NEW YORK, Jan. 27 -- Just days after WorldCom Inc.'s accountants hid $828 million in costs to improve the company's reported results, then-chief executive Bernard J. Ebbers told Comptroller David F. Myers, "I'm sorry you were asked to do what you were asked to do," Myers told the jury at Ebbers's criminal trial Thursday.
Myers's testimony could be crucial for the prosecution because it provides the first direct evidence supporting allegations that Ebbers was aware of accounting fraud at WorldCom. The telecommunications giant filed for bankruptcy protection in July 2002 and later revealed $11 billion in false accounting. The soft-spoken accountant was the government's main witness on the third day of Ebbers's trial in U.S. District Court in Manhattan.
Prosecutors have charged Ebbers with securities fraud, filing false documents with the Securities and Exchange Commission and conspiring with Myers and other WorldCom executives to pump up revenue and hide costs by falsely classifying them as capital expenses. Ebbers's defense attorney Reid H. Weingarten contends that Ebbers left the accounting to others and was misled by trusted underlings. The defense has not yet had a chance to cross-examine Myers, who pleaded guilty to fraud and said he hopes to avoid prison by cooperating with the government.
On the stand, Myers added potentially damning details of his October 2000 hallway encounter with Ebbers, which occurred when two of Myers's key underlings were threatening to quit over the fraudulent entries. Ebbers, according to Myers, called the comptroller by name, said he knew Myers was "having trouble with [his] staff," and added, "It's something you should not have been put in that position to do." Then the chief executive "gave me his word that we would never have to do that again," Myers testified.
The comptroller also described a second encounter a few days later, this time with Ebbers and WorldCom's then-chief financial officer, Scott D. Sullivan, who also has pleaded guilty and will testify for the prosecution. The two top executives were discussing what they should tell Wall Street analysts about WorldCom's prospects for revenue growth in 2001. Sullivan said the company, which had just finished cooking its books to meet expectations for 2000, should reduce its forecasts to 9 to 12 percent growth.
But Ebbers argued for 15 percent, saying the company would no longer be considered a growth company if its revenue predictions fell any lower, Myers said.
"Scott said WorldCom was stretching as it was, and he didn't think 15 percent could be maintained," Myers said. "Ebbers said he still believed 15 percent was the number that needed to be in the range." WorldCom, which now operates as Ashburn-based MCI Inc., eventually issued guidance that put the growth rate for one of its two tracking stocks at 12 to 15 percent.
The testimony provides evidence to support Assistant U.S. Attorney David B. Anders's contention in his opening statement that Ebbers orchestrated the fraud by setting impossible growth targets and then repeatedly ordering Sullivan to "hit the numbers."
Myers also told the 16-member jury panel exactly how company officials turned to fraud when rising "line costs" -- payments to other phone companies for use of their networks -- threatened efforts to meet Ebbers's ambitious growth targets, known as guidance.
Each quarter, Myers said, he would take a draft version of WorldCom's financial results to Sullivan. "Usually the numbers were not representative of what had been provided to the Street as guidance," so Sullivan would send the draft back, Myers told the jury. "We were tasked to change the numbers to make them equal the guidance."
At Sullivan's suggestion, Myers would move expenses between categories and shift costs from one part of the business to another, all to fool financial analysts who made recommendations about WorldCom stock. Sullivan was seeking "consistency between the numbers so that questions wouldn't be asked about why they weren't" consistent, Myers told the jury. He said the changes, which occurred every quarter, ballooned from $10 million to more than $700 million per quarter before the fraud was discovered.
The process became so routine that WorldCom officials created spreadsheets to track the company's lies, Myers said. Each quarter, WorldCom's then-director of general accounting, Buford T. Yates Jr., who also has pleaded guilty and cooperated with the government, would create a computer file that showed -- in column form -- what the company's real expenses were and what WorldCom reported to the public and to the SEC. In between, Yates created a column that recorded the "on-top entries" that Sullivan had ordered Myers to make.
Myers is expected to remain on the stand into next week.
