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The Five Dumbest Things on Wall Street This Week

This week, a special edition of Five Dumbest focuses on WorldCom!

Talk about a company that keeps on giving.

Hard to believe, but we at the Five Dumbest Things Research Lab once thought we had exhausted all the Dumbness we could wring from the company that used to be known as



Yes, after spending countless hours last year writing about WorldCom's then-CEO Bernie Ebbers -- the miser who cut off employees' coffee and scrapped workers' telephone benefits while borrowing $400 million from the company till -- we really thought the well had run dry.

Of course, as on so many other occasions at the lab, we were wrong.

First came that whole bankruptcy thing -- not really Dumb, but Sad -- and then that little unpleasantness with the accounting fraud. The fictional $9 billion in profits. The guilty pleas. The transformation of the company into the New and Improved MCI.

Which leads us to this past Monday, when both the special investigative committee of WorldCom's board of directors and bankruptcy court examiner Dick Thornburgh issued reports of the size and weight usually reserved for


fall fashion issue.

By now you know the broad outlines of the reports: The two sets of books. The sleepwalking board of trustees. The clueless accountants.

But as horrifying as these headline items are, the real devil is in the details. And these reports have plenty of details.

Enough, we daresay, to fill up a whole column of Dumb Things.

Ahoy, Bernie!
Oh cap'n, my cap'n

So after spending the week curled up next to our Bunsen burners and reading each report cover to cover, we've decided to make this a Special WorldCom edition of the Five Dumbest Things. Your regular scheduled programming will return at the appointed time next week.

Here goes.

1. Whatever Floats Your Boat

Question: How obsessed was Bernie Ebbers with doing deals?

Answer: Obsessed enough, according to the bankruptcy examiner, to name his yacht



2. The Great Telecom Bully Market

Bernie as Rummy
What was that, son?

Now just because Ebbers appears to have had a wry sense of humor, don't go thinking that he was a nice guy. He wasn't. As portrayed in the reports, he was a bully and a hypocrite.

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Which corresponds to our first-hand memory of Ebbers, back in 1997 when he first announced his bid for MCI. Our dim recollection was that when some reporter or analyst asked Ebbers what the CEO believed to be a stupid question, he said so. Everybody laughed.

Back then, we thought to ourselves, "What a blunt, plain-spoken, no-nonsense kind of guy!" But now, in 20/20 hindsight, we think, "What an --."

Actually, this being a family publication, we can't say what we think.

Of all the new evidence of what an unpleasant guy Bernie Ebbers is, this example from the bankruptcy examiner's report is our favorite: "Mr. Ebbers apparently received a daily list of all employees who exercised options and sold the underlying stock. Mr. Ebbers would on occasion call employees to inquire about the stock sales."

Imagine the hapless middle managers on the receiving end of that phone call. Then imagine the utter hypocrisy of the whole situation, since those middle managers didn't have the options that Bernie had when he was short on cash -- borrowing, say, $50 million from WorldCom's treasury, or even, as the reports allege, selling his stock in late 2000 when a blackout on executive stock sales was in force and when Ebbers appeared to possess material nonpublic information.

But corporations having cultures and all, this mean streak was endemic to WorldCom, judging from the reports. As the special investigative committee's report notes:

    When a financial analyst in the Budget Department prepared a budget that incorporated estimates of actual costs and corporate adjustments, chief financial officer Scott Sullivan wrote to this employee and her supervisor: "This is complete, complete garbage. ... What am I supposed to do with this? What have we been doing for the last six months. This is a real work of trash." When another employee went to director of general accounting Buddy Yates for an explanation of a large discrepancy, Yates reportedly berated him and said, "show those numbers to the damn auditors and I'll throw you out the --- window."

Sully's Sass
Say it ain't CFO

3. Odd and Auditor

Not that Yates really had to worry about the damn auditors. After all our reading this week, we at the lab still can't figure out what WorldCom's auditors at Arthur Andersen actually did. They certainly didn't audit.

In auditing WorldCom from 1999 through 2001, reports the bankruptcy examiner, Andersen used "a Fraud Risk Practice Aid to assess the risk of material fraud and accordingly plan and perform the audit in order to obtain reasonable assurance that any material fraud will be detected. As part of this process, Arthur Andersen assessed the Company's accounting policies as 'aggressive' in 1999, but changed that assessment to 'conservative' in 2000 and 2001."

The examiner adds in a footnote, "We have not identified any narrative explanation in the workpapers for this change."

If they do, we'll keep you posted.

4. Yellow Peril

Speaking of posted, we discovered a previously unnamed co-conspirator in WorldCom's accounting fraud: Post-it Notes. Some data from the investigative committee's report:

  • Fourth Quarter of 1999: "The $239 million international line cost accrual release was entered in WorldCom's general ledger ... The only support recorded for the entry was '$239,000,000,' written on a Post-it Note and attached to a printout of the entry."
  • Third Quarter of 2001: "Myers gave Sethi a Post-it Note that said 'Assume $742 million.' Later, Myers and Sethi had a conversation confirming that $742 million identified on the Post-it Note was the line cost capitalization entry for the quarter."
  • First Quarter of 2002: "In Capital Reporting, Myers told Sethi to go see Vinson, who would have the amount to be capitalized. When Sethi did so, Vinson handed him a Post-it Note that had the $818 million adjustment on it. Brian Higgins once again refused to make the necessary allocation for the first-quarter 2002 capitalization entry. Despite his growing concerns, Sethi made the allocation because he was concerned that his immigration status would be jeopardized if he lost his job."
  • First Quarter 2002: "$109.4 million was taken from the general accrual account that Vinson set up and reclassified to several SG&A balance sheet accounts in five large, round-dollar amounts. The only supporting documentation that we were able to locate for these entries was a Post-it Note listing the various SG&A accounts and the amounts that should be taken from the Vinson account."
  • "We found hundreds of huge journal entries, many of them in round-dollar amounts, made by the staff of the General Accounting group without any support other than a Post-it Note or written instruction directing that the entry be made."

Forget about suing Andersen or WorldCom. It's time to go after


(MMM) - Get 3M Company Report


5. I Should Hope So

If it isn't already clear, none of this could have been done without the guidance of Bernie Ebbers. After all, reports the bankruptcy examiner, a board member, "in discussing the deference the Board of Directors gave to Mr. Ebbers generally, referred to Mr. Ebbers as 'God,' 'Jesus Christ' and 'Superman.'" These references do not appear to have been ironic.

Appropriately enough, the investigative committee notes that WorldCom's board meetings followed a consistent format: "Each meeting opened with a prayer."

Everybody was looking for upbeat guidance on WorldCom. Even Bernie.

Glory Be Bernie!