VideoScott Sullivan, the disgraced former CFO of WorldCom Inc., was indicted by a federal grand jury in New York on Wednesday on two counts of securities fraud and five counts of filing false reports with the SEC. Also indicted: Buford Yates, who has served as the bankrupt telecom company's director of general accounting since 1997.
The grand jury also named David Myers, the company's onetime controller, as an unindicted co-conspirator in the case. Along with Yates, two other current WorldCom finance department employees were named as unindicted co-conspirators: Betty Vinson, director of management reporting, and Troy Normand, director of legal entity accounting Troy Normand.
Sullivan and Myers were arrested in a high-profile bust in New York on Aug. 1. The two finance department executives had left the company in June, following Worldcom's initial disclosure of a $3.9 billion accounting error.
No members of WorldCom's internal audit team were named in the case. Cynthia Cooper and Glyn Smith, the two top officials on the telco's internal audit staff, have been generally credited with uncovering the alleged accounting scheme.
The 23-page indictment handed out on Wednesday spells out an elaborate bookkeeping ploy allegedly hatched by Sullivan and the other four co-conspirators in July 2000. At the time, WorldCom's fixed costs for access to outside telecom networks were rising more quickly than revenues. The alleged plot was intended to hide from Wall Street investors the true scale of the company's operating costs.
According to the indictment, WorldCom had locked itself into long-term contracts for access to external telecom networks. Those contracts were intended to help the company coin it off the surging new economy. But after the stock market bubble burst in early 2000, growth in Internet traffic tailed off -- and so did WorldCom's top line revenue.
By April 2001, the line costs to outside networks continued to mount, and WorldCom apparently could no longer mask those costs by offsetting debits to reserve and capital accounts and credits to line costs. At that point, CFO Sullivan allegedly made the crucial decision to start recording the line costs as capital costs, rather than operating expenses.
The ploy enabled WorldCom to file financial statements showing that line costs were holding steady at roughly 40 percent to 42 percent of total sales from 1999 through 2001. In reality, the costs had grown close to 50 percent -- out of whack with what other telcos were reporting at the time.
According to the indictment, the alleged co-conspirators were aware they were committing an unlawful act by treating operating costs as capital expenses. "Neither Sullivan nor Myers provided Yates, Vinson, or Normand with any supporting documentation or business rationale for the entries," the indictment states. "As Sullivan, Myers, Yates, Vinson, and Normand well knew, there was no justification in fact or under GAAP."
The two counts of securities fraud against Sullivan and Yates stem from false accounting entries. The five additional accounts of false filings with the SEC result from using the improper accounting in the company's 10-K and 10-Q filings for 2001 and the first quarter of 2002. WorldCom management has already admitted the company's accounting for those periods was in error.
In addition to indicting Sullivan and Yates, the U.S. Attorney for the Southern District of New York announced its plan to file "informations" against Myers, Vinson and Normand. According to observers, the filing of criminal informations is often a sign that prosecutors are about to announce plea agreements in a case.
But lawyers note that prosecutors in the WorldCom case are taking an unusual tack in the filing of the criminal informations. Christopher Bebel, an attorney in Houston, told Bloomberg News that prosecutors typically wait until the day a plea agreement is announced before disclosing the filing of a criminal information. By announcing the WorldCom information filings early, government lawyers may be attempting to add to the psychological pressure felt by other targets of the investigation.
"The government is becoming quite accomplished at rattling sabers," Bebel told Bloomberg.
In a scant two months, the scope of the WorldCom fraud has come to rival that of Enron Corp. as the most notorious business scandal in recent memory. The misappropriation of $3.9 billion in operating costs was disclosed on June 25. On Aug. 8 -- just a week after Sullivan and Myers were anarrested -- WorldCom disclosed the discovery of another $3.3 billion in improper accounting. That raised the total accounting error to $7.2 billion.
Within the past week, investigators from the House Financial Services Committee have also released details about the extent of the relationship between WorldCom executives and investment bankers at Citigroup Inc.'s Salomon Smith Barney unit. According to documents Salomon has submitted in response to a Committee subpoena paint, the business dealings between the New York bank and the Clinton, Miss. telco were tainted by conflicts of interest.
In particular, Salomon and its star telecom analyst, Jack Grubman, apparently made WorldCom's former CEO Bernie Ebbers a favored client, setting aside one million shares in hot IPOs during the Internet stock bubble of the late Nineties. In return, WorldCom used Salomon's investment banking services -- earning Salomon tens of millions of dollars in fees for advising WorldCom on the telco's string of mergers.
Reader Comments» Post a comment