Sullivan’s Travails Continue

Former WorldCom CFO to appear in court tomorrow; director of accounting also to be arraigned. Elsewhere: Survey shows that aggressive bookkeeping pay off -- in spades. Plus: so how much did Bernard Ebbers make off gifted IPO shares?


Wednesday is Arraignment Day for two former WorldCom finance executives who are allegedly at the center of the telecom giant’s $7.68 billion accounting fraud..

Former CFO Scott Sullivan and former Director of General Accounting Buford Yates are expected to appear before U.S. District Judge Barbara Jones in Manhattan federal court tomorrow.

As you recall, last week the two were indicted by a federal grand jury in New York on two counts of securities fraud and five counts of filing false reports with the SEC.

Three other finance executives were also named as unindicted co-conspirators: Betty Vinson, director of management reporting, Troy Normand, director of legal entity accounting, and former Controller David Myers.

Sullivan and Yates are each charged with one count of securities fraud, conspiracy to commit securities fraud, and fraud in connection with the purchase or sale of securities. The indictment also charges them with three counts of making false filings with the SEC.

The conspiracy count reportedly carries a possible maximum five-year prison term and a $250,000 fine. The securities fraud and false filings charges each carry a possible maximum term of ten years and $1 million fines.

The indictment alleges that the defendants and their co-conspirators illegally schemed to hide expenses, including keeping critical information from the company’s external auditor, Andersen, and from the SEC.

WorldCom, which recently filed for bankruptcy, fired Sullivan in July. CEO Bernard Ebbers resigned under pressure in April

Sullivan Lost Money on Stocks

Believe it or not, there’s more embarrassing news for Scott Sullivan.

According to information released by the House Financial Services Committee on Friday, the former WorldCom CFO failed to make money on a potentially lucrative IPO shares offered by investment bank Salomon Smith Barney (part of Citigroup).

The committee revealed on its web site that a number of former WorldCom executives were given the opportunity to buy into hot IPOs before those newly listed companies began trading in earnest. Back in the late Nineties, such an opportunity was akin to winning the lottery, since technology, telecom, and Internet issues frequently soared on their first day of trading.

Former WorldCom CEO Bernard Ebbers, for example, made about $11 million 869,000 shares in 21 IPOs, according to the committee. That total included $4.56 million alone from the sale of Metromedia Fiber Network shares, and nearly $2 million from shares of Qwest Communications International.

Former WorldCom Director Walter Scott reportedly made $2.4 million when he sold 250,000 shares of Qwest after the telecom rival went public.

It seems, however, that Sullivan was not such a deft stock flipper. According to the House committee, Sullivan and his wife actually wound up losing $13,059 in the nine IPOs in which they received shares.

Sullivan’s biggest loss came when he sold 7,000 shares of Rhythms NetConnections for 33 cents and 37 cents per share. Apparently, Sullivan waited two years after the company went public to sell off his holdings. A mere three months after Sullivan sold, Rhythms NetConnections filed for bankruptcy.

The practice of allocation IPO shares to top corporate executives is now being examined by legislators. Some members of the House committee have questioned whether there was a quid pro quo between WorldCom — a frequent buyer of M&A banking services — and Salomon Smith Barney — a seller of those services.

“This is an example of how insiders were able to game the system at the expense of the average investor,” said Rep. Michael Oxley (R-Ohio), chairman of the committee. “It raises policy questions about the fairness of the process that brings new listings to the markets.”

It also raises questions whether the other major investment banks engaged in similar practices.

Over the Labor Day weekend, a few Wall Streeters noted in TV interviews that the mere fact that corporate clients were given the opportunity to buy into hot IPOs at the opening price was not unusual. The large size of the WorldCom allocations has raised eyebrows, however.

In a letter apparently sent to the House committee, Citigroup lawyer Jane Sherburne reportedly wrote: “We believe the allocations at issue fit well within the range of discretion that regulators have traditionally accorded securities firm in deciding how to allocate IPO shares.”

Report: CEOS at Probed Companies Made Big Bucks

Apparently, aggressive accounting pays off.

That’s the stark conclusion of the ninth annual CEO pay study conducted by the Institute for Policy Studies and United for a Fair Economy.

According to the report, “Executive Excess 2002: CEOs Cook the Books, Skewer the Rest of Us,” the chief executives of 23 large companies currently under investigation for accounting irregularities earned 70 percent more from 1999 to 2001 than the average CEO at large companies.

On average, the CEOs of the 23 companies earned $62 million from 1999 to 2001, compared with an average of $36 million for all CEOs in Business Week’s annual executive pay survey, said the study.

The report looked at companies which are currently being investigated by the SEC, Department of Justice, and other agencies. All have had market capitalizations over $1 billion since Jan. 2001. The list includes Adelphia, AOL Time Warner, Bristol-Myers Squibb, CMS Energy, Duke Energy, Dynegy, El Paso, Enron, Global Crossing, Halliburton, Hanover Compressor, Homestore, Kmart, Lucent Technologies, Mirant, Network Associates, Peregrine Systems, PNC Financial Services, Reliant Energy, Qwest, Tyco International, WorldCom, and Xerox.

All told, the CEOs at the companies in the survey took home $1.4 billion from 1999 to 2001.

By contrast, shareholders and employees of the 23 businesses didn’t make out so well. Between Jan. 1, 2000 and July 21, 2002, the value of the shares at these companies shrunk by $530 billion, or roughly 73 percent of their total market capitalization.

In addition, 162,000 employees of these companies have lost their jobs since January 2001. Tyco, for example, has laid of 18,400 workers since early 2001.

Short Take: IBM To Cut More Jobs

International Business Machines Corp. reportedly plans to eliminate about 4,000 jobs. This comes as IBM completes its $3.5 billion purchase of PricewaterhouseCoopers consulting arm, according to a published report Tuesday.

According to the Wall Street Journal, the acquisition of PwC’s consulting group is slated to close around Sept. 30. The layoffs could amount to about 5 percent of the combined consulting operations. The Journal reported that the layoffs should take place in the fourth quarter.

The Armonk, New York-based IBM has already trimmed about 5 percent of its total workforce this year.

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