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Reports Detail WorldCom Execs’ Domination

June 9, 2003 GMT

McLEAN, Va. (AP) _ The former top executives at WorldCom Inc. ruled with unquestioned authority, steering the telecommunications company into multibillion-dollar acquisitions on a whim and intimidating underlings who questioned their conduct, according to two reports released Monday.

The outlines of WorldCom’s financial wrongdoing have been known for a year. And portions of one of the reports that emerged last week revealed that former Chairman Bernard Ebbers had been in meetings in which company officials discussed ways to make revenue appear higher.

Even so, Monday’s reports, totalling more than 500 pages, offered some of the most explicit details yet about the scandal.

A report by former Attorney General Richard Thornburgh explained how the corporate culture dominated by Ebbers and ex-chief financial officer Scott Sullivan fostered the environment that led to WorldCom’s largest-ever U.S. bankruptcy and $11 billion accounting scandal.

The second document, produced by lawyer William McLucas at the request of the company’s new board, offered searing accounts about how Sullivan and other key finance executives cooked WorldCom’s books to hide that the real numbers were falling short of Wall Street’s expectations.

In one incident cited by the investigators, accounting executive Buford Yates told an underling who questioned the company’s books: ``Show those numbers to the damn auditors and I’ll throw you out the (expletive) window.″

McLucas’ report faulted Ebbers for fostering a poisonous corporate culture and said he was ``aware, at a minimum, that WorldCom was meeting revenue expectations through financial gimmickry.″

A voicemail Sullivan left for Ebbers on June 19, 2001, more than a year before WorldCom acknowledged its accounting fraud, described monthly revenue reports as ``getting worse and worse. ... (T)he latest copy that you and I have already has accounting fluff in it ... all one-time stuff or junk.″

That report stung Ebbers for resisting efforts to establish a code of conduct at WorldCom. Ebbers was said to have described it as a ``colossal waste of time.″

``We have heard numerous accounts of Ebbers’ demand for results _ on occasion emotional, insulting, and with express reference to the personal financial harm he faced if the stock price declined _ we have heard none in which he demanded or rewarded ethical business practices,″ the report said.

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Thornburgh’s report, prepared for a bankruptcy judge in New York, said Ebbers and Sullivan dominated WorldCom ``with virtually no checks or restraints placed on their actions by the board of directors or other management.″

In one instance, WorldCom, a company built largely through acquisitions, spent $6 billion in September 2000 to purchase a company called Intermedia Communications. WorldCom conducted about 60 to 90 minutes of due diligence research before making the deal, which was rubber-stamped by the board of directors after a half-hour meeting that was held on two hours’ notice. One director called it an ``ego deal″ for Ebbers.

``WorldCom could not have failed as a result of the actions of a limited number of individuals,″ Thornburgh’s report said. ``Rather, there was a broad breakdown of the system of internal controls, corporate governance and individual responsibility, all of which worked together to create a culture in which few persons took responsibility until it was too late.″

The authors of both reports indicated they were hampered by their inability to question Ebbers and Sullivan; Sullivan has been charged with fraud in federal court and Ebbers may face charges.

Sullivan, who has denied wrongdoing, is free on $10 million bail while he awaits trial next year. Yates and three other ex-WorldCom executives, including former controller David Myers, have pleaded guilty and are helping federal prosecutors.

Ebbers’ lawyer has said prosecutors are being overzealous in their efforts to find something against Ebbers.

WorldCom hopes to emerge from Chapter 11 protection this fall, renamed MCI and headquartered in Ashburn, Va.

Its ability to exit bankruptcy largely hinges on acceptance of a proposed $500 million fine negotiated with the Securities and Exchange Commission. While that fine is by far the largest of its type ever imposed by the SEC, many of WorldCom’s competitors and critics say it is woefully inadequate, considering that WorldCom’s collapse wiped out about $180 billion in shareholder value.

The McLucas report, which the SEC reviewed before agreeing to the $500 million settlement, concludes that ``the company no longer employs the people whose culpable conduct was principally responsible″ for the fraud. That gibes with the assertion by chief executive Michael Capellas that the fraud was perpetrated by fewer than 100 people who have since been fired or left the company.

But the Thornburgh report, prepared by the Kirkpatrick and Lockhart law firm, takes a broader view of the wrongdoing. For example, the company’s general counsel and treasurer remain in place even though the report finds fault with their actions.

The McLucas report faulted WorldCom’s auditor, Arthur Andersen, for not catching some of the fraud. Even though WorldCom people were uncooperative in providing important material to Andersen, the accounting firm should have at least alerted the company’s audit committee, the report said.