Ebbers Helped Cook the Books, CFO Says

Bernard J. Ebbers, WorldCom Inc.’s former chairman and chief executive, took part in falsifying the company’s accounting records to produce the profit that Wall Street expected, the government’s star witness testified Monday.

The telecom giant was on the ropes after a failed merger with Sprint Corp. in 2000, former WorldCom Chief Financial Officer Scott D. Sullivan told a federal jury. Sullivan said he and Ebbers masked the company’s financial condition through accounting gimmicks in a scheme that ultimately led to the biggest bankruptcy in U.S. history.

“I falsified the financial statements of the company,” Sullivan said in his first day of testimony. Moments later, he said that Ebbers and others were involved in the deceit. “We did not disclose these [accounting] adjustments. We did not talk about these adjustments” with investors, he testified.

Ebbers, a former high school basketball coach, faces at least 30 years in prison if convicted on fraud and other charges.

Sullivan is considered the key witness for the prosecution for his ability to link Ebbers directly to the alleged $11-billion accounting fraud. His role is especially crucial because, unlike in other recent cases of corporate malfeasance, there is little in the way of documentary evidence. Ebbers didn’t use e-mail, and there are no extensive written records indicating what role he may have played.

Sullivan said he and Ebbers worked as a team, particularly during the company’s acquisition binge in the late 1990s, when it morphed from a regional provider of long-distance telephone service to a telecom behemoth.

“It was a close relationship,” Sullivan said, adding that the two men spoke daily and lunched together with other employees “just about every day.”

Sullivan repeatedly portrayed Ebbers as being deeply involved in all aspects of WorldCom’s business and well aware of its shaky financial condition. That is a key theme for the prosecution because defense lawyers are expected to depict Ebbers as a detached leader who set broad policy but was removed from day-to-day management.

Sullivan testified that Ebbers piled stacks of accounting documents in his office and often pulled them out during discussions.

“He’s very hands-on,” Sullivan said. “He’s very detailed, and he knows the business inside and out.”

To make his point, Sullivan described an incident involving the company’s provision of free coffee to employees. He said Ebbers once told him that there were more coffee filters than bags of coffee in company storerooms.

“ ‘That means employees are taking coffee home,’ ” Sullivan said Ebbers told him. “ ‘That means we have to cut the [free-coffee] service.’ ”

Sullivan, who testified for two hours, acknowledged that he had pleaded guilty to fraud charges in the WorldCom case, and that he was testifying as part of a plea deal that could result in an abridged prison term.

In response to questions from Assistant U.S. Atty. William Johnson, Sullivan also acknowledged that he occasionally used marijuana up until 1999 and cocaine up until 2001 -- a line of questioning that may be pursued by Ebbers’ attorneys as they seek to challenge Sullivan’s credibility.

U.S. District Judge Barbara S. Jones has also granted Ebbers’ lawyers the right to question Sullivan about his alleged marital infidelities. That subject was not broached Monday.

Sullivan said WorldCom began fudging its books after the Justice Department nixed a proposed merger with Sprint in mid-2000.

Until that time, WorldCom had grown rapidly by gobbling up a string of ever-larger companies.

But after the deal was quashed on antitrust grounds, WorldCom had to expand its existing business, which proved impossible to do.

“We were out on our own,” Sullivan said.

Sullivan said the company eventually did away with free coffee as part of a belt-tightening campaign, but it wasn’t enough to save WorldCom.

“We needed to cut a lot more than coffee expenses,” he said.