Hey, I happen to be writing a paper on this particular subject, and
have been doing some research on it myself. Since I have everything
that I have found pasted into a Word file, I figured it couldn't hurt
to spend a couple of minutes cutting and pasting it in here for you...
But, I don't know if it all applies to what you were looking for.
I'm just trying to help...
Oh, and if you do find out anything on this, could you pass it along to me?
Thanx!!!
P.S. I know it's a lot, sorry... There's a lot of information about
it out there...
Links:
http://money.cnn.com/2003/08/27/technology/mci_charges/
Articles:
Knight Ridder/Tribune Business News, March 13, 2004 pITEM04073044
MCI Officially Reduces Its Income by More Than $74 Billion.
Full Text: COPYRIGHT 2004 Knight-Ridder/Tribune Business News
By Vikas Bajaj, The Dallas Morning News Knight Ridder/Tribune Business News
Mar. 13--The dust finally settled on WorldCom Inc.'s accounting fraud Friday.
Almost two years after the phone company disclosed it had incorrectly
booked expenses to make itself appear more profitable, it filed new
financial statements that reduced its income by $74.4 billion in 2001
and 2000.
The company, which is changing its name to MCI, filed a 363-page
report with the Securities and Exchange Commission providing its first
results for 2002 and restating 2001 and 2000 figures. It plans to
release 2003 figures soon and finish its Chapter 11 bankruptcy case in
April.
Separately, Oklahoma Attorney General Drew Edmondson dropped criminal
charges against the company Friday in return for 1,600 new WorldCom
jobs in the state. Experts say the settlement raises thorny legal
questions.
WorldCom filed for bankruptcy in the summer of 2002 soon after
revealing executives had masked certain normal expenses as capital
spending, which is booked over a long period of time. In its filing,
the company said $4.8 billion in expenses were shifted in 2001 and
2000. This boosted profits to satisfy Wall Street.
"They were basically cooking the books to a gargantuan degree," said
Dan Meader, a certified public accountant and president of
Dallas-based Trinity Advisors LP.
The biggest restatemets came from how it valued assets.
WorldCom, of Ashburn, Va., wrote down $60 billion in assets. Much of
it came from goodwill, which is the difference between the price it
paid for acquisitions and the true value of those assets.
"One day someone woke up and said really these aren't assets of the
company," Mr. Meader said.
That resulted in losses totaling $9 billion in 2002, $15 billion in
2001 and $49 billion in 2000."While these restatement adjustments are
substantial they do not have any impact on our current substantial
liquidity position," said Bob Blakely, MCI's chief financial officer.
But experts said the company faces significant tests.
"The real question that has been lingering and hasn't been answered
and won't be answered for a while is, what does the new MCI do now?"
said Robert C. Atkinson, a research director at Columbia University's
Institute for Tele-Information. "Are they going to be price leader,
the price follower?"
The company dealt with one challenge by settling with the Oklahoma
attorney general.
But the deal left experts uneasy, because it implies a company can
make amends for criminal actions by hiring more workers.
"Since when can criminal defendants buy themselves out of criminal
prosecutions?" Mr. Atkinson said. "I can understand civil litigation
settled that way. It sounds unusual to say the least."
Mr. Edmondson's spokesman said a conviction could jeopardize the
company's ability to operate.
"Outside of a criminal conviction we don't have any mechanism in
Oklahoma statute to pursue a financial penalty," said Charlie Price.
WorldCom has to create 160 new jobs a year in Oklahoma for the next 10
years. The company faces fines totaling up to $15.4 million if it
doesn't comply. WorldCom will also assist Mr. Edmondson in his
prosecution of former executives.
To see more of The Dallas Morning News, or to subscribe to the
newspaper, go to http://www.dallasnews.com.
(c) 2004, The Dallas Morning News. Distributed by Knight
Ridder/Tribune Business News.
http://msnbc.msn.com/id/4428124/
The Associated Press
Updated: 3:06 p.m. ET March 02, 2004NEW YORK - Former WorldCom CEO
Bernard Ebbers was indicted on federal charges in the
multibillion-dollar accounting scandal at the telecommunications
giant, and his top financial officer pleaded guilty Tuesday and agreed
to testify against him.
Conspiracy and fraud charges were filed against Ebbers on Tuesday for
his alleged role in the nation?s largest accounting scandal, hours
before former chief financial officer Scott Sullivan entered his
guilty plea in federal court.
Sullivan admitted to U.S. District Court Judge Barbara Jones that he
deceived investors, regulators and Wall Street in a ?misguided effort
to preserve the company to allow it to withstand what I believed were
temporary financial difficulties.?
While the company?s finances deteriorated, ?management at the highest
level continued to provide unduly optimistic guidance to security
firms, analysts and to the investing public,? he told the judge.
Sullivan said in court that he had signed a deal with prosecutors
agreeing to cooperate, with the possibility that substantial
cooperation could decrease any potential sentence.
?I deeply regret my actions and sincerely apologize for the harm they
have caused,? he said.
Sullivan also reached a settlement with the Securities and Exchange Commission.
Sullivan left the courthouse without speaking to reporters. Outside
the courtroom, his lawyer, Herb Nathan, said ?has taken courageous and
honorable actions to try and put this matter behind him,? Nathan said.
The indictment, handed up late Monday and filed Tuesday in U.S.
District Court in Manhattan, accused Sullivan, 42, of Boca Raton,
Fla., and Ebbers, 62, of Jackson, Miss., of deceiving the public, the
SEC, securities analysts and others about WorldCom?s true financial
condition.
Ebbers? attorney, Brian Heberling, declined to comment.
According to the indictment, when the company?s results fell beneath
analysts? expectations in September 2000, Sullivan advised Ebbers that
WorldCom should issue an earnings warning to alert investors, but
Ebbers refused.
?Ebbers nevertheless insisted that WorldCom publicly report financial
results that met analysts? expectations,? the indictment said.
A month later, the men instructed subordinates ?to falsely and
fraudulently book certain entries in WorldCom?s general ledger? that
misclassified expenses to diminish their draining effect on current
profits.
