Bernie Ebbers and other former top executives at WorldCom Inc. ruled the phone giant as lords who concealed a massive accounting fraud from their auditor, bullied underlings who questioned their tactics and approved multibillion dollar acquisitions in a matter of hours or minutes without a shred of paper presented to the board of directors, according to two investigative reports that were released Monday.
“Ebbers was aware, at a minimum, that WorldCom was meeting revenue expectations through financial gimmickry,” stated one report led by William McLucas of the law firm of Wilmer, Cutler & Pickering.
The investigation, which examined millions of pages of accounting records and other documents and electronic files, describes how former CFO Scott Sullivan masterminded the fraud in order to inflate the company’s revenue and conceal line costs, which represented about half of all its expenses from 1999 to 2001.
The U.S. Justice Department has filed criminal charges against Sullivan. Sullivan pleaded not guilty to criminal charges of conspiracy and securities fraud in a scandal that forced WorldCom to file the largest bankruptcy petition in U.S. history.
“As business operations fell further and further short of financial targets announced by Ebbers, Sullivan directed the making of accounting entries that had no basis in generally accepted accounting principles in order to create the false appearance that WorldCom had achieved those targets,” the report states, adding former controller David Myers helped carry out the fraud.
Myers, former general accounting director Buford Yates Jr. and two other former executives have pleaded guilty to felony charges. Prosecutors have not filed any charges against Ebbers, who was not interviewed as part of the two investigative reports that were publicly released Monday.
The report by McLucas, a former Securities & Exchange Commission director of enforcement, says more than a few executives were aware or suspicious of the fraud, but many employees did not raise objections, and even went so far as to enlist the aid of others. Other employees, according to the report, complained to their supervisors or refused to take certain actions.
The report details how former top brass concealed questionable accounting practices from employees while scolding and intimidating others. After one employee approached Yates “for an explanation of a large [accounting] discrepancy, Yates reportedly berated him and said, `Show the numbers to the damn auditors and I’ll throw you out the [expletive] window.'”
The former board of directors do not appear to have knowledge of the fraud but was “so passive and reliant on Ebbers and Sullivan that it had little opportunity” to find it, according to the report, which classified nearly all the directors as people who had sold their company to WorldCom.
The board, according to the investigative reports, functioned as puppets, rather than as watchdogs, not even questioning Ebbers when he secured a $50 million loan through WorldCom to cover personal bank loans that he risked defaulting on as a result of the company’s declining stock price.
The senior leadership had such control over the board that they closed multibillion dollar acquisitions with little due diligence and practically no review by the board, according to an investigative report bankruptcy court examiner Dick Thornburgh issued Monday.
“Several multibillion dollar acquisitions were approved by the board of directors following discussions that lasted for 30 minutes or less without the directors receiving a single piece of paper regarding the terms or implications of the transactions,” the report states.
For example, WorldCom acquired Web hosting provider Digex Inc. based on one hour to 90 minutes of due diligence and a 35-minute telephone board meeting, according to the report. The board also approved the $2 billion acquisition of SkyTel Communications Inc. in 1999 after a 15-minute presentation “and again without a single piece of paper being provided to the board,” according to the report.