Five indicted at WorldCom

By Kevin Maney, Andrew Backover and Paul Davidson
USA Today

Another episode of the WorldCom debacle unfolded yesterday, this time centering on indictments, conspiracies, firings and a handful of new characters.

Observers say the latest charges conjure a culture of misconduct at telecom giant WorldCom, which has a major presence in Tulsa, Okla., as well as in Mississippi, Texas, North Carolina and Washington, D.C. Bloomberg News Service

For the short term, all of it will hamper recovery efforts of WorldCom, the No. 2 long-distance carrier, as the broader conspiracy charges make it seem that the company had a culture of misbehavior, analysts say.

Previously, the company, now attempting to restructure under Chapter 11 bankruptcy protection, portrayed its alleged fraud as the work of a couple of lone renegades. Yesterday, five WorldCom employees were named in the indictment, and prosecutors indicate there may be more.

The pressure on WorldCom isn't likely to let up in a charged atmosphere arising from corporate scandals that have stirred public disgust.

The alleged WorldCom fraud "is so overt and so wrong and so supported by the e-mail trail," says Jeffrey Sonnenfeld, associate dean at the Yale School of Management. "It's the kind of fraud that's wearing a bull's-eye on its back saying, 'Kick me.'"

Meanwhile, the scandal and its circle of players continued to broaden. For the moment, the prosecutors' chief target is Scott Sullivan, who was fired as chief financial officer.

Once considered by Wall Street one of the most respected CFOs, he was indicted yesterday on charges of securities fraud, conspiring to commit securities fraud and making false filings with the Securities and Exchange Commission.

Ebbers' lawyer fires back

In a plot twist, Ebbers' lawyer is firing verbal missiles at prosecutors and, for the first time, publicly defending Sullivan and his underlings.

"Our investigation and our knowledge of these individuals make it hard to believe that anyone acted with criminal intent in connection with these accounting decisions," Reid Weingarten said yesterday. "I don't think (Sullivan) woke up in the morning intending to defraud investors. Scott Sullivan, for everything we know, was a completely honorable and competent accountant."

Weingarten says there is "no credible evidence" linking Ebbers to the accounting decisions.

David Myers, the Sullivan deputy arrested with his boss earlier this month, was not named in the indictment. Papers filed by prosecutors indicate he, among others, is cooperating with the investigation.

Sullivan is accused of masterminding schemes to boost WorldCom's books in an effort to keep the one-time high-flying telecom from missing Wall Street earnings expectations.

Members of Sullivan's staff allegedly carried out his order, reducing expenses by $3.9 billion from 2001 through March 2002, prosecutors say.

Sullivan attorney Irv Nathan says, "We are diligently preparing his defense. We continue to look forward to our day in court. We hope by the time this comes to trial, the media frenzy will calm down so we can have a fair and dispassionate hearing on the complex accounting issues."

Ebbers, who has maintained his innocence, is not named in the indictment. The documents say the alleged conspirators failed to tell WorldCom's auditor, Arthur Andersen, of alterations to the books. But the indictment does not say that the group failed to tell Ebbers or the board.

"The government wants the biggest fish in the pond, and that may well be Ebbers," says Jacob Frenkel, a former federal prosecutor now with Smith Gambrell & Russell.

"The charges filed today reflect our commitment to pursue fraud cases both up and down the corporate ladder," a statement by U.S. Attorney James Comey of Manhattan said yesterday. "We will prosecute the CFOs and controllers who give the orders from the top to commit white-collar crimes. But we will also prosecute corporate officials at all levels who knowingly carry out criminal schemes which defraud the investing public."

Sullivan, though, probably won't help prosecutors get Ebbers. Legal experts say it's likely prosecutors were unwilling to offer an attractive plea deal to Sullivan.

"The government wants to leave Mr. Sullivan naked, homeless and without wheels," says Chris Bebel, a lawyer at Sheperd Smith & Bebel who specializes in white-collar crime cases and is a former consultant to the Justice Department.

Sullivan, meanwhile, "figures he'll be hit so hard even if he cooperates that he has no reason to," Bebel says. Sullivan also has maintained that he believed his accounting practices were proper.

The circle widens

The filings yesterday also charged other players in Sullivan's alleged conspiracy:

• Buford Yates, a lower-level employee who had been a minor player in the WorldCom case, was indicted on the same charges as Sullivan.

Yates told WorldCom investigators, according to WorldCom documents, that he was not familiar with the entries and that investigators should talk to Myers. Yet on July 25, 2000, Yates sent Myers an e-mail saying, "I might be narrow-minded, but I can't see a logical path for capitalizing excess capacity." He also sent an e-mail to another WorldCom employee, who raised the idea that such capacity could be capitalized.

"David (Myers) and I have reviewed and discussed your logic of capitalizing excess capacity and can find no support within the current accounting guidelines that would allow for this accounting treatment," Yates wrote.

Yates attorney David Schertler said yesterday that the indictment was a surprise. He had no further comment. Myers didn't return phone messages to his home. His attorney couldn't be reached.

• Two other employees were named as co-conspirators.

One is Betty Vinson, who allegedly entered altered numbers into WorldCom's books. Along with the others, she knew that "there was no justification in fact, or under generally accepted accounting principles" for making the changes, the indictment says.

The other alleged co-conspirator is Troy Normand, charged with carrying out Sullivan's orders even though he had questioned their justification.

Vinson and Normand were both fired after the indictment came out yesterday. Yates had recently resigned.

WorldCom employees, already battered by weeks of bad press, took yesterday's news in stride. Internet chat rooms and message boards devoted to WorldCom were relatively quiet. Employees said they were expecting it, and some said they were glad that the investigation was progressing because it helped them look toward the future.