The effort was meant to ?satisfy analysts? expectations, even though
Ebbers and Sullivan knew that WorldCom?s true results in fact failed
to meet those expectations,? the indictment said.
Ebbers resigned from WorldCom in April 2002, well after its stock
price had begun a steady decline and soon after questions began to
swirl about the company?s finances. Two months later, WorldCom
announced it had uncovered nearly $4 billion in hidden expenses ? the
beginning of a spiral that would become the largest corporate fraud in
U.S. history. The fraud is now estimated at $11 billion.
?America?s economic strength depends on the integrity of the
marketplace, a belief in the free flow of information that is
reliable,? Attorney General John Ashcroft said at a New York news
conference. ?It depends on the transparency of financial dealings, and
it depends on the accountability of corporate officials.?
WorldCom, parent of the nation?s second biggest long-distance
telephone company, filed for bankruptcy July 21, 2002. In a bid to
heal its reputation, WorldCom changed its name to MCI last April and
moved its headquarters from Jackson, Miss., to Ashburn, Va. The
company expects to emerge from bankruptcy protection within two
months.
Four former company executives, including controller David Myers, have
pleaded guilty to criminal charges in the Justice Department?s fraud
investigation and are helping federal prosecutors.
Sullivan, who was arrested in August 2002, had been scheduled to go to
trial April 7.
A WorldCom report issued in June said Ebbers fostered a poisonous
corporate culture and was ?aware, at a minimum, that WorldCom was
meeting revenue expectations through financial gimmickry.?
A second report, by former Attorney General Richard Thornburgh for a
bankruptcy judge in New York, described a corporate culture dominated
by Ebbers and Sullivan ?with virtually no checks or restraints placed
on their actions by the board of directors or other management.?
Last year a federal judge in New York approved a $750 million
settlement between WorldCom and the SEC, designed to repay investors
who lost money in the fraud. WorldCom also has agreed to corporate
reforms, including a court-appointed monitor and regular audits.
Ebbers and business associates started Long Distance Discount Service
two decades ago in Hattiesburg, Miss. For the next 12 years, it
snapped up communications companies, including IDB WorldCom, and in
1995 adopted the name WorldCom Inc., with Ebbers as chief executive.
WorldCom merged with MCI in 1997 and planned to merge with Sprint in
1999 until the deal was called off.
© 2004 The Associated Press. All rights reserved. This material may
not be published, broadcast, rewritten or redistributed.
http://www.usatoday.com/money/companies/management/2003-08-26-worldcom2_x.htm
Posted 8/27/2003 11:03 AM Updated 8/28/2003 11:14 PM
MCI hit with 1st criminal charges
By Andrew Backover and Kevin Maney, USA TODAY
Former WorldCom CEO Bernard Ebbers is scheduled to appear in Oklahoma
court next Wednesday to face charges of violating state securities
laws by knowingly giving false information to investors.
Ebbers' appearance is scheduled for 1:30 p.m. CT before Judge Russell
Hall of the Oklahoma County District Court, a spokesman for the
Oklahoma Attorney General said Thursday. Ebbers' attorney did not
return calls seeking comment.
USA TODAY
Ebbers
Oklahoma on Wednesday filed the first criminal charges against MCI and
Ebbers ? but they might not be the last, state Attorney General Drew
Edmondson says.
"We're aware of maybe half a dozen states that are looking at either
civil or criminal filings," Edmondson said in a conference call. But
at least two of the states he mentioned, Oregon and California, later
said they were not considering criminal charges at this time.
Edmondson says Oklahoma pensions lost $64 million from the collapse of
MCI, formerly WorldCom, because of its $11 billion accounting fraud ?
the largest ever. He says federal penalties, including a $750 million
fine, are "inadequate."
Oklahoma's filing reveals no evidence beyond what federal prosecutors
and MCI have already released. Although accounting firm Arthur
Andersen was convicted of obstruction of justice last year, companies
usually escape federal criminal charges if they cooperate.
States are more likely to pursue civil cases, as they have against
tobacco companies and Microsoft, because they can get money or other
remedies. Given the billions lost by MCI investors, "States might
decide they need to defend their own citizens," says securities lawyer
Thomas Ajamie.
MCI, the nation's No. 2 long-distance carrier, says Oklahoma's charges
won't derail its exit from Chapter 11 this fall and will "only punish"
MCI's 20 million customers and 55,000 employees. MCI says it will
cooperate.
But the charges might hurt MCI with customers: The company could "be
seen as having too much baggage," says Danny Briere, CEO of consulting
firm TeleChoice. The charges also could create friction with federal
officials, much as New York Attorney General Eliot Spitzer rankled
some with his probe of Wall Street firms.
The U.S. Attorney's Office in Manhattan said Wednesday that "competing
interests can impede and delay" justice.
The Securities and Exchange Commission, which settled fraud charges
against MCI, says it is "disappointed" Edmondson didn't give it a
heads up. MCI says it wasn't notified, either, which is rare.
Oklahoma accuses MCI, Ebbers and five other former MCI employees of
committing 15 counts of securities fraud by hiding expenses, which
inflated earnings and MCI shares.
Each count carries as much as 10 years in prison and a $10,000 fine.
MCI might have to pay restitution, Edmondson says.
The five employees, excluding Ebbers, already face federal fraud charges.
Four pleaded guilty. Former CFO Scott Sullivan awaits trial.
Ebbers' attorney, Reid Weingarten, says he expects Ebbers to "be fully exonerated."
David Schertler, attorney for defendant Buford Yates, calls the
charges "nonsensical," because Yates pleaded guilty and is cooperating
with the federal probe.
Contributing: Wire reports
http://msnbc.msn.com/id/4547364/
Banks had early WorldCom concerns
Report: Lenders had misgivings in early 2001
Updated: 11:55 a.m. ET March 17, 2004March 17, 2004 - Analysts at
three big banks expressed misgivings about the financial soundness of
now bankrupt WorldCom in early 2001, months before they helped the
company sell $12 billion in debt, the New York Times said on
Wednesday.
