Called to Account
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GWEN IFILL: Today’s indictment alleges that the multi-billion dollar accounting scandal at WorldCom was orchestrated by the telecom giant’s highest ranking officers. Following the announcement of the indictment, FBI Assistant Director Pasquale D’Amuro talked about the effects of the scandal.
PASQUALE J. D’AMURO: From our investigation to date we already know that this scheme was a product of a conspiracy at the highest levels of WorldCom. The impact of this betrayal has been felt on several levels. Thousands of former WorldCom employees lost their jobs and the value of the employee stock ownership holdings withered to nothing. Thousands of other WorldCom stockholders lost their life savings or a significant portion of them.
GWEN IFILL: With me now is Deborah Solomon. She covers corporate accounting scandals and the securities industry for the “Wall Street Journal,” and shared the 2002 Pulitzer Prize for the newspaper’s coverage of the WorldCom debacle. Deborah, welcome.
DEBORAH SOLOMON: Thank you.
GWEN IFILL: Tell us in a nutshell what the government is charging Bernie Ebbers with today?
DEBORAH SOLOMON: They’re saying that he knew about everything that was going on at the company with relation to the accounting fraud, that he gave the go-ahead for the fraud to take place, and that he knowingly lied and misled investors about it.
GWEN IFILL: And that the fraud was what in essence?
DEBORAH SOLOMON: They were basically taking some expenses that should have been classified as operating expenses and moving them over to capital account so that it didn’t hit the company’s bottom line. In essence, they were trying to prop up revenue, earnings. They didn’t want to miss analyst expectations, and this was the way they found to do it.
GWEN IFILL: In order to convince shareholders and others watching them that they were doing as well as they said they were cooking the books?
DEBORAH SOLOMON: That’s what the government says. That’s what Scott Sullivan, the former chief financial officer, is planning apparently to testify before a court of law against Mr. Ebbers, and say that the CEO and he both orchestrated this $11 billion fraud.
GWEN IFILL: Until today, Scott Sullivan was the biggest fish they had reeled in on this. He was chief financial officer. But today by pleading guilty, what has he agreed to?
DEBORAH SOLOMON: He’s basically agreeing to cooperate with the government’s investigation, to provide them with any information that he has about Bernie Ebbers’ involvement. He will face prison time. He’s facing up to 25 years in prison, but obviously, since he’s cooperating, and if he provides the government with enough information, they could depart from that sentence and give him lesser time in jail.
GWEN IFILL: What evidence was shown in the indictment as it was released today, as it was handed up today– I guess that’s the correct term– that shows that the government feels it has a case? What evidence did they cite?
DEBORAH SOLOMON: There wasn’t that much in there. What was interesting was they basically laid out a scenario where Scott Sullivan and Bernie Ebbers worked hand in hand. They got preliminary income statements every quarter. Bernie Ebbers knew what was going on with the numbers. In the indictment it said that he basically told Scott Sullivan to direct subordinates to cook the books because he felt that they weren’t going to make the estimates that they had promised wall street. He didn’t want to see that happen.
GWEN IFILL: In one example they cited was something they called the “close the gap process.” What’s that?
DEBORAH SOLOMON: These are these monthly revenue statements that they got each month that showed the revenue. What they basically are alleging WorldCom did was look for some one-time items, things that they could use to boost revenue, you know, sell something, do something that each quarter could help them hit that revenue target that they needed to hit and close the gap that way.
GWEN IFILL: Let’s take us back a bit to tell us or remind us who Bernie Ebbers was. He was a classic rags-to-riches story.
DEBORAH SOLOMON: He was this scrappy guy, born in Canada, made his home in Mississippi, brought a lot of wealth to that town. He started WorldCom back in 1983-84 as a long-distance discount service. He scrawled it out on a napkin, the whole business plan in the diner — just had this enormous success with this company. He went through this huge acquisition spree and bought all of these companies, and was about to merge with sprint in 1999. That fell through. That seems to have been the tipping point for this company.
GWEN IFILL: How big a fraud are we talking about in dollars?
DEBORAH SOLOMON: The government is saying it could be up to $11 billion. Initially it started out at $3.8 billion. It’s incrementally grown. It would be the largest U.S. accounting corporate fraud scandal in history if that number holds up.
GWEN IFILL: This $11 billion is money lost to stockholders or money that was actually misspent.
DEBORAH SOLOMON: That was money that they misappropriated. The amount lost to investors is about $180 billion.
GWEN IFILL: There were two critical reports, one done internally at WorldCom and one done for the bankruptcy judges I guess by Richard Thornburgh, the former U.S. attorney general, which were very damning. Did their findings lead or give the government’s case additional weight?
DEBORAH SOLOMON: Well, those were done in June, and they seemed to provide something of a blueprint for the government. I mean, they were focused mainly on the revenue recognition problems that the closing the gap, the monthly revenue statements that WorldCom was trying to boost its revenue, Bernie Ebbers was very involved with that. It did have one titillating e-mail about Bernie knowing about this and talking about closing the gap. So in that respect, it might have helped and aided the government’s case.
GWEN IFILL: There was a voice mail in which Scott Sullivan also referred to something that used the term “accounting fluff and junk.”
DEBORAH SOLOMON: Right.
GWEN IFILL: In which he left this message on, I guess, Bernie Ebbers’ voice mail.
DEBORAH SOLOMON: Right. One of the problems with this case was that Bernie, for running a huge telecom company, he was something of a Luddite. He didn’t like technology. He didn’t use e-mail, had very little communication with e-mail and on the computer. He preferred to do everything by hand or not communicate at all, do it more kind of through his assistant. So it’s been hard to find the paper trail that would normally lead you to connect the dots. That’s why they’re going to have to rely so heavily on what Scott Sullivan tells them.
GWEN IFILL: What is Bernie Ebbers’ defense in all this; what’s his side of the story?
DEBORAH SOLOMON: His attorney is basically saying, look, he didn’t know anything about this. He didn’t know what was going on. You’ll remember he testified before Congress actually a couple of years ago and said, you know, under oath that you will not find that I committed any fraud. He appeared before a church in Jackson, Mississippi, right after this happened and said no one will ever find that I knowingly committed fraud. He has been staunch in his saying that he didn’t do anything wrong. He didn’t know about this. It was Scott Sullivan. He’s never named him, but he said my hands are clean.
GWEN IFILL: We’re seeing the beginning of finger-pointing that is likely to start happening here.
DEBORAH SOLOMON: Right, right.
GWEN IFILL: What does he stand to pay for this if he is convicted on any or all of these charges that the government is bringing? How much jail time are we talking about?
DEBORAH SOLOMON: He could face up to 25 years in prison, which is not a small amount of time. He’s also going to probably have to pay back salary and bonuses, you know. The Securities and Exchange Commission is probably, if they file a civil charge against him– which they probably will do– they’ll force disgorgement, which is returning all the money and bonuses he got during the period when they were returning false earnings.
GWEN IFILL: What happens, what’s become now of WorldCom, which has now remade itself as M.C.I.?
DEBORAH SOLOMON: They are getting ready to emerge from Chapter 11 bankruptcy. One of the reasons WorldCom got into this situation is because the telecom industry was just collapsing. In 2000 when the government says this fraud started, this company was reeling from a glut of capacity. Prices were just falling. You had so much competition.
Things aren’t that much better now. I mean, we’re seeing, you know, more consolidation in the wireless industry, because people can’t make it on their own. So they’re not coming out to a great environment, but they don’t have any debt. That’s going to give them a leg to stand on.
GWEN IFILL: Deborah Solomon, thank you very much for helping us out.
DEBORAH SOLOMON: Thank you.