the company’s current CEO. WorldCom hopes to emerge from bankruptcy protection later this year.