Citing documents filed in a federal court in Manhattan on Monday, it
said lending analysts at J.P. Morgan Chase, Deutsche Bank, and Bank of
America had early concerns about WorldCom, which plans to change its
name to MCI on emerging from bankruptcy.
The story also pointed out the lead role of Salomon Smith Barney unit
of Citigroup in the 2001 debt offering and cited a memo suggesting the
group's commercial lending to WorldCom was linked to its investment
banking.
None of the four banks were immediately available to comment.
WorldCom filed for bankruptcy in 2002 amid the biggest ever accounting
scandal in U.S. corporate history.
The documents described were filed in relation to a class-action
lawsuit brought two years ago on behalf of the New York State Common
Retirement Fund and other investors in WorldCom between 1999 and 2002,
the story said.
Institutions close to WorldCom knew more than they let on to investors
but acted to protect themselves from the company's shaky finances even
as they sold its securities to the investing public, the Times said
citing court documents.
Defendants include former WorldCom Chief Executive Bernard Ebbers, who
was recently indicted on fraud charges, company directors and banks
and brokerage firms that sold WorldCom securities, it said.
© Reuters 2004. All rights reserved. Republication or redistribution
of Reuters content, including by caching, framing or similar means, is
expressly prohibited without the prior written consent of Reuters.
Reuters and the Reuters sphere logo are registered trademarks and
trademarks of the Reuters group of companies around the world.
http://msnbc.msn.com/id/4533921/
MCI: $74 billion in past profits vanish in cleanup of tainted WorldCom
booksBy ASSOCIATED PRESS
Updated: 1:00 p.m. ET March 16, 2004Mar. 16 - WorldCom reported
profits in 2000 and 2001, but the renamed company should have shown a
combined loss of nearly $65 billion, according to a long-awaited
restatement that likely is the biggest in corporate history.
The financial restatement by MCI totaled $74.4 billion in additional
expenses for the two years, surpassing a $54 billion writedown
recorded by AOL Time Warner in April 2002 to reflect the declining
value of the America Online business.
The restatement of WorldCom's tainted books wipes away a vast
accounting fraud and reflects the plunging value of its
telecommunications assets. However, it has no direct impact on the
telephone company's operations.
In fact, the revisions should advance the company's bid to emerge from
bankruptcy by the end of April, less than two years after the company
filed for Chapter 11 protection.
The adjustments, issued Friday with MCI's annual report, also include
the company's first accounting of its full-year results for 2002, a
net loss of $9.2 billion on revenue of $32.2 billion.
The adjustments for the two prior years would mean that WorldCom
actually suffered a net loss of $48.9 billion in 2000 and a net loss
of $15.6 billion in 2001. The company had reported profits of $4.7
billion in 2000 and $1.4 billion in 2001.
Although the revisions technically apply only to the years 2000 and
2001, MCI said it basically rebuilt its books from scratch, going all
the way back to 1993, to develop a proper accounting. The process took
more than a year and a half.
"This filing culminates the largest and most complex financial
restatement ever undertaken," said chief financial officer Bob
Blakely. "It is one of the last remaining milestones on our path to
emerge from Chapter 11 protection."
The filing attributes $8.8 billion of the $74.4 billion restatement to
the financial irregularities and questionable accounting practices
that have led to criminal investigations and charges against former
senior executives at the company, including former Chief Executive
Bernard Ebbers.
Most of the restatement -- nearly $60 billion -- stems from a
reduction in the book value of numerous companies that WorldCom
acquired at top dollar during the technology boom. As the
telecommunications industry collapsed, WorldCom should have recorded
the plunging value of those assets as an expense.
And because WorldCom inflated the initial value for some acquired
assets, MCI said it had to wipe another $5.8 billion off the books.
Blakely said the financial restatements do not affect the company's
liquidity, and that it has about $6 billion in cash as of the end of
2003.
Separately on Friday, the state of Oklahoma agreed to settle its
criminal fraud case against the telecommunications giant MCI in
exchange for new jobs and cooperation in its prosecution of former
executives of the company.
Under terms of the agreement, MCI would create 1,600 new jobs in
Oklahoma over the next 10 years and has pledged to assist the state in
its prosecution of former executives of the company formerly known as
WorldCom, state Attorney General Drew Edmondson announced.
http://msnbc.msn.com/id/3540924/
Okla. drops charges against Ebbers
State defers to feds investigating former WorldCom bossNov. 20 -
Oklahoma has dropped criminal charges against former WorldCom Chief
Executive Bernie Ebbers, a clerk for Judge James Paddleford said
Thursday.
A spokesman for Oklahoma Attorney General Drew Edmondson had said on
Wednesday that the charges may be pulled, deferring to federal
prosecutors investigating the bankrupt long-distance company, and that
Edmondson would pursue his case against Ebbers at a later time.
The state charged WorldCom, now known as MCI , Ebbers and five former
executives with violating state securities laws by knowingly giving
false information to investors.
Copyright 2004 Reuters Limited. All rights reserved. Republication or
redistribution of Reuters content is expressly prohibited without the
prior written consent of Reuters.
http://www.washingtontechnology.com/news/1_1/daily_news/21915-1.html
10/14/03
WorldCom names an ethics officer
By Patience Wait
Staff Writer
A former official of Lockheed Martin Corp. will serve as WorldCom
Inc.?s chief ethics officer and executive vice president of ethics and
business conduct.
Nancy Higgins, formerly vice president of ethics and business conduct
for Lockheed Martin, will oversee the new global ethics program from
WorldCom?s offices in Ashburn, Va., the company announced Tuesday. She
will report to Michael Capellas, WorldCom chairman and chief executive
officer.
WorldCom has been working to rebuild its corporate image since it
filed for one of the largest bankruptcies in history in 2002. The
company is conducting business under the brand name MCI, and has moved
its corporate officers to Ashburn.
