Former WorldCom Inc. chief executive Bernard J. Ebbers was indicted yesterday on conspiracy and securities charges after a two-year federal probe identified him as the architect of an $11 billion accounting fraud that has already netted guilty pleas from five other executives at the telecommunications company.
Scott D. Sullivan, Ebbers' chief financial officer, became the fifth yesterday in a plea deal in U.S. District Court in New York. Sullivan pleaded guilty to participating in the conspiracy and adjusting accounting reports to improve the company's financial results.
Both men, accused of inflating the price of WorldCom stock, were charged in the indictment with two counts of securities fraud; and one count of conspiracy to commit securities fraud, to make false filings with the Securities and Exchange Commission, and to falsify books and records of WorldCom.
Sullivan's guilty plea and agreement to cooperate with prosecutors is a pivotal step in the federal case against Ebbers, who had until now escaped charges after resigning from WorldCom in April 2002.
The move against Ebbers follows a string of high-profile corporate corruption cases that have advanced to the trial phase in the past year, including former Tyco International CEO L. Dennis Kozlowski and Martha Stewart.
"It certainly doesn't help Ebbers' case at all that Sullivan has pled guilty," said David Willis, vice president of technology research and services at the META Group, a research and consulting firm in Stamford, Conn. "The irony is that in the quarter before WorldCom's collapse, Ebbers made the statement during a conference call that `Scott can sure make the numbers dance.' Well, maybe they're not supposed to dance."
He added: "It's very important for the public to see that there are very heavy penalties to be paid if you defraud investors and the public."
The conspiracy charge carries a maximum sentence of five years in prison and a fine of at least $250,000. Each of the securities fraud counts could carry a 10-year sentence and a fine of at least $1 million.
The SEC's enforcement division also announced yesterday that it had simultaneously filed civil charges and settled its case against Sullivan.
Sullivan admitted to U.S. District Judge Barbara Jones that he deceived investors, regulators and Wall Street in a "misguided effort to preserve the company to allow it to withstand what I believed were temporary financial difficulties."
While the company's finances deteriorated, "management at the highest level continued to provide unduly optimistic guidance to security firms, analysts and to the investing public," Sullivan told the judge.
Ebbers' attorney Reid Weingarten was not available yesterday for comment.
In a statement after the charges were unsealed in New York, Attorney General John Ashcroft said: "The charges filed today are another example of the Department of Justice's commitment to thoroughly investigating and prosecuting perpetrators of corporate fraud to the highest levels of management.
"Corporate executives who cheat investors by deceiving them about the true nature of their businesses are not above the law and will be held accountable."
The charges against Ebbers follow a guilty plea in January by Andrew Fastow, Enron Corp.'s former chief financial officer. Last month, former Enron CEO Jeffrey K. Skilling was also indicted. Former Chairman Kenneth L. Lay has not been charged.
The collapse of Enron in 2000 was the beginning of a series of corporate malfeasance cases.
Before then, Ebbers was largely credited with taking a small long-distance reseller in Mississippi and turning WorldCom into a global telecommunications giant that swallowed a number of its competitors. With the acquisition of MCI Communications Corp. in 1998, it became the nation's second-largest long-distance company for residential customers behind AT&T.
But by 2000, conditions in the telecommunications market became increasingly difficult. Industry revenues and stock prices plummeted.
The federal indictment against Ebbers and Sullivan said they knew that WorldCom's true operating performance and financial performance were in decline and had fallen below analysts' expectations.
"Sullivan, with Ebbers' knowledge and approval, directed co-conspirators to make false and fraudulent adjustments to WorldCom's books and records" from September 2000 to June 2002, the indictment said.
The indictment also quoted several statements made by Ebbers and Sullivan from 2000 to 2002 during television appearances and analysts' conferences in which both men repeatedly reassured investors about the stability and strength of WorldCom's finances.
An independent investigative report released last year by WorldCom placed most of the blame on Ebbers.