What Did Ebbers Know?
By Catherine Yang and Brian Grow
Scott D. Sullivan was a young nobody until WorldCom CEO Bernard Ebbers plucked him from obscurity in 1992. After WorldCom snapped up Sullivan's employer, Advanced Telecommunications, the MBA grad from Oswego State shot into the stratosphere of Corporate America as WorldCom's CFO.
Together, Sullivan and Ebbers charted the aggressive acquisition strategy that turned the long-distance startup into a telecom juggernaut during Wall Street's go-go years. In 1998, after Sullivan helped engineer WorldCom's audacious $37 billion acquisition of telecom stalwart MCI, he was named CFO of the Year by CFO magazine.
Now, a long way from those glory days, Sullivan, 43, will confront former mentor Ebbers, 63, in a federal courtroom in Manhattan when his old boss goes on trial Jan. 18. Last March, the former CFO pleaded guilty in an $11 billion accounting fraud that helped keep WorldCom's stock price afloat during a nasty market downturn.
Prosecutors are pointing the finger at Ebbers, whom they allege participated in the fraud. Since Ebbers relied little on memos or e-mail, the case will turn largely on Sullivan's testimony. "The personalities play a central role, more so than in other big corporate fraud cases," says former federal prosecutor Robert Mintz, a partner at law firm McCarter & English in Newark, N.J.
Luckily for the government, the relatively simple alleged fraud at WorldCom won't distract jurors from the personal drama between the duo, who were "as thick as thieves," according to a former associate, yet suffered a prickly relationship. Prosecutors say that between September, 2000, and June, 2002, Sullivan and Ebbers wrongly moved expenses from one column of the balance sheet to another in order to beef up the bottom line. Specifically, the two allegedly switched $3.8 billion in day-to-day operating expenses to longer-term capital expenditures, which can be written off over longer periods.
SCAMMED OR SCAMMER?
In addition, Sullivan and Ebbers allegedly maintained the appearance of WorldCom's heady revenue growth by counting one-time events, such as settlements of outstanding payments, normally excluded from investors' analysis of revenue growth. Lawyers for Ebbers and Sullivan could not be reached for comment.
The case will turn on the jurors' assessment of the starkly different protagonists. The government prevails if the ex-CFO comes across as a loyal underling who took cues from a meddling boss. But Ebbers gets off the hook if he can make Sullivan look like a master of financial shell-and-pea games that succeeded in pulling the wool over his superior's eyes. Here are the touchstones that court-watchers will be looking for:
• Sullivan, good or evil? To make Ebbers look bad, Sullivan must come across as a decent, dedicated employee. Former co-workers say the straight-laced Sullivan worked from 8 a.m. to 10 p.m. at the company's Jackson (Miss.) headquarters, flying home on weekends to visit his wife and daughter at the family's home in Boca Raton, Fla. In a September, 2000, meeting, according to Ebbers' indictment, Sullivan suggested to Ebbers that WorldCom issue an earnings warning to Wall Street, but Ebbers refused. The implication: Sullivan took the cue from Ebbers to pump up the numbers.
• Big-picture CEO. Ebbers is likely to argue that he was busy charting a broad strategic vision and delegated the accounting details to his trusted CFO, who proceeded to cook the books. Indeed, the Canadian Ebbers, a college dropout and former gym teacher who now lives a good ol' boy's life in his adopted Mississippi, could well strike New York jurors as a financial innocent.
• Eagle-eyed CEO. Yet, Ebbers was well-known as a micromanager and a hawk on office expenses. He personally scrutinized employees' expense reports, and when he took over MCI, he did away with water coolers to cut costs. "I always found it odd for a CEO of a company to do that," says a former employee. That attention to detail is difficult to square with a know-nothing chieftain. Still, even if the detail-oriented Ebbers knew about his company's accounting, his lawyers could argue that the CEO didn't understand enough accounting minutiae to know that what went on was wrong.
• Sullivan's credibility. Ebbers' lawyers will attack Sullivan's motives. After all, the CFO's testimony may help reduce his own potential 165-year sentence to 25 years. To counter, the government must find plenty of other witnesses to testify to Ebbers' alleged knowledge of wrongdoing.
Come Jan. 18, the personal drama between a mentor and his former protégé begins. As it unfolds, the final piece in the resolution of the nation's largest accounting scandal hangs in the balance.
Edited by Beth Belton