A federal jury Tuesday convicted former WorldCom Inc. Chief Executive Bernard J. Ebbers of engineering a record $11 billion fraud that sent his once-highflying telecommunications company into the largest bankruptcy in U.S. history.
After eight days of deliberations, a mostly blue-collar jury of seven women and five men found Ebbers guilty on one count each of fraud and conspiracy and seven counts of filing false financial reports. Ebbers, who remains free on bond, could face as many as 85 years in prison. Sentencing was set for June 13.
The verdict marks a bitter downfall for a man who had been lauded as one of the country’s top CEOs, feared and admired for the aggressive style with which he built WorldCom into a telecom powerhouse.
But more than that, Ebbers is the first of several big-name former corporate chiefs on trial to be found guilty, and his conviction could portend badly for Tyco International Ltd.’s Dennis Kozlowski and HealthSouth Corp.’s Richard Scrushy, who also stand accused of committing fraud at their companies.
“This is the home run of convictions,” said Sydney Finkelstein, a professor at Dartmouth College’s Tuck School of Business and the author of “Why Smart Executives Fail.” “Everyone knew Enron and WorldCom, and to get the CEO of WorldCom is an overwhelming success for the prosecution, and it will scare the hell out of all sorts of people.”
As the jury forewoman read each count, the tall, silver-haired Ebbers, 63, remained impassive. His wife, Kristie, who sat in the courtroom’s first row throughout the six-week trial, burst into tears.
When the court was adjourned, Ebbers, his face stoic, hugged his wife and stepdaughter before walking with them out of the courthouse in lower Manhattan into a throng of photographers and reporters.
The usually outspoken and glib Ebbers declined to comment before being helped into a taxi by a court guard.
Ebbers’ chief lawyer, Reid Weingarten, said he would appeal the verdict, arguing that the trial should have taken place in Mississippi.
Responding to a reporter’s question as to whether chief executives are responsible for fraud that takes place at their company, Weingarten said WorldCom’s fraud was undeniable. But in the case of WorldCom, he said, the fraud was the work of its former finance chief, Scott Sullivan, not Ebbers.
“The captain of the ship is responsible for the ship, but he isn’t criminally responsible unless he acted with criminal intent, and I don’t think Mr. Ebbers acted with criminal intent,” he said.
For federal prosecutors, the Ebbers verdict may serve as a warning that a chief executive can be proven guilty even when the prosecution fails to present incontrovertible evidence, such as an e-mail or handwritten note. The lack of a so-called smoking gun led Weingarten to assert during the trial that Ebbers should not be convicted on the “uncorroborated testimony of Scott Sullivan.”
Sullivan, who pleaded guilty last year to taking part in the fraud in hopes of receiving a lighter sentence, testified for five days for the prosecution.
“The tactical message this sends is that you can get a conviction, even absent compelling documentary evidence and, basically, on the testimony of one witness,” said Thomas Dewey, a securities litigator and partner at the New York firm of Dewey Pegno & Kramarsky. “That’s a very significant development.”
The verdict will be watched closely by government prosecutors and defense lawyers involved in the trial of former Enron Corp. executives Kenneth Lay and Jeffrey Skilling, scheduled to begin early next year on charges that also include fraud and conspiracy.
Like Ebbers and Scrushy, who is on trial in Birmingham, Ala., for accounting fraud, Lay is expected to argue that despite being the head of the company, he, too, was unaware of the billions of dollars in fraud being committed around him.
At the center of the government’s case against Ebbers was the charge that he knew full well what was happening at WorldCom between September 2000 and spring 2002, when the bulk of the fraud was said to have taken place.
Assistant U.S. Atty. William F. Johnson may have uttered the trial’s most memorable line when during closing arguments he derisively referred to Ebbers’ courtroom claim as the “`aw shucks, I’m just not that sophisticated’ defense.”
Ebbers, Johnson said, was a highly engaged, detail-oriented administrator who was aware that Sullivan was manipulating sales and profit numbers in order to meet financial targets essential to maintaining WorldCom’s stock price.
“It insults your intelligence that Ebbers could have built this company up from nothing in 10 years and still be clueless about its financial performance,” Johnson said.
In contrast, the defense portrayed Ebbers as a jocular former gym teacher and motel owner who flunked out of two colleges, living for a while in a trailer behind one of his Mississippi motels. Weingarten called Ebbers a “big picture” guy who was neither smart enough nor interested in the finer points of accounting.
Under questioning from his counsel, Ebbers told the court, “I don’t know about technology and I don’t know about finance and accounting.”
Ultimately, the jury sided with the government’s portrait of a chief executive who at one point during the 1990s collected millions of dollars annually in salary, bonus and stock options.
“What this says is that if you’re going to paid like a CEO, the claim that you didn’t know what was going on probably doesn’t wash,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “This is also very important for accountability. If they had acquitted him, it would have had a very different effect on deterrence.”
Ebbers is the highest-profile CEO convicted of fraud in connection with a rash of corporate accounting scandals that rocked the corporate world as the 1990s’ stock-market bubble burst. At its 1999 peak, WorldCom had a market value of about $180 billion, served about 15 million customers and employed about 40,000 people.
By July 2002, the company was in bankruptcy, shackled with $41 billion in debt.
Along with Ebbers, Martha Stewart, Adelphia Communications Corp. founder John Rigas and former dot-com banking star Frank Quattrone have been found guilty on securities-related charges. Kozlowski is being re-tried in a New York state court on charges that include defrauding shareholders.
More than any one person, Ebbers, a transplanted Canadian, personified the swashbuckling style that helped catapult WorldCom from a small reseller of telephone services based in a quiet corner of the Deep South into one of the world’s largest telecommunications providers.
From the late 1980s through 2000, the man known as the Telecom Cowboy led WorldCom through a series of billion-dollar acquisitions, often buying companies much larger and far more established than his own. Typical of the Internet boom, Ebbers used stock rather than cash in more than 60 purchases.
According to prosecutors, WorldCom’s downfall was due to the company’s unwillingness to admit that by 2000 it no longer was growing at the 15 percent pace it had sustained through much of the 1990s. Rather than acknowledge its revenues were slipping and risk a steep drop in its stock price, WorldCom lied about its numbers.
WorldCom emerged from bankruptcy last year, adopting the MCI Inc. name, the company Ebbers acquired in 1998 in a $37 billion all-stock deal.
Ebbers, the government said, had a clear motive to order Sullivan to commit fraud: His personal wealth was directly tied to WorldCom’s stock price. By 2000, Ebbers was carrying millions of dollars in loans used to finance a string of personal investments, including a yacht-building company and a huge ranch in his native Alberta.
But as WorldCom’s shares gradually fell, weighed down by an economy in recession, so did the value of Ebbers’ portfolio. Between 1999 and late 2000, the value of his WorldCom stock fell from more than $1 billion to less than $400 million. A year later, he turned over all of his WorldCom shares to his chief debtor, Bank of America.
In his closing argument, Johnson told the court that Ebbers “had the financial problems that made you lie awake at night and say, `How am I ever going to get out of this?'”
