WorldCom

DURING THE financial boom of the 1990s, Bernard J. Ebbers, a former basketball coach, bought up a number of telecommunications companies under the WorldCom umbrella. From 1999 to 2000, World Com engaged in the largest accounting fraud in history. The company systematically billed billions of dollars of routine business costs as capital expenditures to make it appear that the company was making enormous profits while it was actually losing millions of dollars a year. Investors who bought stocks according to the inflated prices discovered that their stocks were virtually worthless. Overall, WorldCom's accounting fraud amounted to approximately $11 billion.

Discovery of WorldCom's fraud led to investigations by the Department of Justice, the Securities and Exchange Commission (SEC), several states, Canada, and Mexico. Investigators also investigated a $400 million loan that WorldCom's board of directors made to Ebbers. Although Ebbers was not initially charged, it soon became evident that he had been aware of the fraudulent accounting practices all along.

Ebbers and former CEO Scott Sullivan were charged on 15 counts by both federal prosecutors and prosecutors in Oklahoma and New York. The charges included lying to investors about WorldCom's worth. If convicted of the charges, Ebbers[Page 872] and Sullivan could each face at least ten years in jail and fines of up to $10 million on each charge. Former WorldCom employees David Myers, Bedford Yates, Betty Vinson, and Troy Nomand all pleaded guilty to charges of fraud and agreed to cooperate with prosecutors. Prosecutors in Oklahoma charged WorldCom/MCI with 15 violations of the Oklahoma Securities Law on charges that the company's bankruptcy cheated investors out of millions of dollars. The state lost at least $64 million in state-pension funds that were invested in WorldCom stocks. WorldCom filed for bankruptcy in July 2002, creating chaos among its investors and playing havoc with the American economy. In October 2003, a federal judge approved a redesigned settlement of $750 million. The settlement included a civil penalty of $2.25 billion to be paid by an initial payment of $500 million in cash and $250 million in common stock to shareholders and bondholders to be distributed after WorldCom emerged from the Chapter 11 bankruptcy proceedings. Trade creditors were set to receive 52.7 cents on a dollar rather than the 36 cents on a dollar originally negotiated.

Microwave Communications Incorporation (MCI) took over WorldCom on October 1, 1997, although WorldCom continued to operate under its own name. In an effort to avoid being associated with the negative publicity that followed the WorldCom scandal, WorldCom officially became known as MCI.

Congress passed the Sarbanes-Oxley Act in July 2003 in response to various accounting scandals over a period of years. The law required all businesses to include internal controls, ethics codes, and information about audit committees in annual reports. While Congress intended to prevent unethical conduct, many businesses claimed that it was difficult to comply with all the regulations of Sarbanes-Oxley. As proof of its own intention to comply with the new law, MCI promised that it would heed the recommendations of a former chairman of the SEC who was assigned to monitor the company. The company emerged from bankruptcy in 2004.

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