What Did Ebbers Know?

Never mind that more and more of his ex-lieutenants are doing
the perp walk on national TV. WorldCom Inc’s founder, Bernard J Ebbers, rides
free in the foothills of the Canadian Rockies.

He was last observed in August in the rolling meadows of his
500,000-acre ranch 200 miles northeast of Vancouver. Meanwhile, government
investigators are looking into the company’s admissions in June and August
that it improperly accounted for $7.1 billion worth of expenses.

But
pressure is mounting on Ebbers, who ran the company for 30 years, to come down
from the hills. On Sept 10, WorldCom’s board of directors voted to ask the
court overseeing its bankruptcy to rescind the former CEO’s severance
agreement, which awarded him $1.5 million a year for life. The severance plan
also includes terms of a $408 million loan the company made to Ebbers at a
bargain rate of 2.3%. The vote was made on the recommendation of its bankruptcy
lawyers at Weil, Gotshal & Manges LLP. They argue that the agreement is
void, because Ebbers knew the company was insolvent when he reached the
severance agreement, one director says.

Federal prosecutors are hot on Ebbers’ trail, too.
Frustrated that former Chief Financial Officer Scott D Sullivan won’t
cooperate, they say they have trained their sights on Chief Operating Officer
Ron Beaumont. They believe the threat of indictment might compel Beaumont to
help link Ebbers to the accounting scandals that pushed the telecom company into
bankruptcy on July 21. Investigators are also leaning on CEO John W Sidgmore,
who told the board on Sept 10 that he planned to step down. The investigators
are also curious to know whether Ebbers played a role in a host of accounting
practices that appear rooted in the corporate culture. In interviews with many
current and former employees, BusinessWeek has learned that the company
manipulated its financial results through a variety of tricks. The company also
had an unwritten policy of not closing dead accounts, ex-staffers say. OmniCom,
a French telecom carrier, was charged $5 million a month for three quarters
after it had asked in writing to close its account in 2000.

New revelations at WorldCom, while painful, position the
company for a fresh start. Only when the financial secrets are brought into the
open will employees, customers, and investors be able to gauge the value and
viability of the fallen giant. That would make it easier to measure the company’s
assets and strike an agreement with creditors, who are holding $41 billion in
debt. And with Sidgmore’s resignation, creditors will be dealing with a new
CEO. One candidate is XO Communications Inc. CEO Dan Akerson, a veteran of MCI
and Nextel Communications Inc.

If investigators do find evidence linking Ebbers to fraud–which
is no sure bet–the ramifications would extend beyond WorldCom. By leveling
charges at its first high-profile CEO, the White House could claim success in
its crackdown on corporate fraud, possibly boosting investor confidence lost in
the wake of scandals.

Ebbers’ own lawyer, Reid H Weingarten, says investigators
are snooping everywhere, even "looking at Ebbers’ fishing licenses,"
but still lack evidence for an indictment. "None is justified,"
Weingarten says.

Still, people are making troubling allegations. The WorldCom
CEO sometimes talked about his financial derring-do, insiders say. A former
high-level executive recalls a senior staff meeting two years ago at Jackson
(Miss.) headquarters, where Ebbers assured colleagues that the company would be
free from nasty financial surprises: "We won’t have to worry about
earnings for years." Ebbers, say sources, said he would tap cash reserves
to boost flagging revenue.

Ebbers, they add, told the same group that he could take huge
write-offs from acquisitions, setting a low bar so that future results looked
strong by contrast. In fact, the company did take $685 million in write-offs in
the third quarter of 2000–a move under investigation by the Securities &
Exchange Commission.

Yet investigators are finding Ebbers an elusive target. Only
a handful of the company’s 60,000 employees ever heard directly from the CEO.
He never used e-mail. His messages were sent to his secretary, who printed them
out for him to read. If Ebbers replied, it was by telephone or handwritten fax,
say former executives. All this makes it hard for investigators to discern what
Ebbers knew about WorldCom’s accounting. In the past 2 1/2 months, House
investigators have combed through six boxes of WorldCom documents and have yet
to find a link, say people familiar with the probe.

But pressure to inflate revenues and cloak expenses appears
to have been widespread at the company Ebbers ran. Ken Emigh, a former financial
analyst in the Dallas office, told BusinessWeek he received an e-mail on Dec.
12, 2000, from then-Chief Technology Officer Fred Briggs and accounting manager
Frank Guckes, ordering him to shift $35 million in labor expenses from a capital
project to the operating budget. Emigh says the network systems division’s
$215 million capital budget was overspent and the company wanted to bring it
back in line, at least on paper. Emigh refused to transfer the costs to the unit’s
operating budget, saying the move was an illegal attempt to cloud the picture.
He was laid off shortly after refusing to reclassify expenses.

Investigators also want to know if Ebbers sanctioned or
encouraged double-counting. Take the case of former government-securities trader
Aubrey G. Lanston & Co. in 1999. Aubrey negotiated a 50% reduction for
annual data services, to $15,000. But WorldCom responded by upping revenue, to
$45,000 in annual income from Lanston, booking the old and renegotiated deals
separately–one on MCI’s system and one on WorldCom’s.

How could a CEO obsessed with details have missed such
shenanigans? Right now, there’s no telling. But investigators are determined
to dig until they find the answer.

By Charles Haddad in Atlanta, with Amy Borrus in Washington
in BusinessWeek. Copyright 2002 by The McGraw-Hill Companies, Inc