Worldcom Scandal

I.
ABOUT
MCI INC. (Previously World Com. and MCI WorldCom) was a telecommunications company.
For a time, it was the second largest long distance telephone company in the United States, after AT&T.
The company grew largely by acquiring other telecommunications companies and filed bankruptcy in
2002 after an accounting scandal, in which several executives, including CEO Bernard Ebbers were
convicted. In January 2006, the company was acquired by Verizon Communications and was later
integrated into Verizon Business. It was originally headquartered in Clinton, Mississippi before relocating
to Ashburn, Virginia.
II. HISTORY
In 1983, in a coffee shop in Hattiesburg, Mississippi, Bernard Ebbers and 3 other investors
formed Long Distance Discount Services, Inc. based in Jackson, Mississippi and in 1985, Ebbers was
named chief executive officer. The company acquired over 60 telecommunications firms and in 1995, it
changed its name to WorldCom. The company became a public company as a corporation in 1989 as a
result of a merger with Advantage Companies Inc. The company name was changed to LDDS WorldCom
in 1995, and relocated to Clinton, Mississippi. The company grew rapidly in the 1990s, after completing
several mergers and acquisitions.
Worldcom’s first major acquisition was in 1992 with the $720 million acquisition of Advanced
Telecommunications Corporation, outbidding larger rivals Sprint Corporation and AT&T to secure the
deal, making Worldcom a larger player in the telecoms market. Other acquisitions included: Metromedia
Communication Corp. and Resurgens Communications Group in 1993, IDB Communications Group, Inc.
(1994), Williams Technology Group, Inc. (1995), and MFS Communications Company (1996), and MCI
in 1998. The acquisition of MFS included UUNET Technologies, Inc., which had been acquired by MFS
shortly before the merger with WorldCom. In February 1998, WorldCom acquired CompuServe from its
parent company H&R Block. WorldCom then retained the CompuServe Network Services Division, sold
its online service to America Online, and received AOL's network division, ANS. WorldCom acquired
the corporate parent of Digex, Intermedia Communications in June 2001 and then sold all of Intermedia's
non-Digex assets to Allegiance Telecom. On November 4, 1997, WorldCom and MCI Communications
announced a $37 billion merger to form MCI WorldCom, making it the largest corporate merger in U.S.
history. On September 15, 1998, the merger was consummated, forming MCI WorldCom. MCI divested
itself of its "internetMCI" business to gain approval from the U.S. United States Department of Justice.
III. KEY PLAYERS

 BERNARD EBBERS- Chief Executive Officer in the company.
 Scott Sullivan-The chief financial officer and secretary of WorldCom.
 David Myers-The controller and senior vice president of WorldCom.
 Cynthia Cooper-Chief Internal Auditor of WorldCom
 Buford Buddy Yates – He was the former director of accounting at WorldCom
 Betty Vinson – She was the former director of corporate accounting at WorldCom.
 Arthur Anderson LLP – Kenneth M. Avery and Melvin Dick were the primary auditors
representing their firm in the WorldCom scandal.
IV. WORLD COM SCANDAL
Between September 2000 and April 2002, the board of directors of Worldcom authorized several
loans and loan guarantees to CEO Bernard Ebbers so that he would not have to sell his Worldcom shares
to meet margin calls as the share price plummeted during the bursting of the dot-com bubble. Ebbers
resigned from Worldcom on April 30, 2002 and was replaced by John W. Sidgmore, former CEO of
UUNET. As part of his departure, Ebbers's loans were consolidated into a single $408.2 million
promissory note. In 2003, Ebbers defaulted on the note and Worldcom foreclosed on many of his assets.
Beginning modestly during mid-1999 and continuing at an accelerated pace through May 2002, the
company—directed by Ebbers (as CEO), Scott Sullivan (CFO), David Myers (Controller), and Buford
"Buddy" Yates (Director of General Accounting)—used fraudulent accounting methods to disguise its
decreasing earnings to maintain the price of WorldCom's stock.
The fraud was accomplished primarily in two ways:

