The Message in Ebbers' Sentence


By Steve Rosenbush As Bernard Ebbers' trial got underway last March, the former WorldCom CEO strode confidently about the courthouse, cigar in mouth and hands on hips. But on July 13, Ebbers appeared a much-chastened man as he confronted his fate in the U.S. District courtroom of Judge Barbara Jones. The judge, a former prosecutor, sentenced the 63-year-old Ebbers to 25 years in prison.

The weight of the proceedings appeared to take its toll on the one-time mogul, a former milkman, bouncer, and basketball coach who worked his way to the top of Corporate America. As he entered the courthouse in Manhattan, he pushed a photographer out of his way. Later, as Jones denied one appeal for leniency after another, Ebbers clasped his hands in front of him, as if in prayer. His face reddened, and he dabbed it with a tissue.

FORGET THE EIGHTIES. Ebbers waived his right to speak during the sentencing. But no words were necessary to convey his devastation. When Jones asked if he understood his right to appeal the sentence, he answered so softly that she could barely hear him, and he had to repeat his answer. After the sentence was pronounced, Ebbers' wife, Kristie, seated on a bench several seats behind him, cried. Ebbers hugged her as she sobbed on his shoulder a few moments later.

The ex-WorldCom boss is free on bail until Oct. 12. His attorneys hope to keep him out of jail until his appeal is resolved, but by no means is that assured.

It was the toughest sentence of its kind. No high-profile CEO has ever faced such a long prison term in a fraud case. John Rigas was sentenced last month to 15 years for defrauding Adelphia (ADELQ), the cable corporation that he ran. Rigas' son, Timothy, was sentenced to 20 years. And the sentences far outstrip those handed down in the insider-trading cases of the 1980s.

"ISN'T SURPRISING." But everything about the WorldCom case has been outsized. During the late '90s, it emerged as one of the world's largest telecom companies. It traces its roots to LDDS, a small company that bought long-distance service in the wholesale market from AT&T and resold it under its own name at a discount. LDDS grew by acquisition, taking a new name from an acquired company called WorldCom. It created an enormous market cap that allowed it to acquire MCI, a pioneer of telecom competition, for $47 billion in 1998.

At its peak, WorldCom had revenues of $40 billion a year and sold telecom and Internet services to consumers and businesses globally. It eventually admitted to a record $11 billion in accounting fraud. Its $107 billion bankruptcy filing in 2002 was the largest in history. The company, which has emerged from bankruptcy under the MCI name (MCIP), is being sold to Verizon Communications (VZ).

Peter Henning, a law professor at Wayne State University, says that the Ebbers sentence was a little longer than he would have expected, but only by about five years. "In light of the Rigas sentences, the Ebbers outcome isn't surprising," he notes. Judges like to be consistent, Henning says, and Jones obviously wanted to send a strong message that accounting fraud is unacceptable.

The blowup of WorldCom already has changed the business climate in the U.S., according to Henning. Outrage over the fraud was a prime factor in passage of the Sarbanes-Oxley Act, which increased regulation of U.S. companies. It also helped lead to a new separations between investment bankers and their research departments.

PERSONAL TOLL. The case shows that CEOs can't escape responsibility for accounting scandals that happen on their watch by blaming underlings. Henning believes the sentencing will embolden prosecutors to go higher up the corporate ladder than they might have in the past.

Legal experts say the sentence was tough but fair, given the enormous amount of damage that investors suffered. "It's an extremely stiff sentence, but I think it's fair, given the magnitude of the harm, the egregiousness of the crime," says securities attorney Michael Missal of Kirkpatrick & Lockhart Nicholson Graham. Missal was lead counsel to the examiner in the WorldCom bankruptcy case. He also represented Michael Milken after Milken's release from prison.

The human cost of the WorldCom case was highlighted in court Wednesday morning when a former salesman urged the court to impose a tough sentence. Ex-employee Henry Bruen Jr., 47, said he lost $800,000, including his home. Bruen says he was a top salesman, but now can't find work because he has been tainted by the WorldCom scandal. He sold his apartment and lives with his parents in White Plains, N.Y.

"WASN'T JUST EBBERS." "I represent the common man...the working professional...and the average investor that has suffered untold human carnage financially, personally, and professionally as a result of the criminal activities of Bernard Ebbers and his co-conspirators," he told the court. Bruen says many WorldCom employees shared his fate.

Speaking to reporters in the hallway outside the courtroom, just moments after the sentencing, Bruen expressed satisfaction with the results, saying, "It sends a message."

But another former employee was taken aback by the sentence. "It wasn't just Ebbers," says former WorldCom sales executive Glenn Klupsak, who sat through the entire trial. Klupsak, who left WorldCom in 1998 -- well before the accounting fraud at issue in the indictment began -- says his stock options were rendered worthless and that he suffered "seven-figure" losses.

He maintains WorldCom's advisers and bankers at Salomon Brothers, including former telecom analyst Jack Grubman, should have shared the blame. "They were responsible, too," Klupsak says.

PLEA FOR MERCY. As for the sentence, it far outstripped anything that Klupsak expected. "I thought it would be closer to 10 years," Klupsak says. Was 25 years for Ebbers fair? "I don't know," said the stunned ex-employee, just moments after his former boss was sentenced.

Ebbers lead attorney, Reid Weingarten, says he looks forward to appealing the verdict and the sentence. Weingarten, who has known Ebbers for years, shed tears as he pleaded with the judge to show mercy. He noted that Ebbers was in poor health, suffering from a heart condition, and that he had made $100 million in anonymous charitable donations over the years. "Doesn't that count for anything...for anything?" he asked.

The judge didn't flinch when it came time to pronounce sentence. She said that under federal guidelines, Ebbers ought to receive 30 years in prison. But she took five years off the sentence because of several factors, including Ebbers' charitable activities.

A POSTER BOY? Given his age and health, however, it's probably a meaningless gesture, considering that there's a good chance Ebbers will die in prison. Jones's only concession: She'll make it easier for him to wind up in a low-security prison in Yazoo, Miss., near his home. Given the length of the sentence, he could have ended up in a medium-security facility.

Weingarten addressed the press outside, at the foot of the court house's imposing steps. Surrounded by a mob of reporters, Weingarten told them that Ebbers continues to proclaim his innocence. "The problem with this case is that Bernard Ebbers was transformed into a symbol of greedy, corrupt executives," the lawyer said.

Prosecutors were under immense pressure to bring charges because so many members of the public lost money. WorldCom's value in the stock market declined by $187 billion, or 90% of its value. And on the way down, it wiped out the life savings of employees and investors, and hurt major investors such as Merrill Lynch (MER), Oppenheimer Capital, and the College Retirement Equities Fund. Rivals such as AT&T and Verizon also complained that WorldCom forced them to compete against an unattainable, phantom benchmark of success, distorting the entire telecom industry.

BUCK STOPS HERE. Working with little direct evidence, a prosecution team led by David Anders convinced the jury to find Ebbers guilty despite the testimony of tainted witnesses like former WorldCom CFO Scott Sullivan (see BW Online, 03/16/05, "Ebbers: Giant Fraud, Simple Conclusion").

Anders seems to have swayed Jones as well. Weingarten argued until the end that Sullivan was really the main culprit. But Jones brushed aside that argument on the day of sentencing, saying, "It seems quite clear to me Mr. Ebbers was central to the criminal activity in this case." And her point was driven home in a record-breaking sentence that surely could send a message to every CEO in America. Rosenbush is a senior writer for BusinessWeek Online in New York


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