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Ebbers to Jury: I Was Clueless

By Steve Rosenbush Former WorldCom CEO Bernard J. Ebbers took the witness stand on Feb. 28 to defend himself against fraud and conspiracy charges that could put him in jail for 85 years. He hadn't been expected to take the risk of testifying, because it would leave him vulnerable to a potentially damaging cross-examination by prosecutors in federal court in New York. But early signs show that the gamble could pay off for the 63-year-old entrepreneur, who firmly and consistently denied any wrongdoing during six hours of direct testimony and cross-examination.

Ebbers bluntly refuted the testimony of the government's star witness, former WorldCom Chief Financial Officer Scott Sullivan, who said in earlier testimony that Ebbers knew about and approved of the fraud. The company has admitted to $11 billion in improper accounting, the largest such case in history. Sullivan and four other former executives have pleaded guilty to criminal charges in the case, which led to WorldCom's $107 billion bankruptcy in 2002.

MORE FLATTERING STORY. Ebbers said Feb. 28 he didn't know about the misdeeds until after the Securities & Exchange Commission began its investigation. "I was shocked. I never thought anything like that was going on," he declared. "I put the people in place. I trusted them. I had no earthly idea anything like this had occurred."

The case is expected to come down to whom the jury decides to believe, Sullivan or Ebbers. The government doesn't have a strong paper trail leading back to Ebbers, who didn't allow subordinates to communicate with him through e-mail. And Sullivan is a problematic witness, at best. He denied any wrongdoing for months after he was charged. Then, he pleaded guilty and pointed the blame at his former boss. In court, he admitted to using marijuana and cocaine and lying to government officials.

Ebbers is counting, in part, on his more flattering life story. The tall, bearded former gym teacher spent hours recounting the story of his rise from humble beginnings in Edmonton, Canada, to his failures in colleges, and his ultimate success in the motel and telecom businesses in Mississippi. He testified that he had anonymously donated $100 million to charity over the years.

WHAT'S "UPSET"? Defense attorney Reid Weingarten also tried to show that Ebbers didn't behave like a CEO who was trying to strip cash from a dying company. Ebbers testified that after the board asked him to step down as CEO, he went out and bought 2 million additional shares of WorldCom stock, because "it was the best investment that I knew of." The stock lost essentially all its value a short time later, after the SEC investigation was announced.

Ebbers was far from a perfect witness though, frustrating prosecutors on even small points. Prosecutor David Anders displayed a memo from Ebbers to a finance executive. Ebbers called the subordinate's work "insufficient" and demanded the subordinate tell him "what's so difficult to understand." Having reviewed the old e-mail, Anders wanted to know if Ebbers agreed that he was upset when he wrote it. Ebbers, who kept his hands folded in his lap, leaned over and told Anders, "I don't understand 'upset.'"

Anders, who is typically calm in front of the jury, raised his arms in an apparent sign of frustration.

SAME NUMBERS, DIFFERENT STORIES. Anders tried to shake Ebbers' description of himself as a CEO who focused on marketing and sales while highly skilled staff executives tended to technological and financial matters. At one point, Anders asserted that Ebbers functioned as the company's de facto chief operating officer. But Ebbers said that wasn't true, because WorldCom's two main operating groups had their own COOs and the position wasn't necessary at the corporate level.

As the late-afternoon duel with Anders unfolded, the wind howling through the windows of the old courtroom, Ebbers often seemed to have a surer command of the facts. A key question in the case is whether the exec knew that Sullivan and others improperly accounted for line costs -- fees that WorldCom paid other phone companies to begin and terminate calls. They should have been classified as operating expenses, although they were accounted for as capital expenses, which can be accounted for a little at a time over a period of many years. That lightens the immediate burden on earnings.

Anders produced a 1999 memo from Ebbers, trying to establish that the CEO was deeply involved in the accounting of such expenses. "These are line costs, are they not?" Anders asked. "No, they're not line costs," Ebbers said, claiming that the costs were actually WorldCom's internal phone expenses.

ABSENCE OF NOTICE? Sullivan said in earlier testimony that he told Ebbers WorldCom couldn't meet its financial targets without using improper accounting tricks. In turn, he said Ebbers simply told him management must "hit our numbers," which he interpreted as a direction to commit fraud. Ebbers denied that claim, which is at the heart of the government's case. "I wasn't advised by Scott Sullivan of anything ever being wrong with accounting at WorldCom," he said.

Ebbers is far from home free. He's facing 85 years in prison, and the trial isn't over. During his opening statement, Anders advised jurors to use their "common sense," as they consider whether the largest accounting fraud in history could escape the attention of the company CEO. But Ebbers is arguing very hard that the fraud did escape his attention -- and it's up to the government to prove otherwise.

It isn't an easy task. Rosenbush is a senior writer for BusinessWeek Online in New York

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