By Steve Rosenbush The fraud and conspiracy trial of Bernie Ebbers, WorldCom's former CEO, began on a dramatic note Jan. 18 as the judge ruled that the prosecution's star witness can be questioned about his alleged history of marital infidelity. At the defense's request, U.S. District Judge Barbara Jones ruled that Ebbers' lawyers can question the witness, former WorldCom Chief Financial Officer Scott Sullivan about such issues because they're pertinent "in regards to Sullivan's capacity for truthfulness."
The ruling was an early defense victory because Sullivan's credibility on the witness stand could determine whether Ebbers, 63, ends up in prison (see BW Online, 1/14/05, "What Did Ebbers Know?"). "It's a piece of the puzzle," Ebbers' attorney, Reid H. Weingarten, told reporters. Sullivan, 43, originally refused to cooperate with the government investigation of his former boss. But after four junior executives reached plea agreements, Sullivan faced a potentially long prison stretch of his own and changed his mind. Now he's expected to testify that Ebbers knew about plans to manipulate WorldCom's revenue and capital expenses, improperly boosting the stock.
WIN ONE, LOSE ANOTHER. But the judge ruled against Ebbers in another matter -- one of potentially greater importance. Weingarten wanted Jones to grant immunity to two executives who have told investigators that they don't believe Worldcom was intentionally violating accounting rules. Weingarten told the judge that the executives, who include Ronald Beaumont, WorldCom's chief operating officer, knew more about accounting than Ebbers. If they didn't understand that the practices violated the law, Weingarten told the judge, then Ebbers couldn't have, either.
Weingarten argued that the duo's testimony would be "profoundly exculpatory" for Ebbers, but that they would be unlikely to testify unless granted immunity. "These are very fair prosecutors," Weingarten said. "I think they want a fair trial."
The judge disagreed with Weingarten's view of the mooted witnesses' impartiality and the importance of their testimony, dealing a blow to the defense. Prosecutors argue that they have additional evidence against Ebbers, so that the testimony of the former executives wouldn't make or break his case.
With the trial is in its initial phase, potential jurors will receive questionnaires on Jan. 19, and jury selection is scheduled to begin Jan. 24. Testimony could begin a few days later.
$11 BILLION FRAUD. Ebbers appeared calm in the imposing federal courtroom, with its huge arches and beamed ceiling. Dressed in his characteristic brown suit and blue shirt, the 6'4'' former basketball player sat a few inches further from the table than his attorneys, to make room for his long legs. And Ebbers smiled as he met his accusers, apparently for the first time. "Mr. Ebbers, a pleasure to finally meet you," said David Anders, assistant U.S. attorney, after the hearing concluded.
The trial will revisit one of the key business stories of the late '90s tech boom, the unlikely rise and spectacular fall of long-distance phone giant WorldCom. Ebbers, a former milkman and bouncer from Edmonton, Alberta, transformed himself into one of the era's celebrity CEOs. After moving to Jackson, Miss., he used a tiny discount long-distance phone company, LDDS, as an acquisition vehicle that ended up buying MCI for $37 billion in 1998.
His empire collapsed in July, 2002, when WorldCom filed for bankruptcy. The outfit eventually admitted to $11 billion in accounting fraud, the largest such case in history. Sullivan and four other former executives have reached plea agreements with federal prosecutors. Ebbers faces up to 85 years in prison if convicted on all charges, which include one count of conspiracy, one count of fraud, and seven counts of filing false statements.
SOBERING LESSON? The outcome of the Ebbers' trial could influence U.S. business for years to come. Already, the collapses of WorldCom, Enron, and others has led Congress to pass the Sarbanes-Oxley Act, according to Scott Cleland, CEO of independent researcher Precursor Group. That law, which requires CEOs and CFOs of publicly held companies to sign off on financial reports, means they can be held criminally liable if the statements turn out to be fraudulent.
Some experts believe Sarbanes-Oxley has changed the business environment in the U.S. for the better, making corporations' finances more transparent to investors and the public, even though it has added to the difficulties and expenses of publicly held companies. Yet nothing is likely to influence behavior in the executive suite more than whether Ebbers ends up serving a lengthy prison sentence. Rosenbush is a senior writer for BusinessWeek Online in New York