Risk Management

Sullivan Pleads Guilty; Ebbers Charged

WorldCom's former CFO and CEO charged with conspiracy, fraud, and making false statements.
Stephen TaubMarch 3, 2004

Former WorldCom chief financial officer Scott Sullivan pleaded guilty to three criminal counts as part of the largest accounting fraud in U.S. history.

His onetime boss, former chief executive officer Bernard Ebbers, faces the same three charges — conspiracy to commit securities fraud, securities fraud, and making false statements to the Securities and Exchange Commission — for his role in misstating $11 billion in revenue and expenses at the telecommunications giant. Sullivan has agreed to cooperate with prosecutors in the case against Ebbers.

The indictment of Ebbers comes about two weeks after the indictment of Jeffrey Skilling, the former CEO of Enron Corp., whose accounting misdeeds and subsequent bankruptcy filing touched off the recent wave of corporate scandals and spawned the passage of the Sarbanes-Oxley Act, designed to prevent future corporate wrongdoing.

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Sullivan, who was arrested in August 2002 and was scheduled to go on trial April 7, admitted that he had participated in a conspiracy and adjusted the accounting reports of the company to improve reported results.

“I knew what I was doing was wrong,” Sullivan said at his plea hearing, according to wire service reports. “I did not take any actions for personal financial gain. I did this in a misguided effort to preserve the company. With sincere remorse and a deep sense of contrition, I am pleading guilty because I am, in fact, guilty of the three counts in the indictment.”

In addition to cooperating with prosecutors, Sullivan added that he will sell his $13 million home to help provide restitution for his crimes, which carry a maximum sentence of 25 years and a fine of as much as $2.25 million.

“Ebbers and Sullivan agreed that false and fraudulent adjustments would be made to WorldCom’s books and records,” said U.S. Attorney General John D. Ashcroft, in a statement. “Ebbers insisted that WorldCom publicly report financial results that met analysts’ expectations.”

WorldCom filed for Chapter 11 bankruptcy protection in July 2002 following revelations that the company had manipulated its financial statements — most notably by counting operating costs as expenses. The ploy enabled the teetering telco to hold its line costs to 40 percent of total sales from 1999 to 2001. In reality, the costs had grown close to 50 percent.

WorldCom, known now as MCI Inc., is slated to come out of bankruptcy in the next few months.

Sullivan also settled a civil suit by the SEC charging him with engaging in a fraudulent scheme to conceal WorldCom’s poor financial performance. The commission alleged that Sullivan, with Ebbers’ consent and knowledge, caused numerous improper adjustments and entries in WorldCom’s books and records, often in the hundreds of millions of dollars, to make the company’s quarterly and yearly financial results appear to meet Wall Street’s expectations. The adjustments and entries were designed to falsely increase the company’s reported revenue and falsely decrease its reported expenses

In addition, the commission alleged that Sullivan made numerous false and misleading public statements about WorldCom’s financial condition and performance, and signed a number of SEC filings that contained false and misleading material information.

Sullivan agreed, without admitting or denying the SEC allegations, to a permanent bar from serving as an officer or director of a public company and a permanent suspension from appearing or practicing as an accountant before the commission. The may also entail monetary relief as well as additional equitable remedies or sanctions.

The SEC settlement is subject to court review.