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Fraud Verdict Is Ominous for Toppled CEOs

Times Staff Writers

The conviction Tuesday of former WorldCom Inc. chief Bernard J. Ebbers for orchestrating an $11-billion accounting fraud could have deep repercussions for other disgraced executives who claim they were unaware of financial scams taking root beneath them.

A federal jury found Ebbers, 63, guilty of securities fraud, conspiracy and filing false documents with regulators. He was convicted on all nine counts that he faced. It was the government’s biggest win yet in a string of victories against top corporate figures, including Silicon Valley financier Frank Quattrone and lifestyles entrepreneur Martha Stewart. He faces a possible prison term of more than 30 years.

There was little hard evidence against Ebbers -- no smoking-gun e-mails or paper trails -- and the defendant insisted the fraud was masterminded by Scott D. Sullivan, his onetime finance chief who became the federal government’s star witness.

But it came down to this: Jurors couldn’t see how the man who had built WorldCom from a small phone company in Clinton, Miss., to a global telecommunication colossus could not have known about the accounting scams that triggered the company’s 2002 bankruptcy filing -- the biggest in U.S. history.

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“When you start a company ... and you bring it up from nothing, it’s hard to convince a jury that you are just too stupid to know what’s going on,” said Daniel J. Callahan, a veteran litigator. “This see-no-evil, hear-no-evil, speak-no-evil policy just doesn’t fly.”

Legal experts said the jury’s decision boded poorly for toppled executives Kenneth L. Lay of Enron Corp. and Richard Scrushy of HealthSouth Corp., who are employing variations of the above-the-fray defense.

Lay faces trial in Houston in January on fraud and conspiracy counts stemming from Enron’s 2001 collapse. Scrushy is on trial in Birmingham, Ala., for an alleged $2.7-billion fraud at HealthSouth.

“These guys are shaking in their boots now,” said Andrew Genser, a white-collar criminal defense lawyer at Kirkland & Ellis in New York.

If anyone seemed poised to pull off the “know-nothing” defense, others said, it was Ebbers.

The former high school basketball coach and milkman twice flunked out of college. He disdained e-mail, denying prosecutors a weapon they had used effectively against Quattrone and others. And Ebbers almost never sold his WorldCom shares, testifying that he even had bought $5.3 million in stock a few weeks after he was forced to resign in 2002 under the cloud of a federal investigation.

In an interview, juror Aran Nulty said that the panel weighed the evidence carefully during eight days of deliberations, and did not rely on Sullivan’s testimony alone.

The tipping point, she said, was the argument that Ebbers would have to know about WorldCom’s troubles because of regular revenue statements and numerous other financial reports.

“We had to come to the conclusion that his testimony was not truthful,” said Nulty, a grade-school teacher. “It wasn’t that we were quick to dismiss what he said. It took us a very long time.”

Duke University law professor Erwin Chemerinsky said he believed the jury’s decision “will embolden prosecutors to bring more such cases.”

“I think it puts more pressure on white-collar defendant CEOs to consider guilty pleas,” he said.

Ebbers will be sentenced June 13, and a lengthy sentence could effectively mean life behind bars. He declined to comment after the verdict, rushing from the courthouse with his wife, Kristie, and grabbing a cab.

It was a sharp contrast with his demeanor during most of the seven-week trial, when Ebbers chatted with onlookers and posed for photographers.

Reid Weingarten, Ebbers’ chief lawyer, said he would base an appeal in part on U.S. District Judge Barbara Jones’ refusal to grant immunity from prosecution to former WorldCom Chief Operating Officer Ron Beaumont and two other former executives. He said they would have supported Ebbers’ story.

Had they been able to testify without fear of prosecution, Weingarten said, they would have provided “powerful exculpatory evidence,” Weingarten said outside the federal courthouse in Lower Manhattan.

“I’m extremely disappointed,” Weingarten said of the verdict. “I know Mr. Ebbers, and I know the evidence in this case.”

Appeals courts seldom overturn jury verdicts, however, and experts noted that generally only prosecutors grant immunity.

In a statement, U.S. Atty. Gen. Alberto R. Gonzales said the government was “satisfied the jury saw ... that fraud at WorldCom extended from the middle-management levels of this company, all the way to its top executive.”

In many ways, the trial boiled down to a credibility contest between Ebbers and Sullivan, the former chief financial officer.

Sullivan pleaded guilty to his role in the fraud last year, and faces up to 25 years in prison. He cooperated with prosecutors in exchange for a leniency recommendation when he is sentenced later this year.

In his testimony, Sullivan described how he doctored WorldCom’s books in the wake of the dot-com collapse beginning in 2000, and said Ebbers was fully aware of what he was doing. Sullivan recounted conversations in which he asked Ebbers to warn investors about WorldCom’s troubles, but his boss instead instructed him to “hit the numbers” that Wall Street expected.

Prosecutors portrayed Ebbers as a demanding boss who was deeply involved in WorldCom’s finances -- even ordering the elimination of free coffee and demanding that bottled-water dispensers be filled with tap water to save money, according to testimony.

Ebbers wanted to conceal WorldCom’s problems, prosecutors said, because he had used his WorldCom stock as collateral for $400 million in personal bank loans. Revealing the extent of WorldCom’s troubles would have sent the stock reeling and forced Ebbers to sell his shares at deflated prices, prosecutors said.

