Superlatives (and Contradictions) in a Fraud Trial

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January 16, 2005

Superlatives (and Contradictions) in a Fraud Trial

By KEN BELSON

AFTER the blizzard of high-profile corporate-executive trials last year that featured Martha Stewart, Frank P. Quattrone and John J. Rigas, Americans might be forgiven for saying "enough!"

But, like it or not, the frenzy is likely to start anew on Tuesday, when the government begins its case against Bernard J. Ebbers, the former C.E.O. of WorldCom.

Prosecutors have accused Mr. Ebbers of conspiracy, securities fraud and filing false statements to regulators in an $11 billion accounting fraud, the biggest in history; he faces up to 85 years in prison if convicted on all counts. The fraud led to the largest corporate bankruptcy in history when WorldCom collapsed in 2002.

The company's lead investment banker, Citigroup, paid $2.65 billion to settle claims by investors who were burned in the meltdown, and 10 former WorldCom directors agreed to pay $18 million of their own money to settle the same lawsuit.

The superlatives, firsts and continuing fights over WorldCom are a big reason that the Ebbers trial is being called the granddaddy of all fraud cases. Not undeservedly, it is also being billed as a coda to the excesses of the stock market bubble that catapulted and then consumed the telecommunications industry in the last half decade.

In digging through WorldCom's wreckage, the government has methodically built its case against Mr. Ebbers, a former high school basketball coach who turned a cut-rate long distance telephone company into a behemoth worthy of the name he gave it. Prosecutors have secured guilty pleas from five of his underlings, including his former chief financial officer, Scott D. Sullivan.

Judge Barbara S. Jones of United States District Court in Manhattan denied attempts to move the trial to Mr. Ebbers's home state, Mississippi, and rejected motions to grant immunity to witnesses for the defense. On their face, these victories would seem to presage a slam-dunk for the government's case. But legal analysts say the trial will be anything but clear-cut because Mr. Ebbers is such a contradictory figure.

Many trials involving former corporate highfliers come down to whether the executive planned or knew about the fraud, or whether the dirty work was done by subordinates with his or her direct knowledge. Proving that Mr. Ebbers was "in the loop" will not be easy. According to managers who worked with him, Mr. Ebbers was a detail-oriented and hands-on executive who was concerned - even obsessed - with sales growth figures and efforts to cut costs.

But he did not appear to be a financial whiz capable of devising Enronlike accounting schemes, they said, and instead was more focused on buying companies to merge into WorldCom and on increasing revenue. While prosecutors say they have damning voice mail messages and memos, Mr. Ebbers rarely sent e-mail messages, making it harder to compile a paper trail of instructions to subordinates.

"It's pretty much what did he know, what should he have known and what he was aware of based on conduct," said Michael Missal, a partner at the law firm Kirkpatrick & Lockhart Nicholson Graham and a contributor to the bankruptcy court report on WorldCom last year by a panel led by Richard E. Thornburgh, the former attorney general. While not a complete review, Mr. Missal said, "our reports showed that Ebbers did have involvement in the financial reporting process." He added, "The question will be: How deeply was he involved in the process?"

Prosecutors are likely to call former co-workers, including the five financial officers who have pleaded guilty, to the stand. Mr. Sullivan, Mr. Ebbers's right-hand man, will be a particularly important witness.

The defense is likely to counter by saying that these witnesses are motivated to cooperate with the government because they are eager to reduce their possible maximum sentences, which range from 15 to 25 years. Former directors and financial industry analysts may also be called, though Mr. Missal said Mr. Ebbers generally kept his own counsel so witnesses with direct knowledge of his plans may be hard to find.

In lieu of a specific memo showing that Mr. Ebbers instructed Mr. Sullivan or someone else to cook WorldCom's books, the government would have to build a case around Mr. Ebbers's motivation, legal specialists said. Here again, contradictions abound.

Mr. Ebbers was a persuasive salesman and an aggressive businessman, having bought dozens of companies over two decades. Seeing opportunity in the breakup of AT&T, he was among the earliest entrepreneurs who helped usher in cheap long-distance service.

But as WorldCom grew, Mr. Ebbers also became a slave to Wall Street. Under pressure to meet analysts' expectations, he had to continue buying companies. When a downturn in the broader market hurt WorldCom's stock, prosecutors say, the company used accounting gimmicks to paper over losses and buoy its shares.

Whether Mr. Ebbers ordered those antics, or was even privy to them, is the question. Prosecutors are likely to try to show that there was no way an executive so involved in the company's climb could not have been involved in its demise.

The company was not the only thing at stake. WorldCom made Mr. Ebbers fabulously wealthy. He borrowed millions of dollars against his stock to buy a 500,000-acre ranch in Canada, where he was born, and acquired timberland, boats, homes and businesses.

Yet Mr. Ebbers kept his WorldCom shares even as they fell. And while he lived lavishly, at least on the surface he seemed loyal to his company.

