Bernie Ebbers, the former WorldCom chief executive, was sentenced on July 13, 2005, to 25 years in prison. He was 63 and had a heart ailment, so the sentence likely meant the rest of his life behind bars. A federal court in New York had convicted him of fraud, conspiracy and making false filings, in what was described as the biggest corporate accounting fraud in US history.
Building WorldCom
His early record was unremarkable. He grew up in the southern US after part of his childhood in Edmonton, Canada, bounced through several colleges, and finished at a Baptist college in Mississippi, graduating in 1966. For almost two decades afterwards he coached basketball and owned motels.
The break came with the breakup of AT&T, which let smaller firms into long-distance service. Ebbers formed Long Distance Discount Service in 1983. Growth was slow until the company went public in 1989, and then the deals started. Over its lifetime the firm bought some 70 companies, among them MCI, a 1998 deal worth $37 billion.
The model was simple. Each acquisition was paid for with stock lifted by the one before, and debt piled up, to more than $30 billion. Accounting for “good will” masked the fact that liabilities far outran assets. Ebbers understood that Wall Street cared about the share price, not the health of the business. Keep the price up and the banks, analysts and press would follow.
The friends who mattered
They did. WorldCom grew close to Salomon Smith Barney and its telecom analyst Jack Grubman. Ebbers paid Salomon more than $100 million in investment banking fees between October 1997 and February 2002, and Grubman’s high ratings supported the stock. Ebbers also benefited from “spinning,” in which select clients got access to profitable IPOs. Arthur Andersen, auditor to both WorldCom and Enron, raised no alarm while collecting large fees.
Ebbers and his chief financial officer, Scott Sullivan, won awards and magazine cover stories. In mid-1999 President Bill Clinton told WorldCom employees the company was “the symbol of 21st century America.” Between 1990 and 1999, shareholders earned a 225-to-1 return, and Ebbers’s own fortune reached $1.4 billion.
Unravelling
By 2000 the structure was cracking. A proposed $115 billion merger with Sprint collapsed and the stock sank. Ebbers had bought much of his stock with borrowed money, and as the price fell the debts came due. He got the company to advance him more than $400 million in loans, expecting to repay them once the stock recovered.
It did not. Without a rising share price, WorldCom had no basis for further profit growth, and the response was fraud. One technique was booking routine expenses as capital outlays, offset by fictional assets that lifted the bottom line. The fraud totalled about $11 billion, more than the manipulations at Enron.
Ebbers resigned in April 2002. WorldCom filed for bankruptcy in July 2002, its stock worth pennies. Thousands of workers lost their jobs and savings, and tens of thousands of investors were defrauded. The Securities and Exchange Commission and then the Justice Department investigated. Sullivan agreed to plead guilty and testify against his former boss. Ebbers was convicted in March 2005 and, to settle another case, agreed to forfeit almost all of his personal assets.
