NEW YORK, Feb. 9 -- Prosecutors seeking to convict former WorldCom Inc. chief executive Bernard J. Ebbers of fraud played a taped June 2001 voice mail Wednesday in which the company's former finance chief explicitly warned Ebbers that the company's revenue results were "getting worse and worse" and warned that an internal report contained "accounting fluff" that disguised the depth of the problem.
While the tape refers to revenue problems rather than the fraudulent expense accounting at the heart of the case, the recording provides the first independent corroboration of former finance chief Scott D. Sullivan's contention that he kept Ebbers fully informed about the company's woes and detailed accounting issues.
In an artist's sketch, former WorldCom CEO Bernard Ebbers sits fourth from left as Scott Sullivan testifies and Judge Barbara Jones presides.
(Shepard Via Bloomberg News)
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Sullivan said he called Ebbers from home on June 19, shortly after reviewing the company's internal revenue report for May 2001. He left a voice mail saying that the company's revenue outlook was worsening, and that "we are going to dig ourselves in a huge hole."
He noted that "the latest copy [of the revenue report] that you and I have already has accounting fluff in it."
Prosecutors still have major challenges ahead as they seek to convict Ebbers, 63, of securities fraud, making false filings to the Securities and Exchange Commission, and conspiring to boost WorldCom's bottom line by hiding expenses and making undisclosed changes in the way it tracked revenue. WorldCom went bankrupt in 2002 and disclosed $11 billion in accounting fraud. It now does business as MCI Inc. of Ashburn.
Sullivan remains the only witness so far to testify that he directly informed Ebbers about the accounting tricks. The former chief financial officer has yet to cite any witness to any of the key conversations when he says he informed the chief executive of the central fraud, in which WorldCom falsely classified billions of dollars in operating expenses, known as line costs, as capital expenditures.
Ebbers's defense team contends that Ebbers relied on Sullivan to oversee the company's financial reporting and had no idea that the finance chief had ordered the company's accountants to hide line costs from investors. Lead defense attorney Reid H. Weingarten of the District has already conceded in opening arguments that Ebbers knew about the revenue issues but thought Sullivan and his underlings were seeking legitimate ways to increase revenue. Weingarten has already told the jury that Sullivan is a liar, and the attorney will get his crack at cross-examination late Thursday or early next week.
Five former WorldCom officials including Sullivan have already pleaded guilty to conspiring to mislead investors by capitalizing line costs -- the fees WorldCom paid other telecommunications companies to use their networks.
Sullivan's testimony, if the 14-member jury panel believes it, puts another big dent in the defense's depiction of Ebbers as the detached boss who paid little attention to accounting details and allowed Sullivan free rein.
Sullivan told the jury Wednesday that he specifically told Ebbers at a March 2001 dinner at Morton's steakhouse in the District that he planned to transfer millions of dollars in line costs into the capital expenditure category to help WorldCom's first-quarter results meet investors' expectations. Sullivan said he told Ebbers, "This would be a shortcut to earnings; that it wasn't right."
Ebbers didn't respond directly, Sullivan said, but he never told Sullivan not to do it.
A month later, the finance chief said, he showed Ebbers two versions of the company's first-quarter 2001 income statement in April, one with the real numbers and a second one that reflected the shift of $771 million in line costs. "I told Bernie that we had made an adjustment [and] . . . it was the only way I knew to get to our earnings number for the first quarter," Sullivan said.
According to Sullivan, Ebbers responded, "We have to grow our revenue; we have to cut our expenses, but we have to hit our numbers this quarter." Then Ebbers "asked me, how were we doing it, what effect it would have and where was it going?" Sullivan said. "I told him . . . we were going to treat it as a capital asset of the company."
When the company announced its falsified results in late April, Ebbers went out of his way to paint a rosy picture, Sullivan said. Ebbers edited a press release to remove references to "difficult comparisons" and told investors to expect revenue growth of 12 to 15 percent, rather than the 12 percent Sullivan had suggested.
Ebbers also departed from a prepared text to tell the Wall Street analysts who followed the company, "If we look out for the remainder of 2001, we do not see any storms on the horizon."
