By Lauren Gard
It was a staid day in the Manhattan courtroom where former WorldCom CFO Scott Sullivan returned to the stand Feb 8 to continue testifying for the prosecution in the fraud and conspiracy trial that could put his former boss, Bernie Ebbers, behind bars for 25 years. A day earlier, Sullivan had confessed to using marijuana and cocaine during his WorldCom tenure, but Tuesday provided few new or salacious tidbits, with the prosecution attempting to cast Sullivan as a loyal puppet who simply carried out orders.
Sullivan told jurors that WorldCom's performance began taking a serious beating in the third quarter of 2000. "Our revenue was going in one direction and our expenses were going in the other," he testified. The 43-year-old, whose voice hardly wavered throughout his six hours on the stand, said that he balked time and again when Ebbers ordered him to pump up revenues and cut expenses on the balance sheet so that WorldCom could meet Wall Street's predictions. At the end of the day, and despite his protests, he said he had no choice but to comply.
In the third quarter of 2000, this meant conjuring up $133 million by improperly depleting reserve accounts. Rather than do that, Sullivan testified that he urged Ebbers to alert analysts that WorldCom's revenues would fall short of predictions. When Ebbers refused, Sullivan says he persisted, in part because Sprint (FON ) -- with which WorldCom had been planning to merge until the Justice Dept. intervened -- had just issued a warning and seemed to be in much the same boat.
"I said, 'Look at what Sprint is announcing on the revenue side -- it's the same thing that is happening to us,'" Sullivan testified. But according to Sullivan, Ebbers responded: "Scott, we can't issue an early warning to the marketplace until we tell them what we are going to do," referring to plans to split WorldCom into two tracking stocks. The only ground Ebbers conceded, Sullivan added, was promising to change fourth-quarter guidance.
So Sullivan said he and his accounting team cooked the books. When he presented the rejiggered balance sheet, Sullivan testified that he told his former boss, "Bernie, this isn't right." Ebbers' reaction, as described in court, became exceedingly familiar to jurors as the day wore on: "He studied it for a while, looked down, then looked up at me, and said, 'We have to hit our numbers.'"
If Sullivan is to be believed, those six words were Ebbers' favorites. After all, it was the answer Sullivan gave each time the prosecution asked him to describe his interactions with his boss in regard to WorldCom's creative accounting. In the chilly courtroom, Ebbers, polished in a tailored pinstriped suit, watched Sullivan's testimony with steely eyes from his seat beside defense attorney Reid Weingarten. The 63-year-old occasionally gnawed on the arm of his eyeglasses, but his stare rarely left Sullivan, who did not return it, choosing instead to address the jury.
HIT LISTS AND RUMORS.
If the juror who followed a good portion of the proceedings with her eyes shut is any indication, keeping up with the numerous spreadsheets admitted into evidence was no easy feat, despite the prosecution's attempt to have Sullivan provide a short lesson on general accounting terms and WorldCom's own internal lingo. Some expressions proved more interesting than others. Case in point: "Hit List."
Sullivan testified that Ronald Lomenzo, the former head of revenue accounting, conjured up a manifest of potentially "adjustable" items before each month's in-house financial statement was due. Lomenzo tagged it the "Hit List." "Ron told me that that's what we would have to do to hit the target," Sullivan said. On a hit list from the third quarter of 2000, 21 items that could be adjusted to increase revenue were targeted, he said.
Sullivan testified that he wasn't the only one aware of the precarious position WorldCom was putting itself in. He said that former controller David Myers reported "rumblings" in the accounting department, including the possible resignations of two accountants, Betty Vinson and Troy Normand, both of whom have testified against Ebbers. Yesterday, Sullivan recalled how he had scribbled a note of concern to Ebbers upon hearing the news, writing: "We made adjustments for reserves that we have no support for. From here on out it's up to operations to make adjustments, and not accounting."
STICKS AND STONES.
In response, Ebbers reportedly said, "We shouldn't be making adjustments. We shouldn't be putting people in this position." According to Sullivan's testimony, Ebbers said it wouldn't happen again.
The day's proceedings also revealed some insights into Ebbers' peccadilloes, including a distaste for having his outfit described in what he perceived as dismissive terms. T. Rowe Price Telecom and Media fund manager Robert Gensler struck a raw nerve with Ebbers, Sullivan recounted, when he called WorldCom a "tweener" prior to a shareholder meeting in January, 2000. Sullivan says Gensler explained that a tweener is a company performing between high growth and low growth.
"'Nobody knows what you are,'" Sullivan quoted Gensler as saying. "And the concern is that you're going to become a low-growth company." One thing WorldCom did become is certain: In 2002, when the level of fraud had soared to $11 billion, the outfit's collapse marked the biggest bankruptcy in the history of business.
Gard is a reporter for BusinessWeek in New York