The company also has started ethics training for its 55,000 U.S.-based
employees and contractors, distributing its code of ethics and
business conduct to all employees. It also has established a
zero-tolerance policy concerning suspected violations of the company?s
code of ethics and business conduct, and opened a confidential ethics
hotline for employees.
Higgins ?brings a rare combination of direct experience in developing
and overseeing large-scale ethics programs, a proven 10-year track
record for creating best practices and, most importantly, an absolute
passion for the job,? Capellas said.
Before her time at Lockheed Martin, Higgins was a senior corporate
attorney with the Boeing Co., where her responsibilities included
providing legal support to the company ethics and self-governance
functions and serving as director of corporate ethics policy. She
headed Boeing?s first companywide ethics and business conduct
organization.
http://www.business-continuity-online.com/Risk_Assessment/Article1443.aspx
Ethics guru hired at former WorldCom telco
MCI names Nancy Higgins as chief 'ethics' officer for ethics and
business conduct oversight
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MCI, formerly Worldcom, has just appointed a new Chief Ethics Officer.
Nancy Higgins is to be MCI's new executive vice president of Ethics
and Business Conduct and Chief Ethics Officer reporting directly to
chairman and chief exexcutive, Michael Capellas.
According to MCI, Higgins most recently was vice president, Ethics and
Business Conduct at Lockheed Martin and will now be looking after
MCI's ethics programme based in the company's HQ in Virginia, USA.
'Nancy brings a rare combination of direct experience in developing
and overseeing large-scale ethics programs, a proven 10-year track
record for creating best practices and, most importantly, an absolute
passion for the job,' said Capellas. 'MCI strives to be a model of
good corporate governance with best-in-class ethics compliance. We are
thrilled to welcome Nancy as the latest addition to MCI's new
executive leadership team.'
According to the company, MCI has now taken 'significant steps to
build a culture centered on ethics and integrity'. Such steps, MCI
stated, include:
'Ethics Training' for MCI's 55,000 US-based employees and contractors
conducted in conjunction with New York University and the University
of Virginia,
the Company's Code of Ethics & Business Conduct, enhanced and
distributed to all employees,
a 'Zero-Tolerance Policy' dictating that any suspected violation of
MCI's Code of Ethics and Business Conduct will be fully investigated
and dealt with immediately,
a confidential Ethics Hotline that allows employees to raise ethics or
business conduct concerns,
an Ethics Pledge signed by the company's top 100 executives committing
to uphold the highest standards of ethics and integrity, as well as
transparency in financial reporting,
a new set of 10 'Guiding Principles' designed to serve as the
foundation for MCI's environment of ethical conduct and corporate
transparency.
Higgins said she was 'proud' to have the opportunity to play a 'key
role' in the development and implementation of MCI's ethics and
corporate governance initiatives. 'I have spent a significant portion
of my professional career designing and implementing ethics programs
and I look forward to building on the solid foundation already put in
place by MCI's new management team' she said.
Higgins was formerly a corporate attorney at Boeing.
--------------------------------------------------------------------------------
Paul Quigley
--------------------------------------------------------------------------------
12/11/03
http://global.mci.com/values/actions.xml
On August 26, 2003, MCI?s Court Monitor, Richard C. Breeden, issued a
report, ?Restoring Trust: Corporate Governance for the Future of MCI,
Inc.,? in which he outlined a comprehensive set of recommendations for
MCI to follow in its efforts to restore trust and integrity. MCI?s
Board unanimously approved the report and, in fact, management had
already implemented a number of the recommendations. Below are the
highlights, demonstrating MCI?s commitment to creating a culture built
on only the highest ethical standards.
Setting the Tone at the Top:
? Recruited a new CEO known for his high-level of integrity and
ability to lead by his forthright actions
? Recruited a new President and COO, who has more than 25 years of
telecom experience
? Recruited a new CFO, General Counsel, and director of internal
controls, all of whom came from outside the company
? Appointed an entire new board of directors: Nicholas Katzenbach,
former U.S. Attorney General and former Under Secretary of State;
Dennis Beresford, Professor of Accounting at the Terry College of
Business at the University of Georgia and a former chairman of the
Financial Accounting Standards Board; and C.B. Rogers, Jr., former CEO
and chairman of Equifax. MCI recently announced five additional,
highly capable individuals who will join the Board of Directors when
MCI emerges from bankruptcy: former Touche Ross Chairman W. Grant
Gregory; retired Bell Atlantic executive Judith Haberkorn; Patton
Boggs Partner Laurence Harris; former U.S. Deputy Attorney General
Eric Holder, and MatlinPatterson Global Advisors LLC CEO David Matlin.
Bolstering Internal Controls:
? Initiated a thorough review of internal controls to strengthen MCI?s
systems and procedures for capturing and reporting financial data.
Developed a widespread program to correct deficiencies and create a
much stronger system.
? Initiated a widespread and intensive review of the accounting fraud,
led by three new directors. Also funded a separate, thorough
investigation by the Bankruptcy Examiner and responded to his findings
concerning wrongful activities of different types.
