Ex-CEO of WorldCom Is Charged

By Walter Hamilton and James S. Granelli

Aug. 28, 2003 12 AM PT

Times Staff Writers

Bernard J. Ebbers, who as head of WorldCom Inc. was a leading figure in the 1990s telecom gold rush, was charged Wednesday with securities fraud in Oklahoma, marking the first criminal action to be brought against the former corporate titan.

Ebbers was named in a 15-count document alleging that he and five other employees engaged in an extensive accounting fraud that drove WorldCom into the biggest bankruptcy filing in U.S. history. The company also was named as a defendant.

The Oklahoma case brought cheers from some investors and corporate governance experts who have been aggravated that federal prosecutors haven’t charged Ebbers with wrongdoing, even as several of his underlings have admitted guilt.

But the case also reopened a battle between state and federal regulators over who should lead the crackdown on white-collar crime.

The lanky Ebbers, who turned 62 on Wednesday, became a mythic figure in the burgeoning telecom field in the last decade. He used audacious, stock-financed takeovers to transform an obscure Mississippi communications company into a telecom juggernaut.

Along the way, the former milkman became one of the nation’s richest executives.

But WorldCom collapsed in July 2002 after divulging it had understated expenses by an unprecedented $11 billion in an effort to keep its stock price inflated. The firm’s plunge came after Enron Corp.’s bankruptcy filing seven months earlier and helped spur Congress to pass a broad corporate reform law.

WorldCom’s bankruptcy case rippled across the economy, from some 20 million residential and business customers to pension funds that owned $30 billion of WorldCom bonds and to stockholders who lost every dime.

On Wednesday, Oklahoma Atty. Gen. W.A. Drew Edmondson expressed frustration with what he called a “lack of accountability” for WorldCom’s failure.

“The length and breadth of this pattern of deceit was pretty staggering,” he said. He added that he wanted to file an action before his state’s three-year statute of limitations expired.

Wednesday’s action comes after mounting criticism from investor advocacy groups over the absence of federal criminal charges against some of the highest-profile figures from the recent corporate-fraud pandemic.

Criminal charges have been brought against some executives -- most notably home-design authority Martha Stewart and members of the Rigas family, which ran cable TV firm Adelphia Communications Corp.

But three big names -- Ebbers and former Enron executives Kenneth L. Lay and Jeffrey K. Skilling -- have not been charged by the Justice Department though they have been the subjects of federal probes.

“It’s about time,” said Ken Boehm, chairman of the National Legal & Policy Center, an ethics watchdog group in Falls Church, Va. “It really is the crime of the century.”

Legal experts say federal prosecutors have been trying to develop evidence that Ebbers was aware that subordinates were engaging in securities fraud by inflating earnings. Four former middle-level financial managers -- David F. Myers, Troy M. Normand, Betty L. Vinson and Buford T. Yates Jr. -- have pleaded guilty to federal fraud charges. They were charged again in the Oklahoma case.

The Justice Department also has charged Scott D. Sullivan, WorldCom’s former chief financial officer, with fraud and conspiracy. He has pleaded not guilty and is awaiting trial. He also is named in the Oklahoma case.

Ebbers’ attorney, Reid Weingarten, disputed the allegations against his client, saying in a statement that there is “a total lack of any evidence that Mr. Ebbers committed crimes.”

Ebbers grew up in Alberta, Canada, where he worked as a milkman before heading to Mississippi College, a Southern Baptist school in the town of Clinton, on a basketball scholarship.

In Mississippi his interest turned to business. In 1983, he and a group of investors realized that the impending breakup of AT&T; Corp., then the nation’s phone monopoly, offered an opportunity for start-ups to compete in the market for long-distance phone service.

They sketched their plans for Long-Distance Discount Service while eating at a diner.

The company embarked on a string of more than 70 telecom acquisitions, the biggest of which was the 1998 purchase of MCI for $40 billion.

All the while, Ebbers displayed a laid-back, “aw shucks” attitude publicly, belying his business acumen and brash management approach.

