What Did Ebbers Know?

The feds are hot on his trail, but so far he's playing it cool

Never mind that more and more of his ex-lieutenants are doing the perp walk on national TV. WorldCom Inc.'s founder, Bernard J. Ebbers, rides free in the foothills of the Canadian Rockies. He was last observed in August in the rolling meadows of his 500,000-acre ranch 200 miles northeast of Vancouver. Meanwhile, government investigators are looking into the company's admissions in June and August that it improperly accounted for $7.1 billion worth of expenses.

But pressure is mounting on Ebbers, who ran the company for 30 years, to come down from the hills. On Sept. 10, WorldCom's board of directors voted to ask the court overseeing its bankruptcy to rescind the former CEO's severance agreement, which awarded him $1.5 million a year for life. The severance plan also includes terms of a $408 million loan the company made to Ebbers at a bargain rate of 2.3%. The vote was made on the recommendation of its bankruptcy lawyers at Weil, Gotshal & Manges LLP. They argue that the agreement is void, because Ebbers knew the company was insolvent when he reached the severance agreement, one director says.

Federal prosecutors are hot on Ebbers' trail, too. Frustrated that former Chief Financial Officer Scott D. Sullivan won't cooperate, they say they have trained their sights on Chief Operating Officer Ron Beaumont. They believe the threat of indictment might compel Beaumont to help link Ebbers to the accounting scandals that pushed the telecom company into bankruptcy on July 21. Investigators are also leaning on CEO John W. Sidgmore, who told the board on Sept. 10 that he planned to step down. Says Ken Johnson, spokesman for the House Energy & Commerce Committee, which continues to pore over evidence: "We think Bernie Ebbers is up to his eyeballs in this."

The investigators are also curious to know whether Ebbers played a role in a host of accounting practices that appear rooted in the corporate culture. In interviews with many current and former employees, BusinessWeek has learned that the company manipulated its financial results through a variety of tricks. They say it was routine to double-count revenue from a single customer. Finance managers also claim delinquent accounts were kept on the books for as long as seven years after customers stopped paying, meaning that they counted as revenue instead of as liability.

The company also had an unwritten policy of not closing dead accounts, ex-staffers say. OmniCom, a French telecom carrier, was charged $5 million a month for three quarters after it had asked in writing to close its account in 2000. OmniCom paid at least some of the money, a former WorldCom employee says. OmniCom did not respond to a request for comment. WorldCom spokesman Bradford Burns declined to comment on specific allegations. "We are cooperating fully with the investigators who are looking into the past. But WorldCom's new management team and our 60,000 employees are focused on the future," he said.

New revelations at WorldCom, while painful, position the company for a fresh start. Only when the financial secrets are brought into the open will employees, customers, and investors be able to gauge the value and viability of the fallen giant. That would make it easier to measure the company's assets and strike an agreement with creditors, who are holding $41 billion in debt. And with Sidgmore's resignation, creditors will be dealing with a new CEO, one with no ties to the wild days at WorldCom. One candidate is XO Communications Inc. CEO Dan Akerson, a veteran of MCI and Nextel Communications Inc.

If investigators do find evidence linking Ebbers to fraud--which is no sure bet--the ramifications would extend beyond WorldCom. By leveling charges at its first high-profile CEO, the White House could claim success in its crackdown on corporate fraud, possibly boosting investor confidence lost in the wake of scandals.

Ebbers' own lawyer, Reid H. Weingarten, says investigators are snooping everywhere, even "looking at Ebbers' fishing licenses," but still lack evidence for an indictment. "None is justified," Weingarten says. He did not respond to additional requests for comment. Ebbers was unavailable for comment.

Still, people are making troubling allegations. The WorldCom CEO sometimes talked about his financial derring-do, insiders say. A former high-level executive recalls a senior staff meeting two years ago at Jackson (Miss.) headquarters, where Ebbers assured colleagues that the company would be free from nasty financial surprises: "We won't have to worry about earnings for years." Two other former top execs said he made similar statements twice that year. Ebbers, say sources, said he would tap cash reserves to boost flagging revenue.

Ebbers, they add, told the same group that he could take huge write-offs from acquisitions, setting a low bar so that future results looked strong by contrast. In fact, the company did take $685 million in write-offs in the third quarter of 2000--a move under investigation by the Securities & Exchange Commission.

Yet investigators are finding Ebbers an elusive target. Only a handful of the company's 60,000 employees ever heard directly from the CEO. He never used e-mail. His messages were sent to his secretary, who printed them out for him to read. If Ebbers replied, it was by telephone or handwritten fax, say former executives. All this makes it hard for investigators to discern what Ebbers knew about WorldCom's accounting. In the past 2 1/2 months, House investigators have combed through six boxes of WorldCom documents and have yet to find a link, say people familiar with the probe.

But pressure to inflate revenues and cloak expenses appears to have been widespread at the company Ebbers ran. Ken Emigh, a former financial analyst in the Dallas office, told BusinessWeek he received an e-mail on Dec. 12, 2000, from then-Chief Technology Officer Fred Briggs and accounting manager Frank Guckes, ordering him to shift $35 million in labor expenses from a capital project to the operating budget. Emigh says the network systems division's $215 million capital budget was overspent and the company wanted to bring it back in line, at least on paper. Briggs and Guckes did not return calls requesting comment.

Emigh refused to transfer the costs to the unit's operating budget, saying the move was an illegal attempt to cloud the picture. He never learned if anyone carried out the order. He was laid off shortly after refusing to reclassify expenses.

Investigators also want to know if Ebbers sanctioned or encouraged double-counting. Take the case of former government-securities trader Aubrey G. Lanston & Co. in 1999. Aubrey negotiated a 50% reduction for annual data services, to $15,000, says a Manhattan branch manager. But WorldCom responded by upping revenue, to $45,000 in annual income from Lanston, booking the old and renegotiated deals separately--one on MCI's system and one on WorldCom's. And former execs in the Tulsa credit department told BusinessWeek that $696 million in uncollectible bills--much of it three to seven years past due--was kept on the books, artificially inflating revenue.

How could a CEO obsessed with details have missed such shenanigans? Right now, there's no telling. But investigators are determined to dig until they find the answer.

By Charles Haddad in Atlanta, with Amy Borrus in Washington

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