Ex-CFO pleads innocent to new charges

Sullivan denies lying to banks while serving as WorldCom executive

April 23, 2003|By BLOOMBERG NEWS

NEW YORK - Former WorldCom Inc. Chief Financial Officer Scott D. Sullivan pleaded innocent yesterday to new charges that he lied on financial statements to secure $4.25 billion in credit for the company.

At the same time, his attorney offered a glimpse of his defense strategy, asking a federal judge for permission to subpoena other telecommunications companies.

Sullivan is accused of defrauding J.P. Morgan Chase & Co., Bank of America Corp., and other banks of $4.25 billion through improper accounting that hid some of WorldCom's expenses. Sullivan's lawyer, Irvin Nathan, told U.S. District Judge Barbara S. Jones that a subordinate at WorldCom told an internal auditor "he believes all other companies in the industry adopted similar practices."

Prosecutors' central claim is that Sullivan reduced WorldCom's expenses by hiding line costs in the capital budget, rather than reporting them as operating expenses. Line costs are access charges WorldCom paid to lease other companies' networks.

"Trying to demonstrate what was generally accepted, or industrywide practice, in an emerging industry may have some merit," said Philip S. Khinda, who was an attorney at the Securities and Exchange Commission and is now in private practice at Ropes & Gray in Washington. "On the other hand, if he's trying to say he wasn't the only one speeding, that won't get very far."

Sullivan's not-guilty plea to the new charges of swindling banks was the second time he has pleaded innocent to a federal indictment since August.

He was initially charged with orchestrating a multibillion-dollar fraud that drove the second-largest U.S. long-distance phone company into bankruptcy proceedings. Prosecutors added new charges last week asserting that he defrauded banks out of $4.25 billion, just weeks before WorldCom said it had misreported $3.85 billion in expenses.

"The essence of the crime is the same," Assistant U.S. Attorney David Anders said. "It's just a different category of victim."

Sullivan, 40, of Boca Raton, Fla., remains free on a $10 million bond. He is the most senior former WorldCom executive to be indicted. At his trial, prosecutors say they plan to call former accounting chief Buford Yates Jr., former Controller David F. Myers, and ex-accounting executives Troy M. Normand and Betty L. Vinson. All have pleaded guilty and are cooperating in a federal probe of former Chief Executive Officer Bernard J. Ebbers.

Nathan said in court yesterday that it was Myers who told WorldCominternal auditor Cynthia Cooper about the accounting practices at other telecommunications companies.

WorldCom is seeking to leave bankruptcy protection this year. The Chapter 11 case, the largest in U.S. history, was triggered by accounting mistatements that may total $11 billion. The company, which filed for protection from creditors July 21, listed $107 billion in assets and $41 billion in debt at the time.

Nathan said yesterday that he would file a motion to dismiss the case because prosecutors allegedly leaked details of Sullivan's confidential plea talks to the media. Nathan also said the government breached an agreement not to parade Sullivan before television cameras after his arrest and will seek dismissal on that ground as well.

Nathan wants Jones to bar prosecutors from using evidence obtained during plea negotiations. The talks failed to yield a guilty plea or enough evidence to charge Ebbers. Nathan said he plans to renew his request to Jones to transfer the case to another state where there's been less publicity. Jones denied an earlier request for a change of venue.

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