Ebbers Knew of Scheme, CFO Contends
Ousted WorldCom Inc. Chairman and founder Bernard J. Ebbers knew about the accounting scheme that allowed the long-distance phone giant to hide losses totaling $1.2 billion, the former chief financial officer told company attorneys, who relayed the information to a House committee.
Scott D. Sullivan, who last month was fired as the top finance executive at the besieged telecommunications company, told WorldCom attorneys that Ebbers was aware that hundreds of millions of dollars had been moved into capital expenditure accounts to make the company look stronger than it actually was.
WorldCom lawyers in turn shared that information with staffers of the House Energy and Commerce Committee headed by Rep. W.J. “Billy” Tauzin (R-La.), who is leading the probe into the largest of the accounting debacles haunting corporate America.
“This is the first evidence we have seen that the muddy footprints [of the scandal] may lead to Bernie Ebbers’ doorsteps,” said committee spokesman Ken Johnson. “Clearly somebody other than Sullivan knew that somebody was cooking the books.”
Ebbers, who once counted Sullivan as his closest lieutenant as the two men put together a string of deals to build WorldCom over the last decade, denied Sullivan’s accusations in an interview with committee investigators, Johnson said. Brian Heberlig, who represents Ebbers at the law firm Steptoe & Johnson, declined to comment.
Over the last few days, committee investigators received five boxes of documents from WorldCom and interviewed company lawyers who are conducting an internal investigation of the accounting irregularities. The committee has been trying to determine who authorized WorldCom’s accounting procedures and whether top executives other than Sullivan knew about the practices.
Sullivan’s accusations, if true, would mark a significant setback for Ebbers, who Monday told the committee that “I do not believe I have anything to hide in these or any other proceedings.” When all the facts become known, “No one will conclude that I engaged in any criminal conduct or fraud.”
Ebbers declined to answer questions at Monday’s hearing. Citing investigations by the Justice Department and the Securities and Exchange Commission, he instead invoked his 5th Amendment right against self-incrimination.
WorldCom disclosed last month that it hid $3.9 billion in operating costs for five quarters--all of last year and the first quarter of 2002--by classifying it as capital investments.
On Thursday, Worldcom said that it would not pay a $71-million dividend to shareholders of its long-distance unit, MCI Group.
Reversing a promise 10 days ago that it would pay the MCI dividend, WorldCom said that “in light of current circumstances” it would not make the payment, scheduled for Monday.
Cutting the MCI dividend is part of WorldCom’s broader effort to save money by cutting 17,000 jobs and selling an unprofitable wireless telephone business and other non-core assets such as its investments in Latin America.
Clinton, Miss.-based WorldCom, which has $30 billion in “junk-rated” debt, is in talks to secure $3 billion in funding, rather than the $5 billion it originally sought. The cost-cutting measures, as well as the $3 billion in funding, could help the company meet its interest payments and delay a bankruptcy.
WorldCom Chief Executive John W. Sidgmore said Thursday that “there is a possibility of a [bankruptcy] proceeding if all of our other options run out,” but that he is “cautiously optimistic” that WorldCom can “obtain the financing required to ensure that the company can continue to provide service to all of our customers long into the future.”
Sidgmore also said he has “no plans” to cut more jobs at the company.
MCI had been attractive to many investors because of the high dividend it paid. Shares of the MCI Group tracking stock plunged on the news, dropping 17 cents, or 43%, to 22 cents on Nasdaq.
WorldCom will discontinue the MCI tracking stock today, a year after it was created to boost shareholder value and differentiate between the company’s telephone and Internet operations.
After the close of trading today, each outstanding share of MCI Group common stock will be converted into 1.3594 shares of WorldCom Group common stock. Shares of WorldCom Group, which tracks the company’s main data and Internet business, lost 4 cents, or 21%, to 16 cents on Nasdaq.
Associated Press, Bloomberg News and Reuters were used in compiling this report.
