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The Honolulu Advertiser

Posted on: Sunday, August 4, 2002

Ex-WorldCom financial chief lived a life of paradox

By Kevin Maney and John Swartz
USA Today

A couple of years ago, patrons of Tico's Steak House near WorldCom's Clinton, Miss., headquarters saw the other side of Scott Sullivan, WorldCom's typically crisp, cool former chief financial officer.

Former WorldCom chief financial officer Scott Sullivan, center, leaves federal court with his attorney Irv Nathan, right, after being charged with improperly hiding billions of dollars in expenses.

Associated Press

Sullivan sat with WorldCom CEO Bernie Ebbers and another WorldCom executive. Amid the dark interior, watched over by an immense stag's head, Sullivan and the other executives argued about Sullivan selling some of his WorldCom stock while he criticized others for doing the same, witnesses say.

Sullivan exploded in anger, and some watchers anticipated a physical fight. Few people in Clinton had ever seen Sullivan that way. All the while, Ebbers grinned. Those who know Ebbers and Sullivan say Ebbers disliked Sullivan so much that he thoroughly enjoyed watching his CFO go embarrassingly ballistic.

For Sullivan, who was arrested Thursday for his role in the WorldCom scandal, it was a rare letdown of his game face but one that betrayed layers of inconsistencies. Sullivan, 40, got mad at others for selling stock, yet did it himself. He worked closely with Ebbers, yet privately detested him. He professed love for his wife and daughter, yet worked away from them and rarely saw them.

Sullivan's complexities make it that much harder for investigators to piece together what happened. WorldCom accuses Sullivan of improperly accounting for $3.9 billion in expenses — which increased WorldCom's revenue and propped its stock. WorldCom fired Sullivan in late June after the accounting misdeeds were unearthed. Sullivan is now free on a $10 million bond and, if convicted, faces as much as 10 years in prison for securities fraud.

In perhaps the ultimate complexity, interviews with Sullivan co-workers, colleagues, acquaintances, neighbors and friends paint a picture of a man who would not intentionally commit fraud for personal gain — but of a man who was driven by a fearsome desire to win. Even money doesn't appear to be a big motive. Though Sullivan still owns 3.3 million shares of WorldCom stock, by the time the alleged accounting improprieties occurred, he'd already cashed in plenty of stock to remain wealthy even if WorldCom tanked — unlike Ebbers, who, despite cashing in even more stock, is hundreds of millions of dollars in debt.

So, if Sullivan pushed WorldCom's accounting over the line, it might have been to make sure WorldCom emerged a winner from the telecom wreck.

"In every encounter I've had with him, he's been by the book," says David Solomon, who was CFO of Brooks Fiber Properties when WorldCom bought Brooks in 1998. Solomon is now CEO of St. Louis-based telecom company NuVox Communications. "I feel for Scott. I don't think he was trying to do anything intentional, but he crossed the line."

Andrew Graham, a lawyer for Sullivan, refused repeated interview requests. Sullivan could not be reached.

Wall Street considered Sullivan one of telecom's most talented CFOs. He had straight answers to every question. He could crunch numbers for a potential deal at hyperspeed.

He could coordinate far-flung teams of lawyers and bankers to get deals done in record time. He would read the fine print on contracts and find errors.

"Scott had a stellar reputation," says Richard Klugman, telecom analyst at Jefferies & Co. "He had a deep grasp of the numbers, keen understanding of the big picture, and was able to articulate both to the Street. It's almost embarrassing to say, but I had a very high level of respect for the man. I emphasize the word 'had.' "

Sullivan became WorldCom CFO in 1994, working with Ebbers as WorldCom bought a string of companies leading up to the $33 billion takeover of MCI Communications in 1998. That deal rocketed WorldCom, Ebbers and Sullivan into the elite of telecom.

Sullivan was also known for his integrity. Wall Street analysts never faulted his numbers or rationale. Inside WorldCom, he scrutinized expense reports to find minor transgressions, and he refused to take part in some of the riskier telecom accounting practices, such as capacity swaps. Those dominate probes by the Securities and Exchange Commission into Qwest Communications and Global Crossing.

He was better with numbers than with people. His staff considered him a distant boss, though not difficult or mean. He revealed little about himself to co-workers and seemed to want to know little about them. He came across as humble, but the humility belied a professional bravado. His business school alma mater, Oswego State University of New York, proclaimed him "Master of the Mega Merger" on its Web site — a notion that Sullivan apparently embraced at a time when WorldCom did deal after deal.

"Every time there is another move, another merger, I ask myself, 'How can you top this?'" Sullivan told an alumni publication in 1999. "Every time there has been something new to come along to offer that challenge, that makes life interesting."

Over the past two years, though, and starting with the Justice Department's block of WorldCom's proposed merger with Sprint, the deals dried up.

In their place? Escalating pressure on Sullivan as the telecom industry crashed. WorldCom's earnings dived, while demand growth dwindled, debt piled up and the stock price tumbled.

A stress-filled personal life compounded the work pressures.

