Ebbers misled investors, witness says

Former WorldCom CEO insisted that company `hit our numbers'

February 09, 2005|By Walter Hamilton | Walter Hamilton,LOS ANGELES TIMES

NEW YORK - Former WorldCom Inc. Chief Executive Officer Bernard J. Ebbers refused to alert Wall Street to WorldCom's deepening financial crisis, despite repeated warnings that investors were being misled, the chief witness against him testified yesterday.

Instead, Ebbers ordered company accountants to make sure that quarterly profits matched the projections from stock analysts, WorldCom's former chief financial officer, Scott D. Sullivan, told jurors in Ebbers' federal trial. "There was one thing he said each time. ... We have to hit our numbers," Sullivan said.

He later described a meeting in October 2000 during which he showed Ebbers a plan to create $133 million in revenue by improperly drawing down reserve accounts. "I told Bernie, `This isn't right,' " Sullivan said.

"He just stared at it, and he looked up at me and he said, `We have to hit our numbers,' " Sullivan testified.

Ebbers is charged with fraud, conspiracy and other counts stemming from the company's $11 billion accounting fraud. He could be sentenced to at least 30 years in prison if convicted. The company has since been reorganized as MCI Inc. His lawyers have maintained that Ebbers was uninvolved in complex financial matters and was unaware of fraud being carried out by underlings.

Prosecutors have said Ebbers orchestrated the conspiracy because he was obsessed with keeping WorldCom's stock price high, partly to protect his $400 million in personal loans that were backed by WorldCom stock.

Sullivan has pleaded guilty to participating in the conspiracy and adjusting accounting reports to improve the company's financial results. He has agreed to testify for the prosecution but has yet to be sentenced.

Sullivan did not testify that Ebbers specifically ordered the doctoring of the books. But he described Ebbers as fully informed about the accounting manipulation and tacitly condoning it.

Sullivan said Ebbers regularly pressured him to meet revenue and earnings targets to please Wall Street.

In his second day on the stand, Sullivan recounted how WorldCom's once-bright fortunes worsened "dramatically" in late 2000 after a failed merger attempt with Sprint Corp. combined with the collapse of the dot-com economy.

Sullivan said he briefed Ebbers on the deteriorating situation and specifically informed him before the company issued its first set of bogus profit figures in the third quarter of 2000.

At the time, the dot-com bubble had burst and WorldCom was faced with sharply slowing revenue growth and expenses that had soared so high that he thought there was something wrong with the numbers, Sullivan said.

Sullivan said Ebbers grew angry when Sullivan handed him a document showing the company's true operating statistics, which depicted weak revenue and high expenses.

In response, Sullivan said, he fudged the numbers, making "adjustments" tailored to meet analyst projections, and gave them to Ebbers a few days later.

Though WorldCom had previously been "aggressive" in its accounting, Sullivan testified, the new figures bore no relation to reality.

For example, a reserve account was listed as operating income, he said. Bogus expense adjustments cut reported costs by $700 million, he testified.

After WorldCom released the bogus statistics in October 2000, there were rumblings about unhappy employees in the accounting department, and two employees threatened to quit, Sullivan said. The finance chief met with them, apologized for the deceit and promised that WorldCom would come clean with Wall Street.

"I was sorry that they were pressured" to manipulate the accounting, Sullivan said. "I said it wouldn't happen in the future."

Sullivan said that when he told Ebbers about the employees' dissatisfaction, "he was very quiet. He looked down and said, `We shouldn't be making adjustments. We've got to get the operations of this company going. We shouldn't put people in this position.' "

Sullivan also testified that Ebbers agreed to issue earnings warnings for the fourth quarter of 2000 and for all of 2001 but continued to mislead investors with high projections.

The Associated Press contributed to this article. The Los Angeles Times is a Tribune Publishing newspaper.

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