After several years of intense speculation — did former WorldCom CEO Bernie Ebbers know about the company’s $11-billion accounting fraud, the largest in corporate history? — the Mississippi legal community is watching and waiting for an answer.
“WorldCom, with Ebbers as its leader, was viewed with reverence in this community,” said Jackson attorney, minor shareholder and former Clinton resident Lance Stevens. “Ebbers’ trial will only confirm either that the unapologetic corporate greed in this country seeps into every small town boy or that our local business superstar was an unsophisticated stooge. It’s a lose-lose proposition.”
On January 18, the Manhattan criminal trial began for Ebbers, who is accused of directing the fraud, which drove WorldCom to the largest bankruptcy in U.S. history. He has been charged with conspiracy to commit securities fraud, securities fraud and false filing with the Securities and Exchange Commission (SEC).
“Mr. Ebbers’ defense team will put on an excellent case that could possibly cast a shadow of reasonable doubt on the jurors,” said Jackson attorney Tal Braddock, who represents several WorldCom shareholders in a civil case. “It appears that the accounting practices employed by WorldCom were standard in the telecom industry. If the case were being tried in the great State of Mississippi, he would have a better chance of walking out of the courtroom. The prosecution is going to have to prove that Mr. Ebbers had mens rea (criminal intent). A majority of the witnesses have pleaded guilty. This is going to make their testimony questionable.”
The indictment alleges that Ebbers and former WorldCom chief financial officer Scott Sullivan and their co-conspirators engaged in an illegal scheme to deceive shareholders, the investing public, professional securities analysts and the SEC, among others, concerning the company’s true operating performance and financial results from 2000 to mid-2002. During that period, Ebbers served as company president, CEO and a board director and Sullivan was CFO, treasurer and secretary. Ebbers signed the annual reports on form 10-K and quarterly reports on form 10-Q that Sullivan prepared and filed with the SEC.
Ebbers’ defense team contends that he was unaware of the fraud, leaving the accounting decisions to Sullivan, the government’s key witness. Sullivan pleaded guilty to conspiracy to commit securities fraud, securities fraud and false filing with the SEC, and faces a maximum sentence of 25 years in prison.
“We’re focused and eager to get the trial over with,” said David Kaufman, a Jackson defense attorney for Ebbers. “Most people in Mississippi are willing to give him the benefit of the doubt and see how the trial comes out, unlike some folks who are ready to convict and hang people before they even have their day in court. He’s received a tremendous amount of support from people around the state. Most of the people we’ve talked to … realize he’s innocent.”
Southern District of New York Judge Denise L. Cote is presiding over the civil cases filed as a result of the collapse of the company’s stock amid revelations of the multibillion-dollar accounting fraud.
With their own trial approaching in a separate civil case, 10 former WorldCom directors recently agreed to pay $18 million out of their own pockets as part of a $54-million settlement. One of the directors, John Porter, recently filed for personal bankruptcy.
Last year, in the same case, Citigroup agreed to pay $2.65 billion to settle investor claims. Other investment banks are expected to reach similar settlements before the case goes to trail late next month. Plaintiffs include many state government retirement funds, unions and financial institutions. MCI has also agreed to pony up $750 million to settle claims by the SEC, including $250 million in company stock.
“Everyone seems to be focused on the criminal aspect of the accounting fraud, and nobody’s really focused on the civil part of it, which is going on right now,” said Braddock. “From the civil side, it’s a slam dunk, especially since the directors have already pled guilty. I want to make sure that the common stockholders are aware of their options.”
The civil remedies available are:
• The $2.65-billion class action suit. The deadline for signing up is March 4.
• The $500-million SEC Fair Fund. A third-party administrator sent every stockholder these forms. The deadline for the returning forms is July 19.
• Arbitration against the brokerage firms. There is a six-year statute of limitations for arbitrations. WorldCom stock peaked at $64.50 on June 21, 1999.
“This represents the second-largest class action suit in American legal history,” said Braddock. “It’s affected darn near everybody in Mississippi.”
Contact MBJ contributing writer Lynne W. Jeter at firstname.lastname@example.org.