Ex-WorldCom Execs Take 5th
Members of a House panel examining WorldCom Inc.'s $3.9-billion accounting irregularities threatened former WorldCom Chief Executive Bernard J. Ebbers with contempt Monday and called for jail time for others involved in the phone giant’s accounting debacle.
At the first public hearing on an unfolding scandal that has roiled Wall Street investors and Main Street pensioners, Ebbers denied responsibility, saying, “I do not believe I have anything to hide in these or any other proceedings.”
He read a short statement to the House Financial Services Committee, saying, “No one will conclude that I engaged in any criminal or fraudulent conduct during my tenure at WorldCom,” and afterward refused to answer questions from committee members. Also summoned to testify were former Chief Financial Officer Scott D. Sullivan; former Arthur Andersen partner Melvin Dick; Jack Grubman, an investment analyst for Salomon Smith Barney; and two others.
Ebbers was immediately condemned by Rep. Max Sandlin (D-Texas) and several other panel members, who charged that Ebbers forfeited his 5th Amendment protection by elaborating on his innocence during his stewardship of WorldCom, which ended in April, when he was forced out and replaced by current CEO John W. Sidgmore.
“The committee should hold him in contempt,” Sandlin said of Ebbers.
The session unfolded as a confrontational, finger-pointing affair.
Andersen’s Dick, for example, said neither he nor his firm had “any inkling” that WorldCom moved routine maintenance costs to capital spending accounts in violation of standard accounting practices. And in a swipe at WorldCom, Dick added that he “would be very interested to know how and when” the company’s internal auditors discovered the problem.
The testimony did little to dampen the public outcry over the growing number of corporate financial scandals. In the wake of the public uproar, politicians have taken aim at WorldCom and corporate governance in general, a move that could reverse nearly two decades of government deregulation of American business.
More than half a dozen bills are circulating in Congress calling for new accounting standards, limits on corporate executive loans and other measures aimed at shoring up public confidence in the economy and the stock market. Monday’s hearing is the latest in a long list of recent probes into corporate finances that began with Enron Corp. in December and expanded to include Global Crossing Ltd. as well as the financial oversight of corporate clients by the accounting firm Arthur Andersen.
The Securities and Exchange Commission has sued Clinton, Miss.-based WorldCom, contending that the nation’s No. 2 long-distance carrier wrongly listed $3.9 billion as capital expenses in 2001 and 2002, allowing it to hide losses of $1.2 billion.
The House Energy and Commerce Committee also is looking into the company.
Ebbers did not appear to be in immediate danger of prosecution by the House for his statements.
Committee Chairman Michael G. Oxley (R-Ohio) put off consideration of contempt proceedings until the committee’s legal staff could examine Ebbers’ testimony in detail. Congress has only infrequently prosecuted witnesses for contempt after a wave of such actions during the 1950s when former Sen. Joseph R. McCarthy accused dozens of Americans of being Communists and subversives, according to historians.
Former WorldCom CFO Sullivan, who was fired last month after acknowledging his role in the accounting irregularities, also invoked the 5th Amendment. He escaped any threat of contempt because he did not make a statement elaborating on his innocence or any role he might have played in the scandal.
Indeed, for most of the afternoon, Sullivan escaped the committee’s wrath as members bore in on Ebbers, Dick, Grubman and two current WorldCom executives.
In his opening statement, Oxley singled out Grubman for criticism before the investment analyst even testified.
“We want ... to try to determine whether Mr. Grubman’s failure to recommend that investors sell their WorldCom stock until it became virtually worthless can be explained by the hundreds of million of dollars in underwriting fees that his firm collected from WorldCom,” Oxley said.
Grubman, a prominent promoter of WorldCom and other telecom stocks, told the panel: “I regret that I was wrong in rating WorldCom highly for too long.”
Grubman went on to acknowledge that the company considered him such a trusted ally it allowed him to attend three WorldCom board meetings and have access to company financial information days before it was made public. Nevertheless Grubman insisted he was unaware of the company’s true financial condition.
Committee member Rep. Gary L. Ackerman (D-N.Y.), meanwhile, took aim at former Andersen partner Dick after the auditor demurred on whether he thought he had been deceived by WorldCom officials.
“Stop giving us these happy horsefeathers!” Ackerman said. “You still feel the need to cover up for these guys? I thought you were off the job.”
Rep. Darlene Hooley (D-Ore.) followed up, asking Dick: “Have you sat down and said to your colleagues, ‘How in the world did we miss a $3.8-billion discrepancy?’ ”
Dick responded, “I have asked, since I became aware of this, other members of the audit team whether or not they had any knowledge of this, whether or not there was anything that we had done that should have revealed this to us. And I’ve concluded, based on the work that we did and my understanding of the work that the other members of the team did, that we did our audit, and we did our audit in accordance with all the things one would expect to do.”
Several panel members said that with voter outrage mounting over corporate finance, Congress must do more than hold hearings.
Rep. Maxine Waters (D-Los Angeles) called on colleagues to pass laws that would put those who commit financial fraud in jail.
Rep. Brad Sherman (D-Sherman Oaks) proposed that the nation’s 1,000 largest companies be audited twice as frequently (or once every six months) because “the world operates at least twice as fast as it once did.”
While Ebbers’ and Sullivan’s decision to remain largely silent was a prudent legal move, experts say they did little to help themselves in the court of public opinion.
“Mr. Ebbers pushed the envelope a little and mightily strained the committee’s patience,” said Charles Tiefer, former deputy general council of the House of Representatives and now a University of Baltimore law professor.
“A witness who asserts the 5th Amendment but then climbs on top of a soapbox at the same time looks unreconstructedly arrogant about involvement in incriminating matters.
“Ebbers has painted a bull’s-eye on his shirt. And an angry public, which lost billions of dollars of its savings for his past hubris, will not forgive him.”
Times staff writer Richard Simon contributed to this report.