NEW YORK, Feb. 10 -- WorldCom Inc. called off tentative merger talks with Verizon Communications Inc. in the summer of 2001 because WorldCom chief executive Bernard J. Ebbers and finance chief Scott D. Sullivan feared Verizon would learn WorldCom was inflating its earnings if they exchanged confidential financial information, Sullivan testified Thursday at Ebbers's criminal trial.
Sullivan told a Manhattan courtroom that he and Ebbers had conversations with counterparts at Verizon in August 2001 and were talking about announcing a deal by Labor Day. But Sullivan said he told Ebbers he was worried about taking the next step -- a confidentiality agreement that would allow them to inspect each other's books.
Bernard J. Ebbers, former WorldCom chief executive, leaves Manhattan federal court, where he is being tried for securities fraud.
(Adam Rountree -- Bloomberg News)
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"I have concerns in the line cost and the revenue areas because of the adjustments we have made," Sullivan said he told Ebbers. "He said, 'You're right.' He says this probably isn't a good time to be talking to Verizon anyhow because our stock price is down." Sullivan said he then told Verizon that WorldCom wasn't interested in a deal because of its low stock price.
Officials of Verizon and of MCI Inc., WorldCom's successor company, declined to comment yesterday.
The story of the abortive talks emerged during Sullivan's fourth day on the stand at Ebbers's trial. Ebbers, 63, is charged with securities fraud, making false filings to the Securities and Exchange Commission and conspiring to boost WorldCom's bottom line by making unreported changes to revenue accounting and falsely categorizing operating expenses called line costs as capital investment.
Prosecutors contend Ebbers orchestrated the multibillion-dollar fraud, which became public shortly before WorldCom declared bankruptcy in 2002, to save his personal fortune from banks that were responding to WorldCom's falling stock price by calling in Ebbers's personal loans.
But the government's case rests almost entirely on Sullivan's word. Sullivan is the only witness so far to testify that he personally informed Ebbers about the expense fraud at the heart of the case.
Ebbers's attorneys contend that Sullivan, who has pleaded guilty, was the real mastermind and that he is lying to reduce his potential prison sentence from the current maximum of 25 years. The defense said Ebbers trusted Sullivan to handle the accounting and did not know his finance chief and his underlings were falsifying the expense accounting. So far, Sullivan has mentioned no other witnesses to his alleged conversations with Ebbers about the expense issues, and the jury has seen no documents demonstrating that Ebbers knew about the fraud.
On Thursday prosecutors introduced a July 2001 memo that suggests he was aware of at least some of the revenue accounting. In it, Ebbers wrote operations chief Ronald Beaumont that he wanted to "see where we stand on the one-time events that had to happen in order for us to have a chance to make our numbers."
Ebbers's defense attorney Reid H. Weingarten conceded in opening arguments that Ebbers knew of the company's revenue woes but contended that Ebbers thought his underlings were looking for legal ways to boost the numbers.
Sullivan also described the company's increasing desperation as 2001 drew to a close. He said business was tanking and the accountants were running out of tricks. For the fourth quarter, Sullivan said, the accountants hid more than $900 million in line costs and tinkered with the accounting to add $130 million to revenue, and he still couldn't get revenue numbers up past 3 percent growth, nowhere near the 10 percent investors expected from high-growth companies.
The finance chief said he told Ebbers that "we identified adjustments. These adjustments were not right . . . and there was no way we were going to get to 10 percent. . . . We couldn't even find items of that magnitude." According to Sullivan, Ebbers replied, "We have to get as close as we can to 10 percent."
When the quarter ended, WorldCom told the public it had grown 7.1 percent.
Staff writer Yuki Noguchi contributed to this report.
