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TERENCE SMITH: Today’s arrests came just a week after top executives at cable operator Adelphia were also led away in handcuffs. With me now to help explain the WorldCom arrests is Floyd Norris, chief financial correspondent for the New York Times. Floyd, welcome. Can you explain to us what roles these two played at WorldCom? They were key executives?
FLOYD NORRIS: They were the top executives in the accounting function, and the government charges that, when it became clear that WorldCom was in financial trouble, they decided to cook the books to conceal how much trouble they were in and to inflate their profits.
TERENCE SMITH: And from the complaint how did they allegedly do that?
FLOYD NORRIS: What they did was they had leased a lot of capacity on other companies’ telephone lines in order to serve what they thought would be the burgeoning Internet traffic that was sure to come. Well, that Internet traffic didn’t grow like they expected, and they had a lot of capacity they couldn’t use. So they decided they’d act like those payments were for future use and capitalize them, not treat them as expenses. That made their operating cash flow look better, it made their profits look better. It made the company look a lot healthier than it was.
TERENCE SMITH: So instead of taking the costs as operating expenses, they spread them out as capital expenses?
FLOYD NORRIS: Well, they called them capital expenses, which meant they’d have to write them off over some period of time. There’s some evidence that they hoped they’d be able at some point to take a big bath write-off and call it a restructuring charge or something and hope no one would notice.
TERENCE SMITH: Now, wouldn’t the auditors look at that and say,” this is not right?”
FLOYD NORRIS: Yes, they should have. The auditors say they asked questions and were lied to. That’s a key part of the charges the government has made, and assuming they can prove that, it goes to show motive.
TERENCE SMITH: And what about the format former chairman, Bernard Ebbers? Did he know of this? Was he involved according to the complaint?
FLOYD NORRIS: The complaint says nothing about Mr. Ebbers’ role. We have no evidence that he knew that this was going on. Now, a lot of people assert, well, surely he must have known, but unless a document surfaces or unless one of these defendants chooses to say he knew, I don’t think the government is going to have a case against him.
TERENCE SMITH: And yet weren’t Sullivan and Ebbers, they were described as inseparable as executives at the company?
FLOYD NORRIS: They were viewed as very close. They rose together in the company. Sullivan was widely viewed as the financial genius of this company and was very well respected on Wall Street. There are some people who have been shaken up just because they really believed this man was an honest man, and now of course the government says he wasn’t.
TERENCE SMITH: And Sullivan and Myers did they profit personally from these accounting procedures, as executives at Enron did?
FLOYD NORRIS: There’s no evidence they did. I mean they obviously were getting paid salaries and bonuses. These gentlemen put up between them $12 million in bail today, so it’s obvious they have money. But they didn’t sell stock during this period. Sullivan sold a lot of stock in ’99… or 2000, I forget which, but this fraud they claim started in 2001.
TERENCE SMITH: Right. Now, this record actually shows that Sullivan sold some $45 million in stock over about a seven-year period.
FLOYD NORRIS: That’s… I didn’t know that exact number, but that sounds about right.
TERENCE SMITH: The point being that he certainly had an interest in seeing the price of the stock propped up?
FLOYD NORRIS: He did. He doesn’t seem to have sold during this period, however.
TERENCE SMITH: From what you can judge, and the sources you’ve talked to, Floyd, is there a government strategy here that is obvious? Are they going to try to turn these two executives against others in the company?
FLOYD NORRIS: I’m sure they’d love to do that. Now, so far, there is no evidence that they have succeeded. We heard from Mr. Sullivan’s lawyer there on the courthouse steps. What they’re doing with this is they’re treating these people like normal criminals. If you were charged with robbing a bank, they’d parade you into court as soon as they caught you, they’d arrest you and the indictment would come later. And that’s exactly what they’re doing with these guys. And they’re doing the perp walk while they’re at it. They never used to do this for white collar criminals, but obviously people are mad. You can call it politics, you can call it public revulsion, but the atmosphere for white collar crime has changed dramatically.
TERENCE SMITH: And what are they trying to say by putting these, as you call them, perp walks on television, letting everyone see these executives come out literally, you know, with their hands in handcuffs?
FLOYD NORRIS: Well, they will tell you, and I’m sure they mean it, that they’re trying to set an example for others. They’re trying to… this is one form of punishment the government metes out. I’m sure that Mr. Sullivan never viewed himself as the kind of man doing a perp walk. The average bank robber knows there’s a risk this is going to happen to him, but corporate executives don’t. And some people will of course assert that the public is furious and the Bush Administration wants to do its best to appear to be on the right side of this issue.
TERENCE SMITH: Was there any suggestion today, Floyd, of subsequent charges or subsequent arrests?
FLOYD NORRIS: There is no direct evidence of it. I’d be highly surprised if the indictment that eventually comes down exactly mirrors the arrest charges filed today. But they will… we’ll see what further evidence they can develop, and we’ll see if either of these fellows wants to cooperate.
TERENCE SMITH: Is it conceivable that the company itself would be charged, the way Andersen, Arthur Andersen was?
FLOYD NORRIS: It’s conceivable. It’s not clear what is accomplished by that. WorldCom will endure as a company, but it’ll be owned by different people. The shareholders are wiped out in this bankruptcy, almost certainly, and the bondholders are not expected to do very well. So this company has suffered greatly financially. It is not clear exactly what is served by further penalizing them. And of course while you can fine a company, you can’t throw it in jail.
TERENCE SMITH: Just from the charges that were mentioned today in the complaint, what are the penalties in terms of jail or fines?
FLOYD NORRIS: Well, they have a securities fraud, the various fraud charges — under the current law have five-year maximum penalties. Now, they’ve thrown in seven counsels. That’s theoretically 35 years. They can throw in more counts, if they want to probably. Moreover, an interesting part of the charge is they came up with a damage figure related to how much the stock went down when this was disclosed, and that was $2 billion. In the sentencing guidelines, one of the issues in a fraud case is the damages, and by getting a number in the billions they’re going to increase the number in the sentencing guidelines that would be called for after conviction.
TERENCE SMITH: Okay. Floyd Norris, thank you very much.
FLOYD NORRIS: Thank you.