Background: Fallen Giant

KWAME HOLMAN:

Two former top executives of WorldCom, an Arthur Andersen auditor, and a Salomon Smith Barney stock analyst sat quietly this afternoon as members of the House Financial Services Committee took turns beating up on them.

REP. MAXINE WATERS:

The founder, Mr. Ebbers, the board of directors and certain think auditor of record, the now infamous Arthur Andersen should have known and should be held responsible. Mr. Sullivan simply committed the simplest most easily detectable accounting fraud. He lied about operating costs, hid debt and is still trying to justify operating costs as capital costs.

KWAME HOLMAN:

Members also beat up on currently accepted accounting practices and regulations.

REP. JOHN LaFALCE:

The safeguards we have relied upon to protect investors have failed at every level. Auditors, audit committees, and boards of directors have not been able to provide the protections to which shareholders are entitled.

KWAME HOLMAN:

And committee members beat up on each other as well.

REP. BERNARD SANDERS:

It is no secret to any American that the wealthy and powerful because of their campaign contributions have enormous influence over the political process and what goes on here. So number one, Mr. Chairman, before we lecture those guys, let us have the honesty to do the right thing and to call for real campaign finance reform so that this institution does not get swamped with money that come from the wealthy and the powerful.

KWAME HOLMAN:

Committee Chairman Michael Oxley called the hearing in the wake of WorldCom's disclosure that it had improperly reported $3.8 billion in operating expenses as profits.

REP. MICHAEL OXLEY:

If these charges are proven, WorldCom executives who participated in the fraud should have to return any profits from stock sales made during the five quarters of misreported earnings. It would be simply wrong to allow them to profit from criminal behavior. The stock has plummeted from a high of nearly $65 a share just a few years back.

This betrayal to the spirit of the 4th of July by senior WorldCom managers is so immense that it could cost tens of thousands of workers and average citizens their livelihood and life savings. How could something like this have happened and what can be done to prevent a recurrence? To get the answers we've invited a number of individuals here today who know or should have known what happened. They owe this committee and the public a thorough explanation.

KWAME HOLMAN:

But Bernard Ebbers and Scott Sullivan, WorldCom's former chief executive and chief financial officer, weren't prepared to provide answers the committee wanted today.

SCOTT SULLIVAN:

Based upon the advice of counsel, I respectfully will not answer questions based upon my Fifth Amendment right to the United States Constitution.

SPOKESMAN:

Mr. Ebbers?

BERNARD EBBERS:

Good afternoon, Mr. Chairman. Members of the committee. I served as CEO of WorldCom for 17 years. During that time, I helped a small company rise to one of America's largest corporations. I am proud of the work that I did at WorldCom. And I believe that despite its recent problems, WorldCom continues to be a valuable company that provides important services to many Americans and to the United States government. Although I would like more than you know to answer the questions that you and your colleagues have about WorldCom, I've been instructed by my counsel not to testify based on my Fifth Amendment constitutional rights.

After careful consideration, I have decided to follow my counsel's instruction, even though I do not believe I have anything to hide in these or any other proceedings. I hope the committee will not draw a negative inference based on my assertion of these constitutional protections on the instruction of my counsel. Or attempt to subject me to ridicule by asking inflammatory questions knowing I that I will not answer them. I do not believe I should be subject to legal harm as a result of my exercise of a basic constitutional protection found in the Bill of Rights.

When all of the activities at WorldCom are fully aired, and when I get the opportunity, and I'm very much looking forward to it, to explain my actions in a setting that will not compromise my ability to defend myself in the legal proceedings arising out of the recent events, I believe that no one will conclude that I engaged in any criminal or fraud you lent conduct during my tenure at WorldCom. Until that time, however, I must respectfully decline to answer the questions of this committee on the basis of my Fifth Amendment privilege. Thank you, Mr. Chairman.