WorldCom is headquartered in Mississippi because that's where Ebbers has lived for 34 years. When Sullivan was named WorldCom CFO, he kept his home in Boca Raton, Fla., and commuted Monday mornings to Jackson, Miss., returning Friday evenings.

For years, Sullivan mostly commuted on commercial airlines. Colleagues were baffled that he continued to work for WorldCom as his wife, Carla, became chronically and seriously ill. They were even more baffled after the Sullivans adopted a baby girl last year. "It defied logic that he left his wife alone," says a former colleague who knows Sullivan well but asked not to be identified. There were incidents when Carla fainted or fell while Sullivan was in Jackson. "It wreaked havoc on Scott."

Neighbors found it hard to reconcile the workaholic and doting father, who frequently baby-sat his daughter. "Unless he's the greatest actor in the world, I think he's a genuinely nice, unpretentious guy," says Al London of Boca Raton.

Sullivan also disliked the Jackson area, acquaintances say. He disliked the lifestyle, the food and what he perceived as the insularity. Sullivan, born and raised in the Northeast, always felt like an outsider and chose to remain an outsider by mixing mainly with other displaced Northerners.

The one thing Sullivan loathed more than Jackson, those close to him say, was Ebbers. Professionally, they were glued to each other — a perfect Batman and Robin dynamic duo on the dealmaking scene. Ebbers saw the grand strategy of deals. Sullivan knew the minutiae and numbers. In negotiations, Ebbers was hard and brusque, Sullivan calm and polite. Together, they forged 17 mergers to build WorldCom.

"They pushed one another pretty hard," says Solomon, the former Brooks CFO. Their differences turned especially bitter over the past four or five years, insiders say. Sullivan privately would say that Ebbers was in way over his head and that Ebbers was micromanaging the company to death. Ebbers would likewise talk about Sullivan behind Sullivan's back. When word of such remarks filtered back to each man, they became more estranged and angry.

At the same time, Sullivan became rich.

From 1995 to 2000, Sullivan sold 1.46 million WorldCom shares for proceeds of $45.3 million. He still owns 3.3 million shares, which were worth about $204 million in 1999 but are worth less than $1 million now.

Despite his wealth, for the past 11 years, he and Carla have lived in a modest suburban tract house that they bought in 1990 for $170,000. They didn't spend money on a garage full of fancy cars. The only boat registered to Sullivan in Florida is an eight-foot Sea-Doo personal watercraft. In Mississippi, he lived in a modest condominium.

In 1998, Sullivan purchased a $2.4 million tract of land in Boca's exclusive Le Lac gated community. He is building a $15 million five-building compound with an 18-seat movie theater, boathouse and swimming pool. Should he be convicted, assets tied up in the house would be protected from creditors because of Florida's homestead protection laws.

Acquaintances say the opulent estate, perched on a lake, is Carla's dream house.

Bottom line: Sullivan lived in two places. Neither could really be called home. He spent most of his time in a town he didn't want to be in, with people he didn't want to be with, while his sick wife, infant child and unfinished dream house were far away.

In the contradictions that make up Sullivan, acquaintances say, he might have been a man on the edge, where too many crushing problems led to judgments that weren't sound and issues that fell through the cracks.

The pressure started ramping up in 2000, as the telecom implosion began. WorldCom was forced to slash its 2001 earnings forecast by about 30 percent. The company had almost always beat Wall Street's earnings estimates, which usually boosted the stock.

"They definitely were under pressure" to continue the streak, analyst Klugman says.

That same year, WorldCom documents show, several employees questioned WorldCom's accounting. One international executive, Steven Brabbs, said $33.6 million of expenses from his division were improperly accounted for by the U.S. office — and that he questioned the office, as well as WorldCom's then-auditor, Arthur Andersen, about it. Sullivan demanded the adjustment, Brabbs wrote in June.

Another WorldCom employee allegedly told Sullivan that some accounting entries in 2000 went beyond aggressive and were wrong, documents released by lawmakers investigating WorldCom show. Sullivan reassured the employee, who worked in the finance department, that everything was OK.

The biggest allegation facing Sullivan — and the one that spurred the Justice Department probe into WorldCom — is that he accounted for certain expenses as capital expenditures, which helped WorldCom's finances look better than reality. It basically pushed those expenses into the future, when growing revenue might be able to offset those expenses.

The SEC says Sullivan's accounting moves turned a loss in 2001 of $662 million into earnings of $2.4 billion before taxes and minority interests WorldCom held in other companies.

Those alleged incidences, coupled with comments from acquaintances, suggest that Sullivan started the accounting alterations on a small scale, believing that revenue growth would eventually make them moot.

But when growth flattened, the scheme snowballed — WorldCom had to keep making alterations to expenses or risk bigger and bigger shortfalls in earnings, disappointing Wall Street and crushing the stock.

David Myers, WorldCom's former controller, told the WorldCom internal auditor who discovered the accounting misdeeds that, once the costs were mistreated the first time in 2001, it "was difficult to stop," WorldCom documents state. It is unclear what Ebbers knew. He has proclaimed innocence.

Sullivan outlined his rationale in a statement presented to WorldCom's board after the accounting moves were discovered. He indicated that he thought he was doing the right thing.