Former WorldCom Execs Could Face Charges

arrie Johnson
and Christopher Stern
(Washington Post)
(The Signal Online)

Two former executives at WorldCom Inc. may face criminal charges as early as Thursday for their role in allegedly manipulating the company’s books, sources close to the investigation said Wednesday.

If charges are filed against Scott Sullivan, former chief financial officer, and former controller David Myers, the action would come just six weeks after the nation’s second-largest long-distance telephone company first disclosed its accounting problems to federal securities regulators. That would be one of the fastest turnarounds in memory for a criminal investigation into corporate wrongdoing.

WorldCom in June fired Sullivan and accepted Myers’s resignation, shortly before it disclosed it had improperly booked $3.9 billion in expenses. The move allowed WorldCom to post a profit for 2001 and the first three months of this year. WorldCom filed the largest bankruptcy petition in history last month and its creditors and shareholders are now fighting to recover billions in losses.

The charges would come two days after President Bush signed a bill designed to stiffen penalties for white-collar criminals and to force auditors to become more independent of their clients. Bush has called for more arrests of corporate leaders who cook their books. Last week, law enforcement officers arrested five executives at Adelphia Communications Corp. on securities and wire fraud allegations.

Bernard Ebbers, WorldCom’s colorful and folksy founder who resigned as chief executive in April, remains of interest to prosecutors, the sources said.

WorldCom also is the subject of at least two congressional probes and civil fraud charges filed by the Securities and Exchange Commission, which said “WorldCom disguised its true operating performance by using undisclosed and improper accounting” in a move directed by WorldCom officials, according to court papers.

Lawyers for Sullivan–who repeatedly told WorldCom’s board that he believed his accounting moves were proper–and for Myers did not return calls Wednesday. The Justice Department declined comment on the investigation.

According to the company’s own account, Sullivan and Myers were able to move hundreds of millions of dollars with a few clicks on a spreadsheet. The amounts ranged in size from $610 million in one quarter to $931 million in another. While the changes had no impact on the company’s overall revenue, they did make WorldCom appear profitable during a period when it actually lost money, according to a civil fraud complaint filed by the SEC.

Specifically, Sullivan had decided to classify the cost of leasing parts of rival companies’ telecommunications networks as a capital expense. But experts say that was improper because the money Sullivan reallocated went toward leases rather than an investment in hard assets such as the construction of WorldCom’s own fiber-optic networks.

The accounting changes were first uncovered in May by Cynthia Cooper, an internal auditor, during a random check of company books, according to WorldCom.

Prosecutors have been able to move quickly in the WorldCom case for a number of reasons, legal experts said. For one, Sullivan laid out his rationale to WorldCom’s board on two occasions and in a three-page written document.

“Certainly in the WorldCom case, the accounting shenanigans are pretty transparent,” said David Larcker, an accounting professor at the University of Pennsylvania’s Wharton School. “If indeed they should have expensed things that they capitalized, that’s one where it seems more cut and dried.”

Paul Huey-Burns, a securities lawyer and former SEC enforcement official, pointed out that the SEC complaint is different from the commission’s usual fare. It does not name individuals who engaged in wrongdoing and does not sketch out specific instances of misdeeds, he said, perhaps a reflection of the speed with which it was prepared in June.

The SEC continues to probe WorldCom’s accounting practices, and the company itself has engaged William McLucas, a prominent securities lawyer, to spearhead its own investigation into alleged wrongdoing. WorldCom told the SEC its financial misstatements may go back as far as 1999.

WorldCom also is the target of lawsuits filed by shareholders and employees.