Bernie Ebbers can't be resting easy after Thursday's latest installment of Executives in Chains, brought to you by the Justice Department. Still, some old hands on the white-collar fraud bar caution that the WorldCom perp walk is hardly certain to lead to a cake walk. It's clear that investors and politicians alike are crying for action in the collapse of the Clinton, Miss., telecom behemoth. Billions of dollars were lost by shareholders and workers while top executives of the company continued to rake in millions in salary, bonuses, executive loans, stock sales and other perks. Even in Wall Street's summer of discontent, the always-deep divide between the insider and the outsider has rarely seemed more bottomless -- or more heartless. But it's that very sentiment, spurring a nearly unanimous cry to action from the political classes, that nettles people like former federal prosecutor Seth Taube. It seems nearly certain that part of the prosecution's plan is to use its strongest cases, such as the one against the financial execs who signed off on the company's expense accounting, to turn WorldCom's ranks against its generals -- in this case, the big fish CEO Ebbers. All the same, Taube and other observers worry that a case brought as swiftly as the one against WorldCom's former financial officers Scott Sullivan and David Myers may in some cases sacrifice thoroughness for speed. "I continue to be concerned that the rush to justice in times of public frenzy is always a risk," says Taube, a former Securities and Exchange Commission prosecutor turned corporate defense attorney. "When the government moves quickly it's tough to meet the burden of proof."
Surrendered to FBI
Former Chief Financial Officer Sullivan and former controller Myers surrendered to FBI agents early Thursday and are expected to face a seven-count indictment later today in federal court, according to an Associated Press report. The charges are expected to include conspiracy to commit securities fraud. The indictments come just weeks after WorldCom revealed it had fudged $3.8 billion in expenses during the past year and a half. By booking operating costs as capital investments, WorldCom was able to manufacture profitable results where losses should have been. The authorities will likely claim that by sustaining these false profits, WorldCom execs were able to gain from the strength of the company's stock price. "This is incredibly fast for a white-collar prosecution," says Seth Taube. "This is a test case for President Bush's new task to prosecute corporate wrongdoing." Just a week ago the feds apprehended several members of Adelphia's founding Rigas family, on charges that execs there plundered the nation's sixth-largest cable system operator. The charges there came amid a summer of scandal on Wall Street that began simmering with last winter's collapse of Enron and Global Crossing. As the stock markets have plunged and more apparent wrongdoing has come to light, the White House and Congress have promised aggressive action to make sure business walks the straight and narrow. With the public up in arms about losses in the markets and seeming profiteering by fat cat execs, the government is expected to take aim at high-profile CEOs. Legal experts say the WorldCom execs will likely plead innocent and work out some agreement to cooperate with the government against others. "This is clearly an effort to get the higher-ups," says Taube, who now works for McCarter & English, a Newark, N.J.-based law firm. "You always indict the middle guys and put pressure on them to get the big guys."
Still, attorneys say it is often quite difficult to prove that CEOs had direct knowledge or played an active role in fraud cases. Typically, prosecutors must rely on the testimony of other employees to make their cases. Though Ebbers founded and ran the company and personally hired Sullivan to handle its financials, connecting him in any direct way to the chicanery may not be easy. Ebbers is an especially appealing target to prosecutors because in addition to building the long-distance provider through acquisitions in the 1990s, Ebbers built up a massive debt to the company as its stock plunged. "It's plausible that Ebbers had no role in WorldCom's potential misdeeds," says Taube. "But you could argue that he certainly would have set the tone for aggressive accounting. It's also entirely possible in a large organization for the CEO not to know," he says. On the other hand, continues Taube, "Of course there may be a good case that he should have known." Ebbers and WorldCom are the subject of a number of probes of the company's accounting and business practices, including a 24-point inquiry launched by the SEC in March. Lawyers say it usually takes about a year between the launch of an investigation and indictments, which clearly puts this case on the fast track. As at Adelphia, where founder John Rigas was arrested less than four months after the SEC started its probe, observers have been struck by the speed of the WorldCom indictments. Clearly, say SEC experts, this is a function of President Bush's need to show quick action and SEC chief Harvey Pitt's promises of swift enforcement action. Some fraud defenders note speed doesn't always equal accuracy. Yet with the mood in the country such as it is, maybe a quick case will do the trick. "They are hoping for pleas so they never have to prove it to a jury," Taube says.