? Consented to the establishment and continuation of the Corporate
Monitor program, which represents an unprecedented level of
independent oversight of management activity
? Agreed to abolish the use of stock options in favor of restricted
stock with full expensing of the value of equity grants on the
company?s profit and loss statement
? Launched an aggressive program to correct the deficiencies
discovered by KPMG?s review of the company?s internal accounting and
financial controls
Communicating the Importance of the New Culture through Ethics Education:
? Established critical benchmarks in conjunction with Ethics Officer
Association to guide the design of its ethics program
? Established an active Ethics Office and intend to double the size of
the staff, to be lead by an experienced Chief Ethics Officer
? Created and distributed MCI?s Code of Ethics & Business Conduct to all employees
? Developed and distributed MCI?s Guiding Principles to all employees
? Established and encourage an Open-Door Policy between management and employees
? Implemented a ?Zero-Tolerance Policy? that dictates that any
suspected violation of law, corporate policy or the Code of Conduct
will be fully investigated by management and dealt with accordingly
? Company worked with education leaders to develop an ethics education
program ? all 55,000 MCI employees will participate in the program
? Put in place a new Ethics Pledge program pursuant to which senior
officers including the CEO pledge to pursue ethics and integrity,
compliance programs, and transparency and candor in financial
reporting well beyond SEC requirements
? Established a confidential Ethics Hotline as well as an e-mail
address and case management database
? Developed vehicles to regularly communicate ethics message and MCI?s
guiding principles to all employees, customers, and other key
audiences
Focusing on Financial and Accounting Controls:
? Retained a new outside auditor, and commissioned a complete
restatement of 1999-2002 earnings reports
? Instituted a training program for employees on their
responsibilities under the federal securities laws, accounting issues
that may signal inappropriate behavior or fraud, and ethical issues
? Entered into a financial settlement with the SEC under which $500
million in cash and $250 million in stock will be paid into a trust
for victims. The settlement was approved by both the U.S. District
Court and by the Bankruptcy Court.
? Retained Deloitte & Touche to help implement accounting and financial controls
? Hired more than 400 new finance and accounting personnel
MCI is committed to establishing and implementing unprecedented
internal controls, ethics programs, and accounting and financial
controls, all with the goal of becoming and remaining a good model of
corporate governance.
http://www.scu.edu/ethics/dialogue/candc/cases/worldcom.html
WorldCom1
By Dennis Moberg (Santa Clara University) and Edward Romar (University
of Massachusetts-Boston)
2002 saw an unprecedented number of corporate scandals: Enron, Tyco,
Global Crossing. In many ways, WorldCom is just another case of failed
corporate governance, accounting abuses, and outright greed. But none
of these other companies had senior executives as colorful and likable
as Bernie Ebbers. A Canadian by birth, the 6 foot, 3 inch former
basketball coach and Sunday School teacher emerged from the collapse
of WorldCom not only broke but with a personal net worth as a negative
nine-digit number.2 No palace in a gated community, no stable of
racehorses or multi-million dollar yacht to show for the
telecommunications giant he created. Only debts and red ink--results
some consider inevitable given his unflagging enthusiasm and
entrepreneurial flair. There is no question that he did some pretty
bad stuff, but he really wasn't like the corporate villains of his
day: Andy Fastow of Enron, Dennis Koslowski of Tyco, or Gary Winnick
of Global Crossing.3
Personally, Bernie is a hard guy not to like. In 1998 when Bernie was
in the midst of acquiring the telecommunications firm MCI, Reverend
Jesse Jackson, speaking at an all-black college near WorldCom's
Mississippi headquarters, asked how Ebbers could afford $35 billion
for MCI but hadn't donated funds to local black students. Businessman
LeRoy Walker Jr., was in the audience at Jackson's speech, and
afterwards set him straight. Ebbers had given over $1 million plus
loads of information technology to that black college. "Bernie
Ebbers," Walker reportedly told Jackson, "is my mentor."4 Rev. Jackson
was won over, but who wouldn't be by this erstwhile milkman and bar
bouncer who serves meals to the homeless at Frank's Famous Biscuits in
downtown Jackson, Mississippi, and wears jeans, cowboy boots, and a
funky turquoise watch to work.
It was 1983 in a coffee shop in Hattiesburg, Mississippi that Mr.
Ebbers first helped create the business concept that would become
WorldCom. "Who could have thought that a small business in itty bitty
Mississippi would one day rival AT&T?" asked an editorial in Jackson,
Mississippi's Clarion-Ledger newspaper.5 Bernie's fall-and the
company's-was abrupt. In June 1999 with WorldCom's shares trading at
$64, he was a billionaire,6 and WorldCom was the darling of the New
Economy. By early May of 2002, Ebbers resigned his post as CEO,
declaring that he was "1,000 percent convinced in my heart that this
is a temporary thing."7 Two months later, in spite of Bernie's
unflagging optimism, WorldCom declared itself the largest bankruptcy
in American history.8
This case describes three major issues in the fall of WorldCom: the
corporate strategy of growth through acquisition, the use of loans to
senior executives, and threats to corporate governance created by
chumminess and lack of arm's-length dealing. The case concludes with a
brief description of the hero of the case-whistle blower Cynthia
Cooper.
The Growth Through Acquisition Merry-Go-Round
From its humble beginnings as an obscure long distance telephone
company WorldCom, through the execution of an aggressive acquisition
strategy, evolved into the second-largest long distance telephone
company in the United States and one of the largest companies handling
worldwide Internet data traffic.9 According to the WorldCom Web site,
at its high point, the company
? Provided mission-critical communications services for tens of
thousands of businesses around the world
? Carried more international voice traffic than any other company
? Carried a significant amount of the world's Internet traffic
? Owned and operated a global IP (Internet Protocol) backbone that
provided connectivity in more than 2,600 cities and in more than 100
countries
? Owned and operated 75 data centers?on five continents. [Data centers
provide hosting and allocation services to businesses for their
mission-critical business computer applications.]10
WorldCom achieved its position as a significant player in the
telecommunications industry through the successful completion of 65
acquisitions.11 Between 1991 and 1997, WorldCom spent almost $60
billion in the acquisition of many of these companies and accumulated
$41 billion in debt.12 Two of these acquisitions were particularly
significant. The MFS Communications acquisition enabled WorldCom to
obtain UUNet, a major supplier of Internet services to business, and
MCI Communications gave WorldCom one of the largest providers of
business and consumer telephone service. By 1997, WorldCom's stock had
risen from pennies per share to over $60 a share.13 Through what
appeared to be a prescient and successful business strategy at the
height of the Internet boom, WorldCom became a darling of Wall Street.
In the heady days of the technology bubble Wall Street took notice of
WorldCom and its then visionary CEO, Bernie Ebbers. This was a company
"on the move," and Wall Street investment banks, analysts and brokers
began to discover WorldCom's value and make "strong buy
recommendations" to investors.