The defense contended that Ebbers had no financial acumen, that he delegated all accounting responsibility to Sullivan and that Sullivan implicated Ebbers simply to help himself.

Ebbers portrayed himself in homespun terms during two days on the witness stand. He testified that he got into the telecom business by chance when he invested with some friends in a Mississippi phone company that grew into WorldCom through a series of mergers.

Some experts said Tuesday that his testimony might have backfired.

“It gave the jury a chance to see that he was not the kind of person who was oblivious to what was going on,” Genser of Kirkland & Ellis said.

Through ever-larger acquisitions -- ending with the 1998 purchase of MCI -- Ebbers built WorldCom into a global network provider second only to AT&T; Corp.

The Canadian-born Ebbers became a billionaire, with holdings that included yachts and the 83,000-acre Douglas Ranch in British Columbia, Canada’s largest working cattle operation.

In the late 1990s, changes in the telecommunications industry hit WorldCom hard. A glut of fiber-optic cable laid by new competitors such as Global Crossing Ltd. led to sharp price drops. Even so, the company was valued at $35 billion when Ebbers stepped down in the spring of 2002.

But that June, an internal auditor found bookkeeping errors, and the company began to unravel. WorldCom filed for bankruptcy protection July 21, 2002, listing $104 billion in assets. That dwarfed Enron’s $63-billion bankruptcy filing the year before.

Today, a year after emerging from bankruptcy as MCI Inc. and moving corporate headquarters to Ashburn, Va., the company is about to be sold at a price far below its once-bloated value to either Verizon Communications Inc. or Qwest Communications International Inc.

MCI directors have accepted Verizon’s offer of $6.7 billion in cash and stock, even though the financially shakier Qwest has offered $8 billion. Qwest is reportedly increasing its bid, and MCI must decide by Thursday whether Qwest’s offer is significantly better. If it is, Verizon will have a week to revise its bid.

Whichever company buys MCI will inherit a jumble of more than a dozen networks that Ebbers never successfully integrated into one cohesive system. Verizon figures it would spend $3.5 billion more to consolidate the networks. Qwest would probably rely on its own nationwide system, using MCI to fill in crucial areas.

But the acquirer also will get a company that has held onto its business customers and has about 15% of the large corporate market. That is second only to AT&T;, which controls 30% of the big-business market.

Despite WorldCom’s successes, some in the telecom industry had long questioned Ebbers’ prowess.

After WorldCom acquired MCI in 1998, analyst Kenneth McGee at consulting firm Gartner Inc. went to the company’s Mississippi headquarters to interview Ebbers and top executives. What he found scared him.

“There was such an absence of management abilities,” McGee recalled. “They were so out of their league.”

At the time, McGee told investors that Ebbers “will ruin” the company.

“When we said that, we never expected it to be anything like this,” he said.

Hamilton and Mulligan reported from New York, and Girion from Los Angeles. Times staff writer James S. Granelli and researcher John Jackson contributed to this report.

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(BEGIN TEXT OF INFOBOX)

White-collar defendants

Former WorldCom chief Bernard J. Ebbers on Tuesday became the latest high-level executive to be convicted of financial wrongdoing. Here is the status of high-profile cases involving other companies:

Adelphia Communications

Company founder John Rigas and his son Timothy are awaiting sentencing after being convicted of looting the cable company and lying about its finances. A jury deadlocked over charges against another son, Michael Rigas, and he is set to be retried. Former finance executive Michael C. Mulcahey was acquitted.

Credit Suisse

First Boston

The company’s former investment banking star, Frank Quattrone, was sentenced to 18 months in prison for obstruction of justice. On Jan. 27 he asked an appeals court to throw out his conviction.

Enron

A January trial is set for former Enron chairman and CEO Kenneth L. Lay, former CEO Jeffrey K. Skilling and former Chief Accounting Officer Richard A. Causey.

All have pleaded not guilty to fraud and conspiracy. Chief Financial Officer Andrew S. Fastow pleaded guilty in 2004 to two counts of conspiracy. Fastow’s wife, Lea, pleaded guilty in May and began serving a one-year sentence in July.

HealthSouth

Fired CEO Richard Scrushy is on trial in Birmingham, Ala. He is accused of masterminding a $2.7-billion plot to inflate assets, increase profit and to meet Wall Street expectations and bolster the price of HealthSouth’s stock. Scrushy pleaded not guilty in 2003.

Martha Stewart

Living Omnimedia

Company founder Martha Stewart is serving five months under house arrest at her home in Bedford, N.Y. after serving five months in a federal prison camp. In March 2004, jurors convicted Stewart of conspiracy, obstruction of justice and making false statements related to a personal sale of ImClone Systems Inc. stock.

Qwest Communications

In April, jurors acquitted former executives John Walker and Bryan Treadway of all charges, cleared Grant Graham of some charges and deadlocked against Thomas Hall. All were accused of improperly booking revenue. Graham pleaded guilty in May to being an accessory to wire fraud. Hall pleaded guilty in September to falsifying documents.

Tyco International

L. Dennis Kozlowski and Mark Swartz are being tried a second time on charges of grand larceny and securities fraud after a mistrial in April. Former top Tyco attorney Mark Belnick was acquitted of the same charges.

Sources: Associated Press, Times research

Los Angeles Times


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