Former WorldCom CEO Bernard Ebbers Monday took the stand in a packed New York courtroom to defend himself against charges of conspiracy and fraud in connection with $11 billion of accounting misstatements that led to the bankruptcy of the telecommunications giant he built.
The former WorldCom chief financial officer, Scott Sullivan, has pleaded guilty in the case and is the key witness against Ebbers.
WorldCom, now operating under the name MCI, filed for bankruptcy in July 2002 after disclosing that employees had falsified records to conceal losses and inflate earnings. MCI emerged from bankruptcy last April after agreeing to a $750 million settlement for accounting irregularities with the U.S. Securities and Exchange Commission (SEC).
The company is now the subject of an acquisition battle between Verizon, with which it announced a $6.7 billion deal two weeks ago, and Qwest, which last week offered a counterbid.
The indictment against Ebbers, filed in U.S. District Court for the Southern District of New York, charges that he participated from September 2000 through June 2002 in a scheme to inflate the price of WorldCom’s stock.
During morning testimony, the defense team’s lead counsel Reid Weingarten took Ebbers through his modest beginnings as a basketball coach. He had Ebbers describe how he got into the telecom business initially as a way of generating capital for a string of motels. He repeatedly asked Ebbers whether he had expertise in finance or accounting. “I know what I don’t know, and to this day I don’t know technology and I didn’t know accounting and finance,” Ebbers said. “I always thought that I was a pretty good coach and supervising sales and marketing people is kind of like coaching.”
The WorldCom management structure, Ebbers said, was divided into three parts: technology; sales and marketing; and finance and accounting. Several times during the morning, Ebbers said that because of his background and lack of technical training, he focused on sales and marketing.
Weingarten also asked Ebbers repeatedly whether Sullivan had ever told him about improper accounting or revenue-booking entries. Weingarten singled out types of improper entries that, earlier in the trial, Sullivan said he had mentioned to Ebbers.
Ebbers denied, multiple times, that Sullivan had discussed the entries with him.
“He never told me he made any accounting entries ever that were not right,” Ebbers said. “If he had we wouldn’t be here today.”
Ebbers appeared calm, occasionally smiling and making eye contact with the jury when Weingarten asked him to explain aspects of WorldCom’s business.
After Weingarten finished questioning Ebbers, prosecutor David Anders drilled him on his acquisition strategy to show that he was familiar with financial matters, demanded data from managers, and exercised ultimate authority in corporate matters.
Ebbers, however, professed that decision-making was shared among the management team and the board of directors, and said he did not recall giving specific orders on financial matters.
“I saw another side of Ebbers this afternoon, more aggressive,” said Ernest Buehler, a retired accountant for the City of New York who was attending the trial. “I think he said ‘I don’t recall’ too many times.”
The defense’s decision to subject Ebbers to cross-examination is controversial.
“Putting Ebbers on the stand is risky, just as putting any defendant on the stand is risky, no matter how well prepared he is,” said Norman Berle, a criminal lawyer who teaches business and ethics at the Fordham University Graduate School of Business.
“The gamble with white-collar crime particularly is that the defendants are not used to being cross examined, and they’re not used to the tone of a cross examination, which can be very confrontational — they’re used to giving orders, not taking orders,” Berle said.
The prosecution must show that Ebbers had knowledge of the scheme as well as criminal intent, Berle noted. Sullivan is the only witness who said he discussed the WorldCom fraud directly with Ebbers. But now that Ebbers is taking the stand, the case may come down to whether the jury believes Ebbers or Sullivan.
“Even if Ebbers is a good witness, what I’ve found happens, although it’s not supposed to, is that when you put a defendant on the stand, the burden of proof starts to be shifted to the defense,” Berle said.
Another strategy would be to rely on raising doubts about the credibility of Sullivan, who by agreeing to plead guilty and testify against Ebbers stands to receive a more lenient sentence than if he had been found guilty in a trial.
However, Berle noted, it’s hard to detect a clear-cut pattern of success with either strategy. Last year Martha Stewart, CEO of home-economics conglomerate Martha Stewart Living Omnimedia did not take the stand but was convicted of obstruction of justice, while Credit Suisse First Boston investment banker Frank Quattrone was convicted of obstruction after he testified.
Ebbers faces one count of conspiracy to commit securities fraud, one count of securities fraud and seven counts of false filing with the SEC. The conspiracy charge carries a maximum prison sentence of five years and a fine of either $250,000 or twice the gross gain or loss resulting from the offense, whichever amount is larger. The fraud count carries a maximum of 10 years in prison and a fine of $1 million or twice the gross gain or loss, whichever is bigger. The other counts have a maximum prison sentence of 10 years.