As this process began to unfold, the analysts' recommendations,
coupled with the continued rise of the stock market, made WorldCom
stock desirable, and the market's view of the stock was that it could
only go up. As the stock value went up, it was easier for WorldCom to
use stock as the vehicle to continue to purchase additional companies.
The acquisition of MFS Communications and MCI Communications were,
perhaps, the most significant in the long list of WorldCom
acquisitions. With the acquisition of MFS Communications and its UUNet
unit, "WorldCom (s)uddenly had an investment story to offer about the
value of combining long distance, local service and data
communications."14 In late 1997, British Telecommunications
Corporation made a $19 billion bid for MCI. Very quickly, Ebbers made
a counter offer of $30 billion in WorldCom stock. In addition, Ebbers
agreed to assume $5 billion in MCI debt, making the deal $35 billion
or 1.8 times the value of the British Telecom offer. MCI took
WorldCom's offer making WorldCom a truly significant global
telecommunications company.15
All this would be just another story of a successful growth strategy
if it weren't for one significant business reality--mergers and
acquisitions, especially large ones, present significant managerial
challenges in at least two areas. First, management must deal with the
challenge of integrating new and old organizations into a single
smoothly functioning business. This is a time-consuming process that
involves thoughtful planning and considerable senior managerial
attention if the acquisition process is to increase the value of the
firm to both shareholders and stakeholders. With 65 acquisitions in
six years and several of them large ones, WorldCom management had a
great deal on their plate. The second challenge is the requirement to
account for the financial aspects of the acquisition. The complete
financial integration of the acquired company must be accomplished,
including an accounting of assets, debts, good will and a host of
other financially important factors. This must be accomplished through
the application of generally accepted accounting practices (GAAP).
WorldCom's efforts to integrate MCI illustrate several areas senior
management did not address well. In the first place, Ebbers appeared
to be an indifferent executive who "paid scant attention to the
details of operations."16; For example, customer service deteriorated.
One business customer's service was discontinued incorrectly, and when
the customer contacted customer service, he was told he was not a
customer. Ultimately, the WorldCom representative told him that if he
was a customer, he had called the wrong office because the office he
called only handled MCI accounts.17 This poor customer stumbled
"across a problem stemming from WorldCom's acquisition binge: For all
its talent in buying competitors, the company was not up to the task
of merging them. Dozens of conflicting computer systems remained,
local systems were repetitive and failed to work together properly,
and billing systems were not coordinated."18
Poor integration of acquired companies also resulted in numerous
organizational problems. Among them were:
? Senior management made little effort to develop a cooperative
mindset among the various units of WorldCom.
? Inter-unit struggles were allowed to undermine the development of a
unified service delivery network.
? WorldCom closed three important MCI technical service centers that
contributed to network maintenance only to open twelve different
centers that, in the words of one engineer, were duplicate and
inefficient.
? Competitive local exchange carriers (Clercs) were another managerial
nightmare. WorldCom purchased a large number of these to provide local
service. According to one executive, "(t)he WorldCom model was a vast
wasteland of Clercs, and all capacity was expensive and very
underutilized?There was far too much redundancy, and we paid far too
much to get it."19
Regarding financial reporting, WorldCom used a liberal interpretation
of accounting rules when preparing financial statements. In an effort
to make it appear that profits were increasing, WorldCom would write
down in one quarter millions of dollars in assets it acquired while,
at the same time, it "included in this charge against earnings the
cost of company expenses expected in the future. The result was bigger
losses in the current quarter but smaller ones in future quarters, so
that its profit picture would seem to be improving."20 The acquisition
of MCI gave WorldCom another accounting opportunity. While reducing
the book value of some MCI assets by several billion dollars, the
company increased the value of "good will," that is, intangible
assets-a brand name, for example-by the same amount. This enabled
WorldCom each year to charge a smaller amount against earnings by
spreading these large expenses over decades rather than years. The net
result was WorldCom's ability to cut annual expenses, acknowledge all
MCI revenue and boost profits from the acquisition.
WorldCom managers also tweaked their assumptions about accounts
receivables, the amount of money customers owe the company. For a
considerable time period, management chose to ignore credit department
lists of customers who had not paid their bills and were unlikely to
do so. In this area, managerial assumptions play two important roles
in receivables accounting. In the first place, they contribute to the
amount of funds reserved to cover bad debts. The lower the assumption
of non-collectable bills, the smaller the reserve fund required. The
result is higher earnings. Secondly, if a company sells receivables to
a third party, which WorldCom did, then the assumptions contribute to
the amount or receivables available for sale.21
So long as there were acquisition targets available, the
merry-go-round kept turning, and WorldCom could continue these
practices. The stock price was high, and accounting practices allowed
the company to maximize the financial advantages of the acquisitions
while minimizing the negative aspects. WorldCom and Wall Street could
ignore the consolidation issues because the new acquisitions allowed
management to focus on the behavior so welcome by everyone, the
continued rise in the share price. All this was put in jeopardy when,
in 2000, the government refused to allow WorldCom's acquisition of
Sprint. The denial stopped the carousel, put an end to WorldCom's
acquisition-without-consolidation strategy and left management a stark
choice between focusing on creating value from the previous
acquisitions with the possible loss of share value or trying to find
other creative ways to sustain and increase the share price.
In July 2002, WorldCom filed for bankruptcy protection after several
disclosures regarding accounting irregularities. Among them was the
admission of improperly accounting for operating expenses as capital
expenses in violation of generally accepted accounting practices
(GAAP). WorldCom has admitted to a $9 billion adjustment for the
period from 1999 thorough the first quarter of 2002.
Sweetheart Loans To Senior Executives
Bernie Ebbers' passion for his corporate creation loaded him up on
common stock. Through generous stock options and purchases, Ebbers'
WorldCom holdings grew and grew, and he typically financed these
purchases with his existing holdings as collateral. This was not a
problem until the value of WorldCom stock declined, and Bernie faced
margin calls (a demand to put up more collateral for outstanding
loans) on some of his purchases. At that point he faced a difficult
dilemma. Because his personal assets were insufficient to meet the
call, he could either sell some of his common shares to finance the
margin calls or request a loan from the company to cover the calls.
