Look out, Bernie Ebbers!
Prosecutors have the sweet-talking Mississippian – who walked away from the now-bankrupt WorldCom with a cool $500 million in his jeans – and the company he founded in their sights.
WorldCom’s financial gurus were arrested yesterday by the U.S. Attorney’s office and charged with seven counts of securities, mail and wire fraud. Both former WorldCom chief financial officer Scott Sullivan and former company controller David Myers are free on bail.
Federal sources said they expect the disgraced duo will “flip” and give evidence against their former boss, Ebbers.
“Justice tries to get targets to flip, but sometimes they have to be encouraged,” said a veteran prosecutor. “The best way to do that sometimes is to charge them. It makes a difference when they’re looking at jail time.”
And the two architects of the accounting shenanigans that put the nation’s second-largest telephone service provider into the nation’s largest-ever bankruptcy are facing 10 years per count, Feds said.
“Cutting a deal could lessen jail time for them,” a source explained.
The duo could also put Salomon Smith Barney top telecom analyst Jack Grubman’s back against the wall, sources said.
“They could tell prosecutors whether Grubman was aware of accounting problems and despite that knowledge kept touting the stock to the public,” said Jacob Zamansky, principal of Zamansky and Associates.
Zamansky, who has a lawsuit against Grubman and Global Crossings, believes Grubman knew or should have known about the accounting fraud at WorldCom, “especially with his attendance at least three board meetings.”
Justice and Securities and Exchange Commission investigators are working in tandem. The SEC has already charged WorldCom with fraud and is investigating its officers, directors and employees. But only Justice can bring indictments.
“If the violation isn’t of a criminal nature, it may be civil and then we charge them as appropriate,” explained an SEC insider.
Either way, it’s Ebbers’ behind in a sling. “Ebbers would be the next logical move, and the company too,” predicted Victoria Toensing, former Justice Department official and partner at Washington law firm DiGenova and Toensing.
Ebbers borrowed more than $408 million from the company he founded when he was slammed with hefty margin calls on the stock he purchased. Those loans, and the restatement of more than $3.9 billion in costs that were misrepresented on the company’s federal filings, caused the firm to file for bankruptcy July 21 and sank its stock to 6 cents.
WorldCom’s bankruptcy will not necessarily protect it from being indicted for the actions of its employees, Toensing added. Justice indicted Arthur Andersen for its role in the Enron scandal, and won a conviction; now Andersen is a shadow of its former proud self.
But maybe it’s Ebbers who has flipped.
“It could also be that [Ebbers is] cooperating and nothing’s being done because [Justice] is holding off,” Toensing said. She pointed out that it’s rare for the “big fish” to turn over evidence on the “little fish.”
Either way, legal eagles for Ebbers think their guy is in the clear.
“While Mr. Ebbers had no involvement in or knowledge of the accounting decisions at issue in this case, he always believed Sullivan and Myers to be competent, ethical and loyal employees devoted to the welfare of WorldCom,” said Reid Weingarten, partner at Washington-based Steptoe & Johnson, in a statement yesterday.
On the hot seat
The Department of Justice just nabbed former WorldCom CFO Scott Sullivan and former controller David Myers. But officials aren’t done with their probe, and things could get ugly.
* Prosecutors will look for Sullivan and Myers to provide evidence against their former boss, ex-CEO Bernie Ebbers, and Salomon Smith Barney telecom analyst Jack Grubman, who praised WorldCom’s stock while the company was sinking.
* Experts say not to expect WorldCom’s bankruptcy to protect it from criminal indictments.
* An SEC probe into officers, directors and employees of WorldCom is moving in tandem with that of the Justice Department.