Reports detail intimidation by top WorldCom execs

McLEAN, Va. -- The former top executives at WorldCom Inc. ruled with unchallenged authority, intimidating anyone who questioned their conduct as the company veered toward bankruptcy, according to two reports released Monday.

The outlines of WorldCom's financial wrongdoing have been known for a year, but Monday's reports, totaling more than 500 pages, offered some of the most explicit details yet about the scandal.

In one incident investigators cited, accounting executive Buford Yates warned an underling who questioned the company's books to not show auditors the numbers or "I'll throw you out the (expletive) window."

WorldCom's $11 billion accounting scandal led to the largest bankruptcy filing in U.S. history last July.

Portions of one of the reports emerged last week, revealing that former Chairman Bernard Ebbers had been in meetings in which company officials discussed ways to artificially inflate revenue.

The report, produced by lawyer William McLucas at the request of the company's new board, 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."

The McLucas report offered searing accounts about how ex-chief financial officer Scott Sullivan and other key finance executives cooked WorldCom's books to hide that the real numbers were falling short of Wall Street's expectations.

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."

A second report released Monday, prepared by former Attorney General Richard Thornburgh for a bankruptcy judge in New York, describes a corporate culture dominated by Ebbers and Sullivan, "with virtually no checks or restraints placed on their actions by the board of directors or other management."

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; Ebbers has not been charged.

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

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 settlement, concludes that those principally responsible for the fraud are no longer employed by WorldCom, as the company asserts.

But the Thornburgh report 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.

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