Yet, when the board learned of his problem, it refused to let him sell
his shares on the grounds that it would depress the stock price and
signal a lack of confidence about WorldCom's future.22
Had he pressed the matter and sold his stock, he would have escaped
the bankruptcy financially whole, but Ebbers honestly thought WorldCom
would recover. Thus, it was enthusiasm and not greed that trapped Mr.
Ebbers. The executives associated with other corporate scandals sold
at the top. In fact, other WorldCom executives did much, much better
than Ebbers did.23 Bernie borrowed against his stock. That course of
action makes sense if you believe the stock will go up, but it's the
road to ruin if the stock goes down. Unlike the others, he intended to
make himself rich taking the rest of the shareholders with him. In his
entire career, Mr. Ebbers sold company shares only half a dozen times.
Detractors may find him irascible and arrogant, but defenders describe
him as a principled man.24
The policy of boards of directors authorizing loans for senior
executives raises eyebrows. The sheer magnitude of the loans to Ebbers
was breathtaking. The $341 million loan the board granted Mr. Ebbers
is the largest amount any publicly traded company has lent to one of
its officers in recent memory.25 Beyond that, some question whether
such loans are ethical. "A large loan to a senior executive epitomizes
concerns about conflict of interest and breach of fiduciary duty,"
said former SEC enforcement official Seth Taube.26 Nevertheless,
27percent of major publicly traded companies had loans outstanding for
executive officers in 2000 up from 17percent in 1998 (most commonly
for stock purchase but also home buying and relocation). Moreover,
there is the claim that executive loans are commonly sweetheart deals
involving interest rates that constitute a poor return on company
assets. WorldCom charged Ebbers slightly more than 2percent interest,
a rate considerably below that available to "average" borrowers and
also below the company's marginal rate of return. Considering such
factors, one compensation analyst claims that such lending "should not
be part of the general pay scheme of perks for executives?I just think
it's the wrong thing to do."27
What's a Nod or Wink Among Friends?
In the autumn of 1998, Securities and Exchange Commission Chairman
Arthur Levitt Jr. uttered the prescient criticism, "Auditors and
analysts are participants in a game of nods and winks."28 It should
come as no surprise that it was Arthur Andersen that endorsed many of
the accounting irregularities that contributed to WorldCom's demise.29
Beyond that, however, were a host of incredibly chummy relationships
between WorldCom's management and Wall Street analysts.
Since the Glass-Steagall Act was repealed in 1999, financial
institutions have been free to offer an almost limitless range of
financial services to their commercial and investment clients.
Citigroup, the result of the merger of Citibank and Travelers
Insurance Company, which owned the investment bank and brokerage firm
Solomon Smith Barney, was an early beneficiary of investment
deregulation. Citibank regularly dispensed cheap loans and lines of
credit as a means of attracting and rewarding corporate clients for
highly lucrative work in mergers and acquisitions. Since WorldCom was
so active in that mode, their senior managers were the targets of a
great deal of influence peddling by their banker, Citibank. For
example, Travelers Insurance, a Citigroup unit, lent $134 million to a
timber company Bernie Ebbers was heavily invested in. Eight months
later, WorldCom chose Salomon Smith Barney, Citigroup's brokerage
unit, to be the lead underwriter of $5 billion of its bond issue.30
But the entanglements went both ways. Since the loan to Ebbers was
collateralized by his equity holdings, Citigroup had reason to prop up
WorldCom stock. And no one was better at that than Jack Grubman,
Salomon Smith Barney's telecommunication analyst. Grubman first met
Bernie Ebbers in the early 1990s when he was heading up the precursor
to WorldCom, LDDS Communications. The two hit it off socially, and
Grubman started hyping the company. Investors were handsomely rewarded
for following Grubman's buy recommendations until stock reached its
high, and Grubman rose financially and by reputation. In fact,
Institutional Investing magazine gave Jack a Number 1 ranking in
1999,31 and Business Week labeled him "one of the most powerful
players on Wall Street.32
The investor community has always been ambivalent about the
relationship between analysts and the companies they analyze. As long
as analyst recommendations are correct, close relations have a
positive insider quality, but when their recommendations turn sour,
corruption is suspected. Certainly Grubman did everything he could to
tout his personal relationship with Bernie Ebbers. He bragged about
attending Bernie's wedding in 1999. He attended board meeting at
WorldCom's headquarters. Analysts at competing firms were annoyed with
this chumminess. While the other analysts strained to glimpse any
tidbit of information from the company's conference call, Grubman
would monopolize the conversation with comments about "dinner last
night."33
It is not known who picked up the tab for such dinners, but Grubman
certainly rewarded executives for their close relationship with him.34
Both Ebbers and WorldCom CFO Scott Sullivan were granted privileged
allocations in IPO (Initial Public Offering) auctions. While the
Securities and Exchange Commission allows underwriters like Salomon
Smith Barney to distribute their allotment of new securities as they
see fit among their customers, this sort of favoritism has angered
many small investors. Banks defend this practice by contending that
providing high-net-worth individuals with favored access to hot IPOs
is just good business.35 Alternatively, they allege that greasing the
palms of distinguished investors creates a marketing "buzz" around an
IPO, helping deserving small companies trying to go public get the
market attention they deserve.36 For the record, Mr. Ebbers personally
made $11 million in trading profits over a four-year period on shares
from initial public offerings he received from Salomon Smith Barney.37
In contrast, Mr. Sullivan lost $13,000 from IPOs, indicating that they
were apparently not "sure things."38
There is little question but that friendly relations between Grubman
and WorldCom helped investors from 1995 to 1999. Many trusted
Grubman's insider status and followed his rosy recommendations to
financial success. In a 2000 profile in Business Week, he seemed to
mock the ethical norm against conflict of interest: "What used to be a
conflict is now a synergy," he said at the time. "Someone like
me?would have been looked at disdainfully by the buy side 15 years
ago. Now they know that I'm in the flow of what's going on."39 Yet,
when the stock started cratering later that year, Grubman's enthusiasm
for WorldCom persisted. Indeed, he maintained the highest rating on
WorldCom until March 18, 2002, when he finally raised its risk rating.
