Former Phone Execs Arrested
Continuing their high-publicity crackdown on corporate corruption, federal authorities Thursday arrested two former executives of WorldCom Inc., the phone company that last month admitted to massive accounting irregularities and then filed the nation’s largest bankruptcy case.
Former Chief Financial Officer Scott D. Sullivan and former Controller David F. Myers surrendered to FBI agents about 7 a.m. in New York and later were charged with seven criminal counts of fraud, conspiracy and submitting false statements to the Securities and Exchange Commission.
They are accused of hiding $3.8 billion in expenses in 2001 and 2002 to make WorldCom appear profitable and thus defrauding investors of billions of dollars. At its peak in 1999, WorldCom--the nation’s second-largest long-distance company--was worth $120 billion. On Thursday, its two classes of shares gave the company a value of $475 million.
Sullivan and Myers, both wearing dark business suits, were handcuffed and paraded past a phalanx of photographers for their ride to federal court in lower Manhattan, where they appeared briefly before U.S. Magistrate Judge James Francis. Sullivan, 40, was accompanied by his lawyer, and Myers, 44, was accompanied by his lawyer, his wife and a Mississippi priest.
In Washington, the nation’s top law enforcement officials sought to assure the public that the government would rid Wall Street of scandal.
“Corrupt corporate executives are no better than common thieves when they betray their employees and steal from their investors,” Atty. Gen. John Ashcroft said. Top officers who “cheat investors, steal savings and squander pensions will meet the judgment they fear and the punishment they deserve.”
Authorities did not take action Thursday against the phone company or its controversial former chairman, Bernard J. Ebbers. But Ashcroft and other law enforcement officials characterized the WorldCom investigation as fast-moving, aggressive and ongoing.
Speaking on the condition of anonymity, Justice Department officials said several other WorldCom executives remained under investigation for possible criminal wrongdoing and could face charges later.
At the Washington news conference, Deputy Atty. Gen. Larry Thompson said Sullivan and Myers worked the numbers backward to make WorldCom’s earnings match Wall Street’s expectations.
Legal experts speculated that the government’s criminal complaint against Sullivan and Myers, which fell short of an outright indictment, could be aimed at getting the two executives to testify against Ebbers as part of plea agreements. The charges carry a maximum of 65 years in prison for each executive.
An indictment of the company could bring down the telecommunications and networking powerhouse. It also could force the government to cancel its contracts with WorldCom, which gets 8% of its business from agencies including the Defense Department.
In a statement Thursday, WorldCom spokesman Brad Burns said, “We’re fully cooperating with all ongoing investigations, and will continue to do so until there is full resolution.”
Ebbers’ lawyer, Reid H. Weingarten, said the former chairman “had no involvement in or knowledge of the accounting decisions at issue.” Weingarten described Sullivan and Myers as “competent, ethical and loyal employees devoted to the welfare of WorldCom.”
Sullivan’s lawyer, Irvin B. Nathan, decried what he termed a “rush to judgment and the political overtones of the way this was handled,” referring to his client’s having been arrested and charged in a criminal complaint rather than indicted by a grand jury.
Speaking to reporters on the broiling sidewalk outside the courthouse, Nathan, noting the Ashcroft press conference in Washington, said: “It is unfortunate that politics is intruding itself into the criminal justice system.”
Myers’ lawyer, N. Richard Janis, said his client would respond to the charges in court, not elsewhere.
After a brief hearing, Francis released Sullivan on a $10-million bond and Myers on a $2-million bond. Sullivan’s bond was secured by a $5-million lien on his palatial Florida home, still under construction, and Myers’ bond is backed by two properties in Mississippi. Myers left in a cab, Sullivan in a limousine.
No pleas were entered, but attorneys representing the executives said both intended to plead not guilty.
The arrests came barely a month after Clinton, Miss.-based WorldCom announced that it had uncovered massive accounting irregularities that disguised $3.85 billion in expenses dating back more than a year and allowed the long-distance carrier to post a profit when it was losing money instead.
The arrests are the latest in a string of high-profile actions against top executives and companies accused of misdeeds ranging from fraudulent bookkeeping to looting their companies.
The most dramatic came last week, when authorities swooped in on 77-year-old Adelphia Communications Corp. founder John J. Rigas at a Manhattan apartment and led him in handcuffs through a throng of cameras--the kind of “perp walk” normally reserved for drug kingpins and notorious killers.
In recent months, the Justice Department has moved against alleged fraud and malfeasance at several other major corporations, including ImClone Systems Inc., Republic New York Securities Corp., Rite Aid Corp., Allfirst Bank and fallen energy trader Enron Corp. Justice Department officials obtained an indictment against Enron’s auditor, Arthur Andersen, and a federal jury in Houston convicted Andersen of obstruction of justice in June.
The Justice Department, Ashcroft said, is continuing to investigate a wide range of companies suspected of engaging in fraudulent behavior, including Enron. On Thursday he issued guidelines to prosecutors and federal agents nationwide to help them implement the corporate reform package signed this week by President Bush and go after corporate wrongdoers.
Deputy Atty. Gen. Larry Thompson, who heads the president’s task force on white- collar fraud, spoke in unusually harsh terms when describing the alleged misdeeds of Sullivan and Myers.
Thompson, a former lawyer defending white-collar companies in fraud cases, said the two men committed “egregious violations” of securities laws that concealed billions of dollars of expenses at WorldCom and ultimately drove the company to file for Chapter 11 bankruptcy protection.
“Together with others, who are not named in today’s complaints, [Sullivan] and [Myers] systematically flouted the rules of accounting and lied outright to investors to perpetuate a false image that WorldCom was succeeding,” Thompson said.
He said the two executives convinced the investing public that WorldCom was meeting stock analysts’ expectations even as its revenue had begun to fall. By early this year, he said, they began to “concoct phony accounting entries to close the gap between that expectation and the disappointing reality.”
One aspect of the alleged scheme, Thompson said, was that the two men booked the cost of leasing access to telecommunications lines as capital investments rather than expenses.
“And because they knew that market participants were looking intently at WorldCom’s earnings, they decided to work backwards, picking the earnings numbers that they knew the analysts expected to see and then forcing WorldCom’s financials to match those numbers,” he said.
Addressing critics who note that no arrests have been made in the Enron case, Ashcroft, Thompson and other law enforcement officials said that their investigations were continuing.
“Without commenting on that particular investigation, I can tell you some cases are more complex than others,” Thompson said. “But specifically with respect to the Enron task force, we’re very pleased with the work of those investigators and lawyers. That investigation is not only ongoing, it’s being pursued in a very aggressive manner.”
Ashcroft has recused himself from the Enron investigation because he received campaign contributions from the firm. He referred questions to Thompson.
