Report: Grounds for Lawsuits Against Former WorldCom Execs

The telco, set to emerge from bankruptcy as MCI, could sue some former execs, a report concludes.
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An outside investigator sees grounds for MCI to sue former executives and auditors for their role in the $11 billion accounting scandal that brought down WorldCom.

A 542-page report, prepared by court-appointed independent examiner Dick Thornburgh, outlines the legal case against former CEO Bernie Ebbers, former CFO Scott Sullivan, onetime auditor Arthur Andersen and former investment banker Smith Barney, a unit of

Citigroup

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.

Thornburgh's report says that lucrative stock gifts to Ebbers from Salomon Smith Barney helped steer business to the bank and caused Ebbers to shirk his fiduciary responsibilities to WorldCom. WorldCom filed the nation's largest-ever Chapter 11 case in the summer of 2002 after its books turned out to be rotten. The company is now preparing to re-emerge as a public company under the MCI name.

A WorldCom representative said the company was reviewing the Thornburgh report and has been evaluating potential claims against a number of parties. The rep said legal action will be taken if there is a good chance of winning a case.

Ebbers' attorney, Reid Weingarten, was not immediately available for comment. He has previously said the former executive engaged in no wrongdoing in the WorldCom scandal.

Observers have long speculated that federal investigators are working to bring charges against Ebbers. Thornburgh has reported that Ebbers created a

culture of fraud while he was in charge of the company.

But to date, only Oklahoma's attorney general has filed any charges against Ebbers, who famously kept little if any records of his discussions. The Oklahoma charges were subsequently withdrawn to eliminate any potential conflict with any federal case, although the attorney general has said he'll refile this spring.

Former CFO Sullivan, who is out on bail, faces several federal charges including accusations that he defrauded creditors in order to obtain loans for the company. He has said he's innocent and is expected to stand trial this year.

WorldCom, the No. 2 long distance company, is expected to emerge from bankruptcy as MCI sometime next month.

The Thornburgh report also says that WorldCom could pursue claims against accounting firm KPMG for giving poor tax advice. The firm was involved in WorldCom's corporate-tax planning in 1997 and 1998. But a WorldCom rep says the company has no intention of suing KPMG.

"Our corporate-tax work for WorldCom was performed appropriately, inaccordance with professional standards and all rules and regulations, and wefirmly stand behind it," KPMG said in a statement Monday.