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What did he know?

Business community ponders fate of Benie Ebbers

For four hours March 2, the day former WorldCom CEO Bernie Ebbers was indicted on federal charges that he conspired with his chief financial officer to cook the company`s books, the phones rang constantly at the Brookhaven-Lincoln County Chamber of Commerce and Industrial Development Foundation offices.

Reporters from around the globe representing dozens of news organizations – Reuters, The Associated Press, The Wall Street Journal, Chicago Tribune, The Los Angeles Times and Japanese and Canadian press among them – wanted to know what local folks thought about the once hometown hero, who was led away in handcuffs March 3 after surrendering to federal agents on charges of conspiracy to commit securities fraud and making false statements in connection with the collapse of WorldCom.

Ebbers, 62, pleaded innocent.

“We said the same thing over and over: ‘no comment,'” said executive director Chandler Russ, with a sigh. “They had the notion that our local economy was tied to the rise and fall of WorldCom, but it`s not, which was obviously a good thing. Our economy is tied to being a service provider for Southwest Mississippi, as well as having a strong manufacturing base in our industrial park. In fact, last month, we had the highest-ever total sales tax collections for Brookhaven.”

Russ, who said he was away from the office during the first hour of “the onslaught,” said some reporters asked if local business folks knew the real story about Ebbers and WorldCom`s demise.

“We obviously don`t know anymore than anybody else knows,” said Russ. “Bernie did some good things around this way, many of them anonymously, so you`ll still be hard-pressed to find anyone who will publicly admonish him. It`s like seeing your son arrested. You don`t want to believe he could be guilty.”

Ebbers resigned under pressure as WorldCom`s chief executive on April 29, 2002, after 17 years at the helm. On June 25, WorldCom disclosed a $3.8-billion accounting fraud, which escalated to more than $11 billion by year-end. On July 21, the company filed the world`s largest bankruptcy. On Aug. 1, former WorldCom CFO Scott Sullivan and the number two accounting person, David Myers, were arrested and charged with securities fraud, conspiracy to commit securities fraud and filing false statements with the Securities and Exchange Commission (SEC).

For 18 months, the trail seemed to grow cold on the extent of Ebber`s involvement. Did Bernie do it? Short of a confession, an unknown paper trail, or a betrayal by those close to him, it seemed the world might never know the truth about his involvement. But Sullivan, 42, who faced life in prison away from his baby daughter, Christina, and his wife, was prompted to cooperate with federal agents and dished up the ultimate betrayal. Ebbers’ trial is scheduled in November.

“There`s a general consensus among the business community that Bernie is going to be found guilty and serve some jail time,” said Paul Breazeale, CPA, of Breazeale Saunders & O’Neil Ltd, in Jackson. “I think it`s going to be a lengthy trial and that it`s going to get a lot of attention. With Bernie`s closest cohort testifying against him, and the overwhelming facts, I think it will be proven that he had to have known about the fraud.”

Pinnacle Trust CEO Stacey Wall is not convinced about the outcome.

“The only thing they can hang Bernie on is Sullivan`s testimony,” he said. “How in the world can anybody know he`s not making everything up to save himself? If that`s all they’ve got – Bernie`s word against Scott`s – it will be a difficult case to prove. It may sound like I’m defending Bernie, but I’m not.”

Insider trading is another charge that Ebbers might face, based on his Sept. 28, 2000, stock sale, when WorldCom`s sagging stock prices forced him to sell three million shares of stock to raise an estimated $84 million to pay off investment debts when personal loans were called.

“I don`t see how a charge for insider trading could go anywhere,” said Wall. “Just because he sold stock, and the stock went down, doesn`t mean it was insider trading. It’d be fairly easy for the defense to prove he unwillingly sold the stock because he had debts to pay.”

In September 1999, Forbes named Ebbers the 174th richest American with a $1.4 billion net worth. The next year, Ebbers’ spot had fallen to No.

368.

“He was in bad shape at that time, and I find it hard to believe that Bernie sold stock because he knew that the company was fudging the books and that it was going south,” said Wall. “He berated people for selling stock, even when they had good reasons to do it, like building a house or sending a child to college. He was egotistical enough to believe that anybody who sold company stock was a traitor. Plus, he was so emotionally attached to the company that he thought until the very end the stock was coming back up.”

That month, the compensation board authorized the first loan of $50 million to Ebbers, which would total nearly $408 million, at a charitable interest rate of 2%. After selling off numerous assets, including the 500,000-acre Douglas Lake Ranch in Canada, Ebbers still owes the company about $300 million. According to the five-year payout plan for his personal loan, a $25- million payment is due next month.

“When the company loaned Bernie the money, they did it for two reasons: because nobody else would – he had tapped out the banks and had borrowed against all his assets – and because they were concerned that if they did not loan him the money, he would be forced to sell a huge chunk of stock to meet margin calls and that would adversely affect the stock price,” said Wall.

Few people realize how bleak Ebbers’ financial situation is now, said Wall.

“Although he still might have some assets, I think he`s upside down,” he said. “I think he owes more than he`s worth. For the average person, that`s hard to see because he has a very nice house and is living a decent lifestyle. But it`s not like the guy made a billion dollars, sold out at the top and drove the company in the ground. That`s very different than a lot of the corporate fraud situations we’re seeing.”

Breazeale was not surprised by the company`s restatement March 12, revealing pre-tax losses of $74.4 billion not previously reflected in the company`s financial reports for 2000 and 2001.

“A lot of things in accounting are subject to a conservative approach while others are not,” he said. “They took the most liberal view of how those assets should be recorded and they were wrong. Those assets should never have been on the books and as a result, investors were misled and lost money.”

Ebbers may be guilty of ignorance and negligence, said Wall.

“He was the captain of the ship and ultimately has to take responsibility for it,” he said.

As a result of the WorldCom case, the world has changed significantly, said Breazeale.

“People are more cynical now of investing in stocks,” he said. “The SEC and the new Sarbanes-Oxley law have tightened the reins on corporate management and public accountants and even the legal profession. We now live in a post-Bernie Ebbers world versus the pre-Bernie Ebbers world. I’m sure we`ll learn to live with all these new rules, but it`s a lot tougher than it used to be.”

MBJ contributing writer Lynne Jeter is the author of “Disconnected: Deceit and Betrayal at WorldCom,” (John Wiley & Sons Inc., $24.95). Contact her at mbj@thewritingdesk.com.

About Lynne W. Jeter

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