At that time, the stock had fallen almost 90 percent from its high two
years before. Grubman's mea culpa to clients on April 22 read, "In
retrospect the depth and length of the decline in enterprise spending
has been stronger and more damaging to WorldCom than we even
anticipated."40 An official statement from Salomon Smith Barney two
weeks later seemed to contradict the notion that Grubman's analysis
was conflicted: "Mr. Grubman was not alone in his enthusiasm for the
future prospects of the company. His coverage was based purely on
information yielded during his analysis and was not based on personal
relationships."41 Right.
On August 15, 2002, Jack Grubman resigned from Salomon where he had
made as much as $20 million/year. His resignation letter read in part,
"I understand the disappointment and anger felt by investors as a
result of [the company's] collapse, I am nevertheless proud of the
work I and the analysts who work with me did."42 On December 19, 2002,
Jack Grubman was fined $15 million and was banned from securities
transactions for life by the Securities and Exchange Commission for
such conflicts of interest.
The media vilification that accompanies one's fall from power
unearthed one interesting detail about Grubman's character-he repeated
lied about his personal background. A graduate of Boston University,
Mr. Grubman claimed a degree from MIT. Moreover, he claimed to have
grown up in colorful South Boston, while his roots were actually in
Boston's comparatively bland Oxford Circle neighborhood.43 What makes
a person fib about his personal history is an open question. As it
turns out, this is probably the least of Jack Grubman's present
worries. New York State Controller H. Carl McCall sued Citicorp,
Arthur Andersen, Jack Grubman, and others for conflict of interest.
According to Mr. McCall, "This is another case of corporate coziness
costing investors billions of dollars and raising troubling questions
about the integrity of the information investors receive."44
The Hero of the Case
No integrity questions can be raised about Cynthia Cooper whose
careful detective work as an internal auditor at WorldCom exposed some
of the accounting irregularities apparently intended to deceive
investors. Originally assigned responsibilities in operational
auditing, Cynthia and her colleagues grew suspicious of a number of
peculiar financial transactions and went outside their assigned
responsibilities to investigate. What they found was a series of
clever manipulations intended to bury almost $4 billion in
misallocated expenses and phony accounting entries.45
A native of Clinton, Mississippi, where WorldCom's headquarters was
located, Ms. Cooper conducted her detective work was in secret, often
late at night to avoid suspicion. The thing that first aroused her
curiosity came in March 2002 when a senior line manager complained to
her that her boss, CFO Scott Sullivan, had usurped a $400 million
reserve account he had set aside as a hedge against anticipated
revenue losses. That didn't seem kosher, so Cooper inquired of
WorldCom's accounting firm, Arthur Andersen. They brushed her off, and
Ms. Cooper decided to press the matter with the board's audit
committee. That put her in direct conflict with her boss, Sullivan,
who ultimately backed down. The next day, however, he warned her to
stay out of such matters.
Undeterred and emboldened by the knowledge that Andersen had been
discredited by the Enron case and that the SEC was investigating
WorldCom, Cynthia decided to continue her investigation. Along the
way, she learned of a WorldCom financial analyst who was fired a year
earlier for failing to go along with accounting chicanery.46
Ultimately, she and her team uncovered a $2 billion accounting entry
for capital expenditures that had never been authorized. It appeared
that the company was attempting to represent operating costs as
capital expenditures in order to make the company look more
profitable. To gather further evidence, Cynthia's team began an
unauthorized search through WorldCom's computerized accounting
information system. What they found was evidence that fraud was being
committed. When Sullivan heard of the ongoing audit, he asked Cooper
to delay her work until the third quarter. She bravely declined. She
went to the board's audit committee and in June, Scott Sullivan and
two others were terminated. What Ms. Cooper had discovered was the
largest accounting fraud in U.S. history.47
As single-minded as Cynthia Cooper appeared during this entire affair,
it was an incredibly trying ordeal. Her parents and friends noticed
that she was under considerable stress and was losing weight.
According to the Wall Street Journal, she and her colleagues worried
"that their findings would be devastating to the company [and] whether
their revelations would result in layoffs and obsessed about whether
they were jumping to unwarranted conclusions that their colleagues at
WorldCom were committing fraud. Plus, they feared that they would
somehow end up being blamed for the mess."48
It is unclear at this writing whether Bernie Ebbers will be held
responsible for the accounting irregularities that brought down his
second in command. Jack Grubman's final legal fate is also unclear.
While the ethical quality of enthusiasm and sociability are debatable,
the virtue of courage is universally acclaimed, and Cynthia Cooper
apparently has it. Thus, it was not surprising that on December 21,
2002, Cynthia Cooper was recognized as one of three "Persons of the
Year" by Time magazine.
Questions For Discussion
1. What are the ethical considerations involved in a company's
decision to loan executives money to cover margin calls on their
purchase of shares of company stock?
2. When well conceived and executed properly, a
growth-through-acquisition strategy is an accepted method to grow a
business. What went wrong at WorldCom? Is there a need to put in place
protections to insure stakeholders benefit from this strategy? If so,
what form should these protections take?
3. What are the ethical pros and cons of a banking firm giving their
special clients privileged standing in "hot" IPO auctions?
4. Jack Grubman apparently lied in his official biography at Salomon
Smith Barney. Isn't this simply part of the necessary role of
marketing yourself? Is it useful to distinguish between "lying" and
merely "fudging."?
5. Cynthia Cooper and her colleagues worried about their revelations
bringing down the company. Her boss, Scott Sullivan, asked her to
delay reporting her findings for one quarter. She and her team did not
know for certain whether this additional time period might have given
Sullivan time to "save the company" from bankruptcy. Assume that you
were a member of Cooper's team and role-play this decision-making
situation. |
