Called to Account
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MARGARET WARNER: The prosecution wrapped up its case in federal court today in the conspiracy and fraud trial of former WorldCom CEO Bernard Ebbers. Ebbers is being tried on charges of masterminding an $11 billion accounting fraud, the biggest in U.S. History, to mislead investors about WorldCom’s financial health.
In the late 1990s, Ebbers turned a small Mississippi-based long distance company into a global telecom powerhouse largely by acquiring competitors. Ebbers crowning moment? The 1988 acquisition of long distance company M.C.I. A merger that made WorldCom second in size to AT&T. But an internal audit under pressure from an SEC investigation forced the company to admit in June 2002 that it had inflated its earnings.
One month later, the $107 billion company filed for what was the largest corporate bankruptcy ever. Last week, the prosecution’s star witness, former chief financial officer Scott Sullivan, testified that he manipulated the firm’s financial statements. He said he did so because Ebbers told him he had to meet Wall Street’s earnings expectations.
OK, for more now, we turn to Ken Belson, who is covering the Ebbers trial for the New York Times. Ken, welcome. After some four plus weeks of laying out their case, what is the picture that the prosecutors have tried to paint of Bernard Ebbers?
KEN BELSON: Well, the government has worked for several weeks now to call in witnesses, one after another, several of whom have pleaded guilty to being part of the fraud. To paint a picture that the fraud was both elaborate and over a long period of time and that worked its way all the way to the top through Scott Sullivan, the former CFO, up to Bernie Ebbers.
And in painting that picture, they basically said that, at key points, Scott Sullivan went into Bernie Ebbers’ office and asked him what he should do in cases like this where they had a chance to inflate numbers, and Bernie Ebbers, according to Scott Sullivan, said, “Go ahead and hit the numbers,” which was a code word for “Meet analysts expectations,” which one layer further meant, “Go ahead and do what you have to do.”
MARGARET WARNER: All right. So explain what Scott Sullivan says they felt they had to do or what auditors found they had done. What was the accounting scheme?
KEN BELSON: Basically, there’s two efforts. One was to inflate revenue by finding sources of revenue that they hadn’t booked before and all of a sudden decided they could book them.
And then the secondary is in something called line cost expenses. They basically took a short-term or an ongoing expense and booked it or rebooked it as a long-term expense and in doing so, created a false picture of their ongoing expenses and, in the same process, inflated their profit picture.
MARGARET WARNER: All right, now go back to Scott Sullivan and his testimony that everyone waited for. What else did he say to point the finger at Ebbers?
KEN BELSON: Well, there’s several elements to what the government’s been trying to say. One was that– and Scott helped say it, basically– that Bernie was a… painted a picture of Bernie as a dictatorial person, somebody with a short temper, somebody who basically directed people to do things.
And secondly, somebody who was also desperate to prop up WorldCom stock because so much of the loans that he had taken out were backed with his own WorldCom stock as collateral. So, basically, he saw his fortunes diving with WorldCom’s falling stock price and he was– according to the government’s picture– desperate to prop it up any way he could.
MARGARET WARNER: Now I gather there’s very little corroboration in the way of a paper trail. Is that right?
KEN BELSON: Yes. There was one document Scott said that he wrote to Bernie describing elements of the fraud, but it’s never been produced in court. There are various e-mails that have been shown in court, but none of them link Mr. Ebbers directly to the fraud.
And so basically, it comes down to Scott Sullivan and Bernie Ebbers in a room, Scott Sullivan saying he told Bernie certain things about the fraud, and Bernie Ebbers responding, “go out and hit the numbers,” and Scott interpreting that as “go ahead and commit fraud.”
MARGARET WARNER: Now what can you glean — and I know the defense is just beginning — but what can you glean about what the basic defense is based on the kinds of questions and grilling they gave the prosecution’s witnesses?
KEN BELSON: Well, there are a couple of elements. One is they’ve tried to discredit Scott Sullivan, which is somewhat predictable in this case because he is the person pinning Bernie Ebbers to the fraud. They’ve pointed out to the jury several times that there is no one else in the room at the time that Scott Sullivan said he’s telling Bernie about the fraud, Mr. Ebbers about the fraud.
And also that Scott Sullivan is motivated to testify against his former boss because he’s also pleaded guilty or has pled guilty to fraud charges and faces up to 25 years in prison. And he is trying to reduce his own sentence by testifying against his boss.
MARGARET WARNER: Now Bernard Ebbers, at least as an executive, was always portrayed as larger than life. What’s been his demeanor through this trial?
KEN BELSON: He’s been extraordinarily quiet. He’s been taking notes at various points, particularly the first day that Scott Sullivan took the stand. He looked very intense. His eyes were furrowed up and his face was turning bright red. But most of the time, he’s fairly passive. He hasn’t made eye contact with a lot of the witnesses, people who were former employees of his.
Outside of the courtroom, he hasn’t said very much to the media at all, walks very quickly from the courthouse to his car and scoots away. So his family is with him. He’s jovial between breaks in the trial and, you know, he’s happy or seems happy in walking around, but basically you can tell that he’s under the gun and he’s pretty intense when the testimony is going on.
MARGARET WARNER: And has the defense said whether they’re going to call him as a witness?
KEN BELSON: They haven’t said that yet. Of course, it is a big gamble in any case. We’ve seen it in Martha Stewart’s trial and Frank Quattrone’s trial, other cases. Sometimes it works; sometimes it doesn’t.
There are some legal experts who say it’s worth calling him because the only piece of evidence the government has is what one person said in the room. On the other hand, there are other people who say it’s not worth putting him up to scrutiny uder the cross examination and it’s better just to poke holes through the government’s case.
MARGARET WARNER: Now the fraud itself, the way you described it — the accounting gimmick, it’s seems so– especially the one about operating expenses and pretending they’re capital expenses– seems so obvious. Did Sullivan say anything to explain why that wasn’t caught either by the accounting firm or certainly by the board of directors and their auditing committee?
KEN BELSON: Well, this is one part of the testimony that’s going on now is that people trusted Scott Sullivan inside and outside the company, both on Wall Street with analysts at Arthur Anderson, the auditors, and also people within WorldCom.
He was extremely persuasive on the stand and people testified to him being persuasive when he was at WorldCom. So I think he was given a lot of latitude to interpret accounting measures, and people believed him and stepped back from really looking at it.
Unfortunately, the amounts became so large that Wall Street analysts certainly woke up to it. Certainly, when other companies in the telecom industry are reporting far worse numbers and WorldCom is the outlier, people really started to look at what was going on beneath the surface.
The other thing to remember is that Enron had happened — the Enron bankruptcy had happened several months before this. And then, all of a sudden, analysts started to pay a lot closer attention to every other company that they might have only casually suspected beforehand.
MARGARET WARNER: All right, Ken Belson of the New York Times, thanks for being with us.
KEN BELSON: Thank you.