KWAME HOLMAN:

That lengthy statement by Bernard Ebbers prompted some on the committee to challenge whether he had in fact waived his Fifth Amendment protection.

REP. MAX SANDLIN:

To come up here and say that he has engaged in no criminal activity and to set forth his affirmative statements in his defense and then to refuse to testify is an outrage; it's not in conjunction with the United States Constitution, I suggest that he consult with his attorneys and then that we hold him in contempt until such time as he elects to go along with the subpoena the committee and testify before us.

KWAME HOLMAN:

Committee members argued back and forth for several minutes over whether Ebbers could be compelled to testify. Finally, Chairman Oxley said he would consider the issue, while Ebbers was asked to remain in the room. The two other witnesses however volunteered to testify. Melvin Dick was the Arthur Andersen auditor in charge of reviewing WorldCom's finances.

MELVIN DICK:

The fundamental premise of financial reporting is that the financial statements of the company, in this case WorldCom, are the responsibility of the company's management, not its outside auditors. WorldCom management is responsible for managing its business, supervising its operational accounting personnel, and preparing accurate financial statements. It is the responsibility of management to keep track of capital projects and expenditures under its supervision. If the reports are true that Mr. Sullivan and others at WorldCom improperly transferred line costs to capital accounts so as to misstate the company's actual performance, I'm deeply troubled by this conduct.

REP. PAUL KANJORSKI:

You're indicating that you just checked the mathematics of whatever management gives you and that's what you consider an audit?

MELVIN DICK:

No. The, let me just reemphasize again that the preparation, the actual financial statements themselves are prepared by management. The auditors' responsibility is to perform an audit on those statements to make sure they're free of —

REP. PAUL KANJORSKI:

Just the statements, not the underlying material that those statements are based on?

MELVIN DICK:

When we performed our audit, we did specific testing.

REP. PAUL KANJORSKI:

Right, okay. Now, this wasn't off balance sheet material, was it? The 3 million we just recorded in the wrong area was recorded as a capital investment as opposed to a normal expense?

MELVIN DICK:

I have not seen specifically what they've done. But based on what I have read he –

REP. PAUL KANJORSKI:

You mean you certified this, you didn't look at it before you came here today?

MELVIN DICK:

With regard to the 3.8 billion that's been —

REP. PAUL KANJORSKI:

You mean you weren't curious to know how these guys snookered your outfit to certify, you didn't figure out what they did yet?

MELVIN DICK:

Congressman, that information has not been provided to me.

KWAME HOLMAN:

Jack Grubman is the Salomon Smith Barney analyst who continued to recommend WorldCom stock even as its financial problems were coming to light.

JACK GRUBMAN, Salomon Smith Barney:

I am aware that there is speculation that I had advance knowledge of this fraud. That speculation is categorically false. I had no advance knowledge what so ever of this fraud.

REP. GARY ACKERMAN:

You've testified today that you've done a job based on information and communications that you've received from the two gentlemen setting in between you among others. Have they deceived you? Have they lied to you? Have they committed any crimes? Mr. Dick?

MELVIN DICK:

I don't know if they committed any crimes. I can tell thaw when we did our audits we asked for the journal entries that had been —

REP. GARY ACKERMAN:

Stop giving us these happy horse feathers. You still feel the need to cover up for these guys? I thought you were off the job. Mr. Grubman, did they lie to you? Did they deceive you? Did they commit any crimes? Thank you very much.

JACK GRUBMAN:

I can't answer the last question about the crimes because I'm not qualified. But what was state as true, then I was deceived by the company reports.

REP. GARY ACKERMAN:

So you believe they lied to you?

JACK GRUBMAN:

If what is allegated is true, because I don't want to say anything that's not true, if what is alleged is true, then for at least the last five quarters of what we know, I and others were lied to.

KWAME HOLMAN:

As these investigative hearings continue, many members of Congress are demanding legislation this session aimed at preventing corporate corruption.