Ebbers' queries recalled in testimony

WorldCom chief said to ask how costs could be hidden

February 10, 2005|By BLOOMBERG NEWS

NEW YORK - WorldCom's former chief executive asked his chief financial officer how he hid millions of dollars in monthly expense from Wall Street analysts, the one-time finance chief told jurors yesterday.

Scott D. Sullivan said he informed Bernard J. Ebbers in April 2001 that WorldCom would have to mask $771 million in fees it paid to other telephone carriers for the use of their lines to meet analyst expectations for the first quarter.

"I told Bernie we had made an adjustment to line-cost expenses," Sullivan testified at the criminal fraud trial of his former boss.

Ebbers responded by inquiring "how we were doing it, what effect it would have and where it was going," Sullivan said.

Showing that Ebbers knew that WorldCom planned to issue phony results is critical to proving the charge of securities fraud, said John J. Fahy, a former federal prosecutor in New Jersey.

Even if Ebbers never explicitly ordered his chief financial officer to cook the books, he may not sit silently by, quarter-after-quarter, as WorldCom reported results that Ebbers knew were false, Fahy said.

"After the CFO tells him, `Should I submit the bad numbers,' he has to tell people, whether it's market makers or at board meetings or the press," Fahy said. Ebbers may be found guilty "if he knows the numbers aren't real, and he says what a rosy picture it is," he said.

Ebbers, 63, is on trial in Manhattan federal court on charges of securities fraud and conspiracy. He has denied responsibility for the $11 billion fraud that led to the company's 2002 filing for bankruptcy protection.

Sullivan's testimony about the April 2001 meeting with his boss also bolstered the government's contention that Ebbers was a hands-on chief executive who was well aware of financial pressures on his company. Defense lawyers say Ebbers steered clear of such matters and left accounting matters to Sullivan.

In an effort to show that Sullivan discussed accounting with Ebbers, prosecutors played a June 19, 2001, voice mail the CFO left for his boss, as revenue was falling.

Referring to "accounting fluff" in internal reports, Sullivan said, "We are going to dig ourselves into a huge hole because year-to-date it's disguising what is going on on the recurring service side of the business."

Prosecutors say Ebbers orchestrated a scheme to hide $3.8 billion in line costs in an effort to prop up WorldCom's stock price. The government contends that Ebbers had a personal stake in that deception since he owed hundreds of millions of dollars in loans secured by his WorldCom stock.

Sullivan, 43, has pleaded guilty and is seeking leniency at sentencing in return for his testimony.

In his testimony yesterday, Sullivan explained that WorldCom's revenue began to fall when the Internet bubble burst in 2000 and many "dot-com" companies that were also WorldCom clients folded.

The slowdown had a "ripple effect" in the telecommunications industry, he said, causing carriers who resold WorldCom service to Internet companies to cut back on their use of the telecom's network.

While revenue had stabilized in the first quarter of 2001, the line costs continued to increase, he said.

Sullivan said he told the company's controller, David F. Myers, "We need to start thinking ahead." Sullivan testified that he told Myers that WorldCom could reclassify line costs as long-term expenses that don't need to be recorded right away.

On March 20, 2001, Sullivan attended a meeting about line costs, he said. "[It] didn't go well. The expenses were up."

At a dinner with Ebbers that night, Sullivan said he told him about a strategy to hide line costs as long-term assets. He said he told Ebbers it "wasn't right, that it was a short cut to earnings, that we would do it this one time."

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