WorldCom's Detail Man or Hands-Off Mentor?
By Brooke A. Masters Washington Post Staff Writer Wednesday, March 2, 2005; Page A01
NEW YORK -- WorldCom Inc. former chief executive Bernard J. Ebbers was so obsessed with cutting costs that he canceled the employees' coffee service to save $4 million. But when the company's accountants made more than $2 billion in operating expenses simply disappear, Ebbers never noticed, according to his testimony at his criminal trial.
Over the past five weeks, jurors in this Manhattan courtroom have been shown two radically different faces of the entrepreneur who built WorldCom from an obscure Mississippi phone service reseller to the nation's second-largest long-distance firm.
One is that of a hard-charging businessman so immersed in WorldCom's finances that he noticed $18,000 cost overruns in a $3 billion budget and sent angry memos when he thought subordinates' presentations were insufficiently detailed. Prosecutors say he was so driven to protect his personal fortune in WorldCom stock that he orchestrated a scheme to inflate the company's earnings from 2000 to 2002 by falsely reclassifying certain operating expenses, known as line costs, as capital expenditures.
The other view of WorldCom's chief was on full display as Ebbers, 63, took the stand in his own defense Monday.
Describing himself as a former milkman and warehouse operator, Ebbers told the jury he focused on hiring talented subordinates to handle areas in which he was weak, such as technology and accounting, and coaching them to do their best. In the crucial period of the fraud, Ebbers said, he was in the process of disengaging from WorldCom because he had developed heart trouble and was "embarrassed" by his inability to understand the technology that was a growing part of his business.
Soon jurors will have to reconcile the two pictures, or discard one, as they decide whether to convict Ebbers of conspiracy, securities fraud and seven counts of filing false documents with the Securities and Exchange Commission. WorldCom filed for bankruptcy protection in July 2002 and now operates as MCI Inc. of Ashburn.
While the government presented its case, and during parts of Ebbers's cross-examination Tuesday, jurors saw flashes of the demanding and details-oriented boss who dominated WorldCom for nearly two decades, leading it through more than 65 mergers.
WorldCom's former "whiz kid" finance chief Scott D. Sullivan, who was just 33 when Ebbers elevated him to the No. 2 job, told the jurors that his boss could be intimidating and difficult to budge. When Ebbers disagreed with one of Sullivan's financial decisions, Sullivan said, "He would make comments to me in the presence of other people, 'We'll just get a new CFO, that's what we'll do.' . . . He said it in a kidding way, but I didn't take it as a joke." Another witness quoted Ebbers as referring to the diminutive Sullivan dismissively as "short man" when he was displeased.
That history is why, Sullivan said, he "took it as a command to commit accounting fraud" when Ebbers ordered him in private one-on-one meetings to "hit the numbers" for revenue and earnings that Wall Street analysts were expecting. "I knew it was wrong. I knew it was against the law," said Sullivan, now 43. "I capitulated."
Ebbers said on the stand that he rarely had one-on-one conversations with Sullivan and that the finance chief never told him about the illegal accounting entries. "If he had, we wouldn't be here today," Ebbers added.
There are no documents or third-party witnesses that conclusively link Ebbers to the fraud, so prosecutors have sought to show that Ebbers must have known that the company was hiding line costs -- fees WorldCom paid to use other carriers' networks -- because he was intimately familiar with the company's finances, down to the smallest expenses.
Budget analyst G. Brady Connor, who works at WorldCom's successor, MCI, testified earlier that at a meeting in Atlanta, Ebbers boasted of his cost-cutting efforts. Not only did the chief executive say he used parking lot video cameras to monitor the length of smoking breaks and count employees' lunchtime walks around a lake at the Clinton, Miss., campus, but he boasted of a trick he was using at the company's offices in Arlington. Connor testified that Ebbers said he was working with a security guard "to manually fill up the bottled-water machines with tap water, and the employees didn't know the difference."
Ebbers, according to Connor, also said he canceled the company's coffee service because he believed employees were stealing coffee that WorldCom provided. The company was running through bags of coffee far faster than it was using filters, Ebbers said, so employees must be taking bags home.
Prosecutors have also shown the jury that Ebbers tossed around financial terms like "incremental revenue," "cash earnings" and "EBITDA margin" (financial speak for a kind of earnings) at meetings with securities analysts.
During two days on the stand, Ebbers kept his temper, appearing grandfatherly and occasionally a bit lost when the government asked him to pick out specific information from a financial document. He talked proudly of his five daughters and eight grandchildren and modestly described his more than $100 million in anonymous charitable contributions.
He smilingly acknowledged his reputation for cost-cutting, noting that in his early career as a motel owner, he angered guests by requiring them to return the towels they had used or pay a fee. A subordinate had recommended the coffee service cancellation after he asked for imaginative ways to reduce expenses, he said. "I did not ever count coffee filters or coffee bags," he insisted. "But I can tell you I agreed with it [the cost-saving recommendation]. . . . I don't consider, when you are playing with shareholders' money, that $4 million is a small number."
But Ebbers repeatedly insisted that he never focused on accounting or on the company's line costs during the period of the fraud because he trusted Sullivan and others to handle financial matters.
"The closest thing I've ever had to an accounting course is a preliminary course on economics," Ebbers said, adding later, "I know what I don't know."
Ebbers testified that he had no idea WorldCom had a problem with too-high line costs even though he traveled to Virginia in June 2001 to attend a meeting on the subject. "I was invited there by Scott Sullivan to do my cheerleading thing and give the troops a little pep talk," he said. Asked why a pep talk was necessary, Ebbers paused and said, "Scott Sullivan told me there was some lack of harmony in the group."
As Tuesday wore on, Ebbers began to wear out under cross-examination by Assistant U.S. Attorney David B. Anders, insisting dozens of times that he did not recall documents or incidents that his subordinates had testified about earlier in the trial.
Ebbers said he had no memory of an October 2000 encounter with then-controller David F. Myers at which Myers said he thought Ebbers was apologizing for the first fraudulent accounting entry. Ebbers also said he did not recall telling his head of investor relations, C. Scott Hamilton, that he would be "wiped out" if the company told Wall Street to expect lower earnings and the stock price fell as a result.
Faced with half a dozen documents that showed line costs fluctuating by $600 million, $700 million, even $900 million in a single month, Ebbers looked tired and coughed as he insisted that he either had never read the document or had not noticed the particular line item in three budget reports he was shown.
"I did not notice that," Ebbers said.
"If I would have noticed it, we would not be here."
"I just didn't see it."
Anders pressed, "WorldCom reduced its line costs by over $2 billion and you had no idea?"
"That's correct," replied Ebbers, who resumes the stand Wednesday.
Copyright 2005 The Washington Post Company
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