He also has humble roots, which his lawyers are sure to emphasize. After moving to Mississippi, he ran some motels before entering the telephone business in the 1980's. Without formal training in engineering or finance, he relied on grit and instinct.

As defense lawyers have done in other cases against corporate executives, Mr. Ebbers's are likely to portray him as someone who focused on the big picture and let his accountants handle the books.

"The government has to paint him as a robber baron whose sole goal was to get rich," said Robert W. Seiden, the president of Fortress Global Investigations and a former prosecutor in the Manhattan district attorney's office. "The defense has to play up the Horatio Alger angle: a guy with a simple background who built a fledgling industry into an alternative to AT&T."

How the jury weighs these competing pictures may be crucial to whether Mr. Ebbers is convicted, particularly because the accounting in question may prove too arcane and incomprehensible for the layperson.

If the prosecution succeeds in lumping Mr. Ebbers in with other executives who have become synonymous with greed and excess, like Ivan F. Boesky and Michael R. Milken, he stands a good chance of being found guilty. At the same time, juries may identify with Mr. Ebbers's modest background and give him the benefit of the doubt.

"Jurors are very, very forgiving," said Angela C. Agrusa, a partner at the law firm Baker & Hostetler in Los Angeles who has won two civil cases against WorldCom, "as long as you're not dealing with the death of a human being."

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January 17, 2005

Ebbers Faces Trial After WorldCom Collapse

By THE ASSOCIATED PRESS

Filed at 3:39 p.m. ET

NEW YORK (AP) -- WorldCom Inc. was in trouble. The stock price was wobbly and Wall Street was asking tough questions. But CEO Bernard Ebbers repeatedly put a positive face on his company, promising sound finances, strong revenue growth and conservative accounting -- famously reassuring concerned analysts in 2001 that ``we do not see any storms on the horizon.''

Federal prosecutors say Ebbers was lying, orchestrating a shell game to cover up his company's financial trouble and stay in Wall Street's good graces. In the summer of 2002, WorldCom collapsed under the weight of an $11 billion accounting fraud and filed for the largest bankruptcy in the history of American business.

Two and a half years later, Ebbers, 63, faces a criminal fraud and conspiracy trial in New York, with jury selection getting under way this week.

The trial completes a remarkable arc for Ebbers, from visionary who launched a long-distance company with colleagues at a Mississippi coffee shop in 1983, to leader of one of the world's leading telecommunications firms, to accused felon facing possibly years in prison.

While Ebbers has kept a low profile since he was indicted in March 2004, he has always maintained his innocence.

``Bernie Ebbers never sought to mislead investors, never sought to improperly manipulate WorldCom's numbers, never improperly took any money and never sought to hurt the company he built,'' his lawyer Reid Weingarten said at the time.

Potential jurors are set to fill out questionnaires Wednesday, with in-court juror interviews set for next Monday. Opening statements could begin as early as the middle of next week.

The star witness for the government is expected to be Scott Sullivan, the former chief financial officer of WorldCom, who faced his own trial until pleading guilty in March 2004 and agreeing to testify against his former boss.

Prosecutors are expected to play a June 2001 voicemail message in which Sullivan told Ebbers that a WorldCom internal revenue report ``just keeps getting worse and worse'' and ``already has accounting fluff in it.''

The defense is expected to argue that Ebbers left the accounting decisions to Sullivan, and that Sullivan was willing to tell the government what it wanted to hear when he made his deal last year.

Unlike other recent white-collar trials, prosecutors do not have -- or at least have not tipped their hands publicly -- much of a paper trail from Ebbers, who was said not to use e-mail often.

In the 2004 trial of star technology banker Frank Quattrone, for example, prosecutors won a conviction partly by relying on a series of e-mails they said showed Quattrone deliberately obstructed a federal stock investigation.

The federal indictment of Ebbers does refer to a memorandum he sent in July 2001 to a senior WorldCom officer, asking for information about ``those one time events that had to happen in order for us to make our numbers.''

Among prosecutors' allegations is that Ebbers had an almost frenzied desire from 2000 to 2002 to see WorldCom meet Wall Street's expectations for quarterly revenue and earnings, ignoring Sullivan's pleas to issue earnings warnings.

WorldCom has since emerged from bankruptcy and now operates under the name MCI Inc., with headquarters in Ashburn, Va.

Manhattan prosecutors will be gunning for their latest high-profile white-collar conviction, hoping to follow wins against Martha Stewart and two executives from Adelphia Communications Corp.

The prosecution is led by David Anders, part of the government team that won a conviction in Quattrone's obstruction trial.

The Ebbers trial is expected to last four to eight weeks. It will be followed closely by some of the tens of thousands of people who lost their jobs or their investments when WorldCom folded in 2002.

One of them is Danny Thompson of Plano, Texas, who was an engineer until the company fell apart.

``Bottom line, one minute you have a retirement plan and a future, you're making a living wage at a great job, and the next you're working for less than half of what you used to make and have zero retirement,'' he said.