By Steve Rosenbush
The federal government's fraud and conspiracy trial against former WorldCom Chief Executive Bernard J. Ebbers reached a crescendo Mar. 1 as the prosecution subjected Ebbers to a grueling six-hour cross-examination that could very well determine the outcome of the case.
Ebbers appeared somewhat testier and shakier than he did on the stand a day earlier (see BW Online, 3/1/05, "Ebbers to Jury: I Was Clueless"). U.S. attorney David Anders didn't produce evidence that conclusively linked Ebbers to WorldCom's $11 billion in improper accounting. But he did manage to put Ebbers on the defensive, eliciting statements that may have damaged the defendant's credibility before the jury. And while Ebbers sometimes seemed in better command of the facts than in his first day of testimony, it was Anders who seemed in control as the cross-examination ended.
DISAPPEARING LINE COSTS.
The attorney landed his strongest blows late in the afternoon as he forced Ebbers to address the way billions of dollars in expenses were treated in late 2001. The expenses, so-called line costs, reflected payments to other telecom companies that began and terminated calls for WorldCom. Former Chief Financial Officer Scott Sullivan and four other former WorldCom executives have pleaded guilty to improperly booking those expenses as capital costs. That boosted earnings because capital costs can be charged against profits over a much longer period of time.
The prosecutor produced evidence that showed WorldCom's revenue was running way below forecasts for the third quarter of 2001. The company had expected growth of about 12% for the year, and it was barely delivering half that as the third quarter drew to a close, according to internal documents produced at the trial.
Similar issues surfaced in the fourth quarter of 2001, when internal reports prepared before the quarter ended showed that growth would reach only 2.8%, even after the use of one-time revenues. WorldCom ended up reporting revenue growth of 7%, according to Anders. He charged that it boosted results by improperly moving line costs from the operating budget to the capital budget.
REPORTS TOSSED ASIDE?
Anders produced internal documents that were prepared in late 2001 for high-level executives, showing that line costs were $2 billion less than expected. The document, projected onto a large screen for the jury to see, showed that line costs in March, 2001, were just $809 million, compared to about $1.5 billion in January and $1.5 billion in February.
Ebbers and Anders parried over the document: "I take it you weren't aware of line-cost adjustments in the first quarter of 2001," Anders said.
"I was not aware of it," Ebbers responded.
"You didn't even look at it. Just tossed it aside," Anders said of the report.
"Probably in the trash," Ebbers said.
Anders also forced Ebbers to deny knowledge of line-cost reductions in the third and fourth quarters of 2000. In each case, they were in the range of $700 million, about half of what WorldCom's finance department had forecasted in the budget.
"It's your testimony you did not notice this?" Anders asked.
"It's my testimony I did not notice. If I did, we would not be here today," Ebbers said.
Anders has no direct evidence to link Ebbers to the capitalization of the line costs, beyond Sullivan's testimony. That might not be enough, because Sullivan's credibility is subject to question. He originally denied any wrongdoing but changed his plea and implicated his former boss months after his indictment. Sullivan also admitted in court that he used marijuana and cocaine and lied to prosecutors.
Anders has now attacked Ebbers' strongest defense, his own personal credibility. From the start, the government's best argument has been that the fraud was so pervasive that the former CEO had to know about it, unless he deliberately shielded himself from evidence of wrongdoing, which would be a crime.
FEW TALKS WITH CFO?
That argument appeared a bit stronger after two days of Ebbers' testimony. At first, he served himself well with broad, clear, and firm denials of wrongdoing. But toward the end of his cross-examination, he was forced to testify that he repeatedly missed huge shifts in the expenses that were clearly laid out in specific reports for high-level executives. The case very well may come down to whether the jury finds those particular denials credible.
Ebbers' credibility was tested earlier in the day as well, when he testified about the nature of his relationship with Sullivan. He acknowledged that the two men had offices in the same part of the headquarters building in Clinton, Miss., but suggested that they seldom talked privately.
"You talked to Mr. Sullivan multiple times a day?" Anders asked.
"Oh no," Ebbers said. "In a lot of weeks, three to four times." He also insisted the two men usually spoke or had lunch accompanied by other executives.
"Other times you spoke three to four times a day?" Anders said.
"I don't recall ever speaking to Mr. Sullivan that often," Ebbers said.
Finally, in exasperation, Anders asked, "Did you never have a one-on-one conversation with Scott Sullivan?"
Ebbers paused for a moment before responding, "Oh, I'm sure I did."
THE RISK OF TESTIFYING.
Ebbers conceded little, if anything, to the prosecution. Even seemingly obvious points, such as his state of mind while his personal financial situation deteriorated, led to highly contentious exchanges. Anders introduced evidence showing that Bank of America threatened to call Ebbers' personal loans, which were secured by WorldCom's stock. As the stock price fell in 2000, Ebbers received one margin call after another on nearly $200 million worth of personal debt.
"It's fair to say you were under pressure?" Anders asked.
Ebbers, who sat with his hands folded in his lap and stared straight ahead, paused for a moment. "Um, a little," he said.
Anders asked for permission to approach Ebbers to make his point: "Weren't you under immense pressure...more than anyone should have to bear?"
Ebbers took a risk by testifying. While he was able to clearly profess his innocence to the jury, he also exposed himself to a lengthy cross-examination, which took a certain toll. He's betting that in the absence of a smoking gun, the toll won't be lethal. It could be a very close call.
Rosenbush is a senior writer for BusinessWeek Online in New York