Former WorldCom Inc. chairman Bernard J. Ebbers used his unusually strong influence over the telecommunications company's board to push through lucrative compensation packages for himself while steering a strategic course largely determined by the rise and fall of its stock price, according to a interim report prepared by a court-appointed corporate examiner.
The report released yesterday also disclosed that WorldCom's former auditing firm, Arthur Andersen LLP, determined as early as 1999 that the company was a "maximum risk" client, although the accounting firm apparently did little to address its concerns. The 122-page report was prepared by former U.S. attorney general Richard L. Thornburgh, who was appointed by a federal bankruptcy judge to review allegations of fraudulent accounting at the nation's second-largest long-distance telephone company.
WorldCom filed for bankruptcy protection in July. The company has said its internal investigation has turned up at least $7.7 billion in improper accounting dating back to 1999, and Thornburgh's report said that amount is likely to increase. Prosecutors have charged five former executives with participating in a scheme to make the company appear profitable during a period when it lost money. Four of those executives have pleaded guilty to charges related to the fraud.
Reid H. Weingarten, Ebbers's attorney, declined to comment on Thornburgh's report yesterday, saying he had not yet read it. Previously, Weingarten has said that Ebbers, who has not been charged by prosecutors, had no knowledge of the fraudulent accounting carried out by lower-level executives.
Although Thornburgh's report does not suggest that Ebbers directly influenced the company's accounting, it is highly critical of his management of WorldCom, which he founded in 1983.
The report paints a picture of a company that was driven in large part by the whims of Ebbers and to a lesser degree by its former chief financial officer, Scott D. Sullivan, rather than by any broad corporate strategy. He said management's main goal "was to meet analysts' expectations as to earnings and stock price."
While the two men were focused on Wall Street, they led the company on an ad hoc basis with little direction from the board or other executives, he said. "It appears that any general strategic planning was in fact done principally by Mr. Ebbers, and somewhat lesser extent by Mr. Sullivan, and that this planning activity was largely informal, lightly documented and to some extent consisted of oral discussions among a small number of executives," the report said.
Sullivan, who has been charged by federal prosecutors with leading the effort to doctor the company's books, has pleaded not guilty.
Thornburgh also wrote that board members, many of whom had large personal stakes in the company, largely acquiesced to the charismatic Ebbers in part because they had seen their personal fortunes grow as WorldCom's stock rocketed during the late 1990s.
Thornburgh asserted that Ebbers was able to push through annual compensation packages for himself worth an average of $25.7 million from 1999 to 2001. In addition, the compensation committee approved more than $408 million in personal loans to Ebbers, ostensibly to cover margin calls on his WorldCom stock. Ebbers's total personal and business debt, according to the report, exceeds $1 billion.
But board members were not told that Ebbers also used $27 million from the loans for other expenses, including building a house, giving $2 million to a family member and lending $1 million to friends and a WorldCom board member. Ebbers also used $22.8 million to fund his own business interests, according to the report.
Ebbers was forced to resign from the company in April after questions were raised about his ability to pay back the loans.
Thornburgh's report also raises questions about Arthur Andersen's role as the company's auditor. According to the report, Andersen added language to its reports in 1999, 2000 and 2001 stating that WorldCom's accounting was at "maximum risk." Internal reports found "significant" risk related to "overly aggressive revenue or earnings targets." Despite the warnings, Andersen appeared to have taken no steps to change the company's accounting practices, Thornburgh wrote.
Andersen spokesman Patrick Dorton said yesterday that it would be almost impossible to uncover fraud committed by a company's management. "There is a lot of compelling evidence in this situation not only that WorldCom misled investors but also that it misled its auditors," he said.
WorldCom chief executive John W. Sidgmore issued a statement yesterday saying the firm has taken steps to tighten its internal controls. "We are working to create a new WorldCom," Sidgmore said. He also noted that the company reorganized its finance and accounting staffs in an effort to correct past problems and prevent them from happening again.