MCI, Former Execs Facing Criminal Charges

Oklahoma’s Attorney General filed felony charges Wednesday against WorldCom’s former CEO Bernard Ebbers and other departed executives, charging they deceived the state’s investors as part of an $11 billion accounting scandal at the telecom giant.

“We allege the company and these six employees executed a scheme to artificially inflate the value of WorldCom stock and bonds by intentionally falsifying information filed with the Securities and Exchange Commission,” Edmondson said in a press conference.

The allegations, including criminal complaints against the company itself, which is changing its name to MCI as it reorganizes under Chapter 11 protection from creditors, add new weight to an already-deepening vortex of charges swirling around the company since errors in its accounting began to unravel after the telecom boom went bust in early 2000.

By the time WorldCom declared bankruptcy in July of last year — the largest in corporate history — it had already admitted it overstated cash flow by $3.8 billion. By then, the SEC was investigating the company, which later said it would restate $9 billion in revenue as a result of improper accounting.

During a phone conference with reporters Wednesday, Edmondson said the state’s pension had lost $64 million as a result of actions and statements of then-WorldCom officials, not to mention what individual investors in Oklahoma lost in their WorldCom investments.

“By falsifying information, the company looked stronger on paper than it really was,” Edmondson said. “Investors counted on this information when buying WorldCom securities. The company lied. These employees lied. The law was broken. It’s just that simple.”

Although it is rare to name a company in a criminal complaint, in this case it is justified, Edmondson said. “The decision to commit this fraud was a company decision. This is not some rogue employee trying to line his own pockets. This was a conscious decision made for the benefit of the company.”

In addition to Ebbers, the AG’s complaint names former WorldCom executives including Chief Financial Officer Scott D. Sullivan; David F. Myers, controller; Buford T. Yates, Jr., director of general accounting; Betty L. Vinson, director of management accounting and Troy M. Normand, who over saw the company’s legal accounting. They face 15 counts of violating the Oklahoma Securities Act, according to the complaint.

The charges, 15 in all, carry a penalty of 10 years in prison and a fine of $10,000 each.

MCI’s General Counsel, Stasia Kelly, said in a statement that MCI intends to fully cooperate with the Oklahoma Attorney General and does not believe the action will impact the bankruptcy process. MCI’s reorganization plan is slated for a confirmation hearing before a Bankruptcy Court in New York on September 8th.

Indeed, MCI’s plans to emerge from bankruptcy protection nearly debt-free has raised the ire of rivals and state prosecutors, who have filed objections to some of the details in MCI’s reorganization plan. In July a federal judge approved a $750 million settlement with the SEC in order to settle charges of accounting fraud, which raised the hackles of some state prosecutors, including Edmondson.

Pointing to sections of the $750 million settlement that are being funded through stock, as well as other other parts that are funded by a tax refund from the IRS, Edmondson said taken as a whole, the settlement “looks like WorldCom is being patted on the back as opposed to being punished” for its actions regarding the accounting scandal.

“The sanctions awarded by the SEC in my opinion are totally inadequate,” he said.

MCI still faces other criminal probes by federal prosecutors, including one by the U.S. Attorneys office in New York. In a statement Wednesday, the U.S. Attorneys office in the Southern District of New York said it was disappointed that it was not told about the charges, given the cooperative relationship it has with attorneys general in other states.

“We are hopeful Oklahoma’s action will not interfere with the prosecution of five individuals already charged,” the statement said, referring to federal fraud charges that have already been brought against five of the six former company executives that were charged by Oklahoma.

Meanwhile, phone companies such as AT&T and Verizon recently alleged that MCI deployed illegal re-routing of its phone traffic in a bid to avoid paying them interconnect fees. Federal prosecutors are looking into the charges.

MCI’s Kelly said the case brought by Oklahoma against MCI would “only punish our 20 million customers and 55,000 employees — 2,000 of which work in Oklahoma. MCI has made tremendous progress over the past year and we are working hard to put our house in order. MCI has, and continues to, cooperate with all investigations while implementing sweeping internal reforms.”

This week, a court-appointed monitor and former SEC Chairman, Richard Breeden, submitted a new report detailing MCI’s progress in cleaning house after the accounting meltdown. The report cited MCI’s move to replace its entire board of directors who were present at the time the company’s fraud was discovered, “thereby removing 100% of directors who were participants in governance under the regime of the prior CEO Bernard J. Ebbers.”

In addition, Breeden’s report said MCI has terminated dozens of employees, “including a number of senior officers, who either participated in inappropriate activities, who appeared to look the other way in the face of indications of suspicious activity, or who otherwise acted in a manner inconsistent with necessary standards of conduct.”

Kelly said MCI’s “new management team and board of directors — under the oversight of Corporate Monitor and former SEC Chairman Richard Breeden — are committed to doing all the right things to ensure what happened in the past can never happen again.”

Edmondson said he was not interested in seeing the company go out of business as a result of the charges, or see the employees of MCI lose their jobs. “This action is intended to punish six former employees. It is simply our opinion that the laws in Oklahoma have been violated.”

Six other states, including Alabama and Texas, are mulling bringing civil or criminal charges against MCI as well.

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