2 key WorldCom execs charged

Ex-chief financial officer, controller accused of hiding $3.8 billion in debt

August 02, 2002|By NEW YORK TIMES NEWS SERVICE

NEW YORK - Two former executives of the telecommunications giant WorldCom Inc. were charged yesterday with orchestrating a multibillion-dollar accounting fraud that disguised growing losses and that helped drive it into bankruptcy.

The executives - Scott D. Sullivan, WorldCom's former chief financial officer, and David F. Myers, its former controller - surrendered at 7 a.m. at the Federal Bureau of Investigation's field office in Lower Manhattan. They were later publicly escorted in handcuffs to the federal courthouse for a brief hearing. Afterward, Sullivan was released on a $10 million bond and Myers on $2 million.

The charges, brought in a criminal complaint unsealed early yesterday, describe in point-by-point detail the inner workings of the accounting manipulations that prosecutors and company officials have said misstated WorldCom's earnings by more than $3.8 billion. The maneuvers helped keep the company's stock price high even as its finances were rapidly deteriorating.

The filing of the charges was among the fastest ever in a white-collar case. They were brought less than five weeks after WorldCom announced its discovery of the accounting misdeeds and were quickly held up by the Bush administration as proof of its commitment to prosecuting corporate miscreants. It came a week after the arrests on fraud charges of members of the Rigas family, which founded Adelphia Communications.

"Today's charges are the latest in a sustained series of law enforcement actions aimed at prosecuting corporate lawbreakers and protecting the savings and pensions of Americans," Attorney General John Ashcroft said at a news conference. "Corporate executives who cheat investors, steal savings and squander pensions will meet the judgment they fear and the punishment they deserve."

Outside the courthouse after yesterday's hearing, Irvin B. Nathan, an attorney for Sullivan, condemned the charges, saying they were brought so quickly largely because of political motives.

"We very much regret the rush to judgment and the part that politics has obviously played in bringing with great fanfare criminal charges with less than a month's reflection," Nathan said. "We will vigorously contest the criminal charges brought against Mr. Sullivan, who looks forward to his day in court, hopefully without the unfair taint of the current political climate."

Myers, the former controller, appeared outside of court with his lawyers about 10 minutes later. He stood silent, holding hands with his wife as his lawyers said he would plead innocent if he was indicted. They declined to comment further.

The WorldCom scandal might at first blush seem just part of the staccato rhythm of accounting and financial debacles that have upended a raft of corporations in the past six months - from Enron Corp. to Adelphia, from Tyco International to Global Crossing Ltd.

But the sheer scope and apparent audacity of the misrepresentations at WorldCom served to punctuate investors' sense of unease about the reliability of corporate financial reporting, helping to send the stock market into a free fall for several days until it touched five-year lows.

The criminal investigation has raised questions on Capitol Hill and on Wall Street about the possible involvement of Bernard Ebbers, WorldCom's former chief executive officer. In a statement released yesterday, Reid Weingarten, an attorney for Ebbers, reiterated his client's innocence and expressed support for Sullivan and Myers.

"Today's actions may be good theater for the media and useful to the politicians," Weingarten said in the statement. "But they don't prove that Sullivan and Myers ever acted with criminal intent, an essential element we doubt the government will ever be able to prove in this case."

As described in the complaint, the accounting maneuvers at WorldCom were simplicity itself; executives took one type of expense and called it something else.

Many facts in the case are undisputed. Sullivan has admitted to WorldCom investigators that he knowingly shifted the $3.8 billion in expenses from an operating account of the company into its capital accounts. That allowed WorldCom to treat expenses that should have been fully recognized each quarter as, instead, something akin to a mortgage, with a little bit of the debt paid off with each filed financial report.

In interviews with WorldCom investigators, Sullivan maintained that he believed such transfers were permissible. Sullivan argued that he treated the expenses, involving amounts paid to other companies for access to their telecommunications networks, as capital costs because they did not have matching revenues to offset the amount paid.

But the current and former accounting firms for WorldCom, KPMG and Arthur Andersen, have said that such treatment of expenses is clearly not permissible under the rules.

Based on the information in the criminal complaint, each defendant has different vulnerabilities in the case. Myers' exposure may be greater than that of Sullivan, who held a higher rank at the company.

That is because all such prosecutions must establish that the defendant had the intent to commit a fraud. Sullivan, regardless of the evidence that his accounting was in error, has at least provided a story that will be difficult to use against him as evidence of criminal intent.

In his interviews with WorldCom investigators, however, Myers stated in effect that he and Sullivan had begun shifting expenses because they were rising over historic levels.

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