Two former WorldCom top execs are indicted for accounting fraud

Thursday, August 29, 2002



WASHINGTON - Two former top executives of WorldCom Inc. were indicted Wednesday on securities fraud and other charges, significantly widening the federal government's efforts to prosecute alleged accounting fraud at the now-bankrupt telecommunications giant.

The move is seen as a key step for the government to possibly seek an indictment of former WorldCom chief executive Bernard J. Ebbers, legal experts said, although Ebbers' attorneys contend he had no knowledge of the accounting scheme under which profits were allegedly inflated by billions of dollars.

Federal prosecutors accused Scott D. Sullivan, the 40-year-old former chief financial officer of WorldCom, and Buford Yates Jr., the company's former director of general accounting, of directing a two-year-long scheme to conceal $3.8 billion in company expenses and boost profits.

The 24-page indictment also names two other WorldCom accounting executives, Betty Vinson and Troy Normand, as unindicted co-conspirators. However, court papers filed Wednesday indicate that Vinson and Normand - along with WorldCom controller David F. Myers - were prepared to plead guilty and cooperate with the government.

If the fraud is proven, it would be the largest accounting scandal in U.S. history and would further tarnish WorldCom, once a high-flying tech giant that carries nearly half of the country's Internet traffic and runs MCI, the nation's No. 2 long-distance carrier.

Ashcroft message

Attorney General John Ashcroft said he intended the government's indictment to send a "clear message" to deter corporate lawbreakers.

"Today's indictments are the result of sustained law enforcement actions aimed at prosecuting corporate law-breakers and protecting the savings and pensions of Americans," Ashcroft said. "With each arrest, indictment and prosecution, we send this clear message: corrupt corporate executives will be punished." Sullivan, who was arrested on Aug. 1 along with Myers, allegedly conspired with Yates to instruct subordinates to hide WorldCom's mushrooming expenses by "capitalizing" expenses - improperly shifting costs from operating to capital expenses - thus reducing reported expenses and artificially inflating profits.

In the seven-count indictment, prosecutors alleged that the scheme began taking shape around 1999 when WorldCom entered into a large number of long term-lease agreements with other carriers to amass additional network capacity for an expected explosion in Internet traffic that never materialized.

Many of the leases, the indictment said, required WorldCom to make upfront payments to other carriers regardless of whether WorldCom actually used the additional capacity. Before the summer of 2000, WorldCom treated these payments as operating expenses. But as the number of carrier leases climbed and became a significant expense, WorldCom did an about face and began to capitalize the costs. By ordering subordinates to carry out the change, the indictment said, Sullivan and Yates "engaged in an illegal scheme to ... falsely and fraudulently" boost WorldCom's reported earnings.

The moves allowed WorldCom to report to investors that its expenses were about 40 percent of company revenue between 1999 and 2000, even though the actual figure was closer to 50 percent.

"As Sullivan, Myers, Yates, Vinson, and Normand well knew, there was no justification in fact or under generally accepted accounting principles for these entries," the indictment says.

Surfaced in June

WorldCom's accounting problems first surfaced in late June, when the company was forced to restate its earnings and admit that it wrongly listed $3.9 billion as capital expenses in 2001 and 2002. A month later, WorldCom filed the biggest bankruptcy filing in U.S. history. Since then, the company has disclosed an additional $3.3 billion in inflated profits.

Sullivan, Yates, and their co-conspirators "were able to assure that WorldCom's reported earnings exceeded its actual earnings for the period from October 2000 through April 2002 by approximately $5 billion," said the indictment, which does not mention Ebbers at all.

Sullivan, who is free on $10 million bail and could get up to 65 years in prison if convicted on charges of securities fraud, conspiracy and filing false statements, could not be reached for comment. Sullivan's attorney, Irv Nathan, has said his client was a victim of "a rush to judgment." David Schertler, a Washington lawyer who represents Yates, said he was surprised by the indictment of his client.

"It came totally out of left field," said Schertler, who added that his client worked two levels below Sullivan in the corporate hierarchy and reported to WorldCom controller Myers, 44. Schertler declined to comment further.

(Optional add end) The pursuit of top WorldCom officials has consumed law enforcement officials who have been looking to crack down on a wave of corporate financial scandals that began late last year when evidence surfaced that energy trader Enron Corp. used off-the-books partnerships to hide its deteriorating financial condition.

But the government's complex and slow moving case against Enron has so far produced only a single guilty plea and no criminal indictments of top executives.

The case against Sullivan and Yates also could prove difficult for the government, some experts said. That's because the accounting standards they are alleged to have violated are not clear cut.

"This is a gray area and it is not entirely clear that what they did was wrong," said Joshua Ronen, an accounting professor at New York University who has served as an expert witness in a variety of securities litigation cases.

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