Serialisation: The Great Telecoms Swindle - part 5

The final part of our Great Telecoms Swindle serialisation, sees authors Keith Brody and Sancha Dunstan return to WorldCom as the cautionary telecoms tale par excellence...

On 22 August 2002 Salomon Brothers, the investment bank, released documents revealing it had allocated more than 100,000 shares in IPOs to senior officers and directors of WorldCom. In a period between January 1996 and November 1997, the brokerage firm had enabled a number of WorldCom leaders to make an average profit of $2.3m each through shares received at the offer price which were then sold when prices rose, after markets had opened for trading.

Salomon Brothers provided neither the names nor the precise number of WorldCom executives who had received these share allocations, nor did they name the firms whose shares were involved. Confidentiality policies, apparently (not to mention conveniently), prevented the release of this information.

The documents had been released as a result of a subpoena from the Congressional committee investigating the role of Salomon analyst Jack Grubman. The charge was that the shares had been directed to WorldCom leaders in return for lucrative investment banking business for Salomon. Grubman, amazingly, had been unable to recall whether IPO allocations had been given to WorldCom in his own, earlier, testimony.

In its own defence, Salomon said its actions amounted to common practice and were entirely consistent with industry regulations. It was, apparently, quite normal for hot IPO shares to be distributed to major clients. That might have been true - at the time, the investigating committee declined to comment - but it was becoming clear the landscape on which an entire market could impale itself built was built on such regulations. Legal or not, something smelled very rotten indeed.

Two weeks later, WorldCom CEO John Sidgmore agreed to leave his post with creditors expressing concern the company needed entirely fresh management to navigate a course through the catastrophe. Even his own board was divided. He would continue to hold his position while a successor was found, then revert to his role of vice chairman.

The announcement was made at a board meeting during which a court-appointed monitor had raised the issue of loans to Bernie Ebbers, and a contract with another board member, Stiles A Kellet Jr, to lease a corporate jet from WorldCom for the princely sum of $1 per month, a benefit presumably not widely available to all employees. Given Kellet was a member of WorldCom's compensation committee, responsible for approving the loans to Ebbers, a conflict of interest was noted.

Kellet, for his part, denied any wrongdoing and defended the agreement noting he himself had (generously, we think) paid for maintenance, fuel and crew for the jet, in addition to which he paid a sum to WorldCom for each hour the plane was in flight. Denuded shareholders will no doubt feel palliated by such a display of largesse.

For that selfless explanation, Kellet was asked to respond formally to questions about the lease the following month. At the same time, the monitor told the WorldCom board there may be grounds to cancel Ebbers own severance agreement with the company, though the board decided to take no action itself.

Sidgmore was criticised by the monitor for high priced contracts with investment banks and consultants that he had entered into in the course of the company's demise. These - worth millions of dollars - were signed without board approval, though Sidgmore claimed he needed advice as he sought to dispose of WorldCom assets in the course of the ongoing bankruptcy. So much for the job of repairing the company's tainted image with the public and Wall Street.

By late September, the first green bottle fell from the WorldCom wall. David F Myers, the company's former financial controller, pleaded guilty to charges he had manipulated accounting in order to inflate profits and that, furthermore, he had then tried to cover up his actions.

Federal prosecutors now had the bit firmly between their teeth. Myers told a judge in US District Court that, furthermore, he was directed by his superiors to do what he had done. Predictably, his plea was part of a deal arranged to help the government nail down the men at the top of the WorldCom Swindle.

Myers pleaded guilty to three counts of conspiracy, securities fraud and making false statements to the SEC who, in response, filed their own civil complaint against him. He faces a multimillion dollar fine and up to 20 years in prison but, because of his co-operation, that will likely be reduced. His actions were taken to ensure that WorldCom's accounts met analyst's expectations.

In court, Myers described a group of WorldCom employees who were involved in what he had done but failed to name names. He said: "I was instructed on a quarterly basis by senior management to ensure entries were made to falsify WorldCom's books to reduce WorldCom's actual reported costs and therefore to increase WorldCom's reported earnings."

Unsurprisingly, WorldCom chose not to comment on Myers' plea. Investigators were hopeful that, at a minimum, enough evidence would emerge to indict Scott Sullivan who was described in court documents as the ringleader of attempts to defraud the company's investors.

As we write, Buford Yates Jr, WorldCom's former accounting director facing a term of 15 years in prison, has joined Myers by pleading guilty to his part in the accounting fraud. It was revealed Yates had been helping the government for two months. At least two of Yates' employees were expected to swell the number of guilty pleas and further assist the prosecutor's case.

The significance of Yates' plea appears to be that the net is closing in on Ebbers. As pending convictions move up the food chain, the pressure will now turn to Sullivan as the investigation nears the very top. Yates, for his part, claimed he did express his reservations to superiors about the actions he had taken but was overruled. He would not speculate on whether Ebbers was aware of what had been going on.

Scott Sullivan's team had now largely turned. Four of the direct employees of the former WorldCom CFO are today working on the government's side and the case alleging Sullivan masterminded the fraud apparently gathers steam. It is only a short leap from where we now stand to the top of mountain itself. Both Sullivan and Ebbers lie quiet for the present.

Was it WorldCom or WorldCon? The answer to that question, without prejudging what remains to emerge and the judgement of the courts, seems fairly clear. But what does that tell us about the nature of The Great Telecoms Swindle?

Part 1 - A swindle exposed - http://www.silicon.com/a57095
Part 2 - The false economy - http://www.silicon.com/a57097
Part 3 - Deregulation and glut - http://www.silicon.com/a57099
Part 4 - The blame game - http://www.silicon.com/a57102