) CEO Bernard J. Ebbers and ex-Enron Corp. (ENRNQ
) CEO Kenneth L. Lay are closely linked. Both rose from humble roots to build dynamic New Economy powerhouses that turned out to be financial shams. And both distanced themselves from the disasters by blaming ambitious underlings. Claiming to be ignorant of the day-to-day operations of their companies, they pointed to the lack of any direct evidence linking them to the alleged frauds. That, in turn, made them a focal point for critics who complained that the long arm of the law doesn't reach into the corner office.
But now their paths have diverged -- and popular ideas about executive accountability may have to be reevaluated. While Lay still hasn't been charged with any crimes and steadfastly maintains his innocence, Ebbers was indicted for securities fraud and filing false disclosure statements on Mar. 2 -- the same day that his former chief financial officer, Scott Sullivan, pleaded guilty to securities fraud and became the government's star witness against his longtime former boss."ALTOGETHER DIFFERENT". A close look at the case against the onetime telecom star reveals that, despite all the superficial similarities with the Lay saga, he'll probably be much easier quarry for prosecutors than the ex-Enron chief. Not only will allegations of WorldCom's wrongdoing be far simpler for a jury to understand than those allegedly committed by the energy giant, but Ebbers also appears to have been more directly involved in the disputed transactions than Lay. He will also have a harder time deflecting liability by saying lawyers and accountants signed off on them. "This is an altogether different case from Enron," says Henry T.C. Hu, a corporate and securities law professor at University of Texas at Austin.
To be sure, Ebbers has denied wrongdoing and is vowing to prove his innocence before a jury. "We believe when we get to court and competent evidence -- not one-sided reports, sound bites, political speeches, and angry headlines -- is the currency of the day, we will be fine," said a statement written by his attorney, Reid H. Weingarten.
But the Justice's Dept.'s 31-page indictment is more than a mere sound bite. It claims that Ebbers and Sullivan artificially boosted the company's profits with a variety of accounting tricks, including understating expenses and treating operating costs as capital expenditures. Although the government has not revealed any documents in which Ebbers orders lower-level managers to mislead investors, the indictment does include references to several previously undisclosed meetings with Sullivan. The former CFO's cooperation with the government means that it is going to be much harder for Ebbers to claim ignorance about WorldCom's accounting manipulations. Sullivan will be able to supplement the seemingly paltry written record with testimony about his conversations with the CEO.
Unlike Lay, who was known as Enron's ambassador to the outside world, Ebbers was a classic micromanager, according to former insiders. The indictment paints a portrait of a man directly involved in many of the events that led to WorldCom's downfall. It claims, for example, that Ebbers and Sullivan agreed to treat the fees that the company paid to lease telecommunication lines as capital expenses during a critical meeting in March, 2001. That maneuver was illegal, prosecutors charge, and it was the most significant of the alleged accounting games that falsely boosted WorldCom's financial performance. No comparable claim has ever emerged claiming that Lay was involved in the advance planning for, say, Enron's now-notorious Raptor or LJM transactions.EASIER TO EXPLAIN. A second critical contrast between Ebbers and Lay is the participation of outside professionals. While the WorldCom managers allegedly hid their schemes from auditor Arthur Andersen LLP, Enron's leaders had the vast majority of their acrobatic transactions blessed by accountants and lawyers. That will make it harder for prosecutors to prove that they intended to break the law -- a critical hurdle in proving criminal intent. Ebbers appears to have strapped on little comparable legal armor.
Finally, the tools that Enron execs allegedly used to manipulate its earnings were mind-numbingly complex. The company set up thousands of subsidiaries and offshore companies and then had them engage in sophisticated, structured finance deals with one another -- producing deal charts that are a forest of arrows and boxes. By contrast, the WorldCom disaster, says former Attorney General Richard L. Thornburgh, the Washington lawyer who investigated WorldCom for the judge overseeing the company's bankruptcy case, was a "pure and simple case of cooking the books." That's a concept just about anybody can understand. And the easier it is for prosecutors to explain their case, the more likely they are to win. By Mike France in New York, with Amy Borrus in Washington and Steve Rosenbush in New York