1. Booking "line costs" (interconnection expenses with other telecommunication companies) as
capital expenditures on the balance sheet instead of expenses.
2. Inflating revenues with bogus accounting entries from "corporate unallocated revenue
accounts".
When the tech boom turned to bust, and companies slashed spending on telecom services and
equipment, WorldCom resorted to accounting tricks to maintain the appearance of ever-growing
profitability. By then, many investors had become suspicious of Ebbers’ story—especially after the Enron
scandal broke in the summer of 2001.
In 2002, a small team of internal auditors at WorldCom worked together, often at night and
secretly, to investigate and reveal $3.8 billion worth of fraud. Soon thereafter, the company's audit
committee and board of directors were notified of the fraud and acted swiftly: Sullivan was dismissed,
Myers resigned, Arthur Andersen withdrew its audit opinion for 2001, and the U.S. Securities and
Exchange Commission (SEC) began an investigation into these matters on June 26, 2002.
By the end of 2003, it was estimated that the company's total assets had been inflated by about
$11 billion. This made the WorldCom scandal the largest accounting fraud in American history until the
exposure of Bernard Madoff's Madoff investment scandal in 2008. Shortly after Ebbers was forced to step
down as CEO in April 2002, it was revealed that he had, in 2000, borrowed $400 million from Bank of
America to cover margin calls, using his WorldCom shares as collateral.
V. BANKCRUPCY
WorldCom filed for bankruptcy on July 21, 2002 in the largest such filing in United States history at
the time (overtaken by the bankruptcies of both Lehman Brothers and Washington Mutual in a span of
eleven days during September 2008)., only a month after its auditor, Arthur Andersen, was convicted of
obstruction of justice for shredding documents related to its audit of Enron. Arthur Andersen—which had
audited WorldCom's 2001 financial statements and reviewed WorldCom’s books for Q1 2002—was
found later to have ignored memos from WorldCom executives informing them that the company was
inflating profits by improperly accounting for expenses. By the bankruptcy reorganization agreement, the
company paid $750 million to the SEC in cash and stock in the new MCI, which was intended to be paid
to wronged investors.
VI. RESULTS/AFTERMATH
This spate of corporate crime led to the Sarbanes-Oxley Act in July 2002, which strengthened
disclosure requirements and the penalties for fraudulent accounting. In the aftermath, WorldCom left a
stain on the reputation of accounting firms, investment banks, and credit rating agencies that had never
quite been removed.
Former CFO Scott Sullivan received a five-year jail sentence after pleading guilty and testifying
against Ebbers. Thanks to debtor-in-possession financing from Citigroup, J.P. Morgan, and G.E. Capital,
the company would survive as a going concern when it emerged from bankruptcy in 2003 as MCI—a
telecom company WorldCom had acquired in 1997. However, tens of thousands of workers lost their
jobs. Without admitting liability, Worldcom's former banks, including Citigroup, Bank of America, and
J.P. Morgan, would settle lawsuits with creditors for $6 billion. Of that amount, around $5 billion went to
the firm's bondholders, with the balance going to former shareholders. In a settlement with the Securities
and Exchange Commission, the newly formed MCI agreed to pay shareholders and bondholders $500
million in cash and $250 million in MCI shares.
Former controller David Myers (pleaded guilty to securities fraud, conspiracy to commit
securities fraud, and filing false statements on September 27, 2002), former accounting director Buford
Yates (pleaded guilty to conspiracy and fraud charges on October 7, 2002), and former accounting
managers Betty Vinson and Troy Normand (both pleading guilty to conspiracy and securities fraud on
October 10, 2002).
On July 13, 2005, Bernard Ebbers received a sentence that would have kept him imprisoned for
25 years. At time of sentencing, Ebbers was 63 years old. On September 26, 2006, Ebbers surrendered
himself to the Federal Bureau of Prisons prison at Oakdale, Louisiana, the Oakdale Federal Correctional
Institution, to begin serving his sentence; he was released in late 2019 for health reasons and died in
February 2020, after serving 13 years of his sentence.
VII. POST BANKRUPTCY

The company emerged from bankruptcy in 2004 with about $5.7 billion in debt and $6 billion in cash.
About half of the cash was intended to pay various claims and settlements. Previous bondholders ended
up being paid 35.7 cents on the dollar, in bonds and stock in the new MCI Company. The previous
stockholders' stock was cancelled. In January 2006, the company was acquired by Verizon
Communications and was later integrated into Verizon Business. In December 2005, Microsoft
announced a partnership with MCI to provide Windows Live Messenger customers voice over IP service
to make telephone calls - called "MCI Web Calling". After the merger with Verizon, this product was
renamed "Verizon Web Calling". Citigroup settled with Worldcom investors for $2.65 billion on May 10,
2004. In March 2007, 16 of WorldCom's 17 former underwriters reached settlements with investors.
VIII. TRIVIA
 To hide its falling profitability, WorldCom inflated its net income and cash flow by
recording expenses as investments, reporting a profit of $1.4 billion—instead of a net
loss—in Q1 2002.
 WorldCom was a telecommunications company that went bankrupt in 2002
following a massive accounting fraud.
 WorldCom remains the biggest accounting scandal in U.S. history as well as one of
the largest bankruptcies.
 The year 2002 was a big year for scandals. In March 2002 a company reported that
US$3.85 billion in cash flow had been due to cooked books. In August, it reported
another US$3.3 billion in improperly booked funds.
 WorldCom declared the largest bankruptcy in history, forfeiting $107 billion in
assets.

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I.

III. KEY PLAYERS

The fraud was accomplished primarily in two ways:

VII. POST BANKRUPTCY

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