Analysts who have dissected Ebbers’ tenure at WorldCom say he was an adept dealmaker, but many question whether he had a viable plan for profitably operating the mammoth company.

Regulators have charged that the company’s accounting fraud was designed to disguise mounting losses and keep the stock up.

But federal prosecutors have faced a tough road showing that Ebbers, who shunned the use of e-mail and cell phones, knew of his underlings’ conduct. The Oklahoma case appears to merely repeat broad allegations made in federal cases against other WorldCom officers.

“It is not apparent from the charging document, which contains no specific allegations of wrongdoing by Bernard Ebbers, what the local Oklahoma authorities think they have uncovered that the federal authorities have overlooked,” said Weingarten, Ebbers’ attorney.

Each count against Ebbers and the other former officers carries a maximum penalty of 10 years in prison. Oklahoma gave the defendants one week to appear in court.

The case heats up the turf war between federal and state officials over who has primacy in white-collar crime cases.

James Comey, the U.S. attorney in Manhattan whose office has led the federal criminal probe of WorldCom, said in a statement that “competing interests can impede and delay the administration of justice.” He added: “We are hopeful Oklahoma’s action will not interfere with the prosecution of the five individuals already charged.”

Though he did not criticize Comey, Edmondson blasted the Securities and Exchange Commission’s recent $750-million civil fraud settlement with WorldCom as “woefully inadequate” and unlikely to deter further fraud.

“As far as the federal action to date was concerned, it seemed that crime was paying,” he said.

Edmondson also said he informed Comey of his plans in a May letter but received no response.

The debate over the role of state prosecutors in corporate fraud cases began last year, when New York Atty. Gen. Eliot Spitzer mounted a campaign to expose misconduct by brokerage analysts. Many experts agreed that federal regulators had done little to crack down on abusive brokerage practices, and Spitzer won wide praise for stepping into the breach.

But some observers fear that state officials could see political gain in taking on cases that could be better handled by more experienced federal authorities.

The Oklahoma charges “create a bad precedent because you’re now seeing other states get in a competition to be more aggressive,” said Warren L. Dennis, a partner at law firm Proskauer Rose in Washington.

Edmondson said California and several other states are contemplating bringing criminal cases against WorldCom.

However, Sandra Michioku, a spokeswoman for California Atty. Gen. Bill Lockyer, said there isn’t “presently a criminal investigation pending” in California.

Washington, D.C., attorney David Schertler, who represents Yates, said Edmondson’s case was “completely unnecessary.”

He called Edmondson “a renegade state attorney general,” and said meddling by state officials is “the kind of thing that could compromise and complicate the federal investigation.”

Attorneys for the other people charged didn’t immediately return telephone calls.

Some lawyers questioned whether Oklahoma’s case is intended primarily to gain negotiating leverage in WorldCom’s bankruptcy proceedings, where the state is squaring off against rival creditors. Oklahoma calculates that its state pension funds lost more than $64 million in the firm’s failure, and the state has formally complained about its position in the bankruptcy case.

“It’s sending the message that if you don’t take us seriously [in Bankruptcy Court] then you’ll see us in our state criminal courts,” said Jacob Frenkel, a partner at Smith Gambrell & Russell in Washington.

For WorldCom, Oklahoma’s case could complicate efforts to emerge from bankruptcy, when it plans to rename itself MCI.

“Today’s action against the company would only punish our 20 million customers and 55,000 employees,” the firm said. “MCI has made tremendous progress ... and we are working hard to put our house in order.”

Times staff writer E. Scott Reckard contributed to this report.

(BEGIN TEXT OF INFOBOX)

Rise and Fall of a CEO

Name: Bernard J. Ebbers

Age: 62

Hometown: Edmonton, Canada

Education: Bachelor’s degree in physical education, Mississippi College, 1967

Career highlights:

1967 -- High school physical education teacher

1983 -- Co-founded LDDS, the company that would become WorldCom

1985-1998 -- President and chief executive, WorldCom

1998-2002 -- Chairman, president and CEO, WorldCom. Resigns after the SEC begins a probe into possible accounting irregularities