WorldCom stock certificate > infamous scandal accounting fraud

Description

Old Stock Yard Collectible Stock and Bond Certificates
WorldCom, Inc.
Original stock certificate
2002
WorldCom became known for the fraudulent accounting scandal involving company executives prior to filing for bankruptcy (read more below)
Accounting scandals
CEO Bernard Ebbers became very wealthy from the rising price of his holdings in WorldCom common stock. However, in the year 2000, the telecommunications industry entered a downturn and WorldCom’s aggressive growth strategy suffered a serious setback when it was forced by the US Justice Department to abandon its proposed merger with Sprint in mid 2000. By that time, WorldCom’s stock price was declining and Ebbers came under increasing pressure from banks to cover margin calls on his WorldCom stock that was used to finance his other businesses (timber and yachting, among others). During 2001, Ebbers persuaded WorldCom’s board of directors to provide him corporate loans and guarantees in excess of $400 million to cover his margin calls. The board hoped that the loans would avert the need for Ebbers to sell substantial amounts of his WorldCom stock, as his doing so would put further downward pressure in the stock’s price. However, this strategy ultimately failed and Ebbers was ousted as CEO in April 2002 and replaced by John Sidgmore, former CEO of UUNET Technologies, Inc.
Beginning modestly in mid-year 1999 and continuing at an accelerated pace through May 2002, the company (under the direction of Ebbers, Scott Sullivan (CFO), David Myers (Comptroller) and Buford “Buddy” Yates (Director of General Accounting)) used fraudulent accounting methods to mask its declining earnings by painting a false picture of financial growth and profitability to prop up the price of WorldCom’s stock. The fraud was accomplished primarily by booking ‘line costs’ (interconnection expenses with other telecommunication companies) as capital on the balance sheet instead of expenses, and by inflating revenues with bogus accounting entries from “corporate unallocated revenue accounts”. In 2002, a small team of internal auditors at WorldCom worked together, often at night and in secret, to investigate and unearth $3.8 billion in fraud. Shortly thereafter, the company’s audit committee and board of directors were notified of the fraud and acted swiftly: Sullivan was fired, Myers resigned, Arthur Andersen withdrew its audit opinion for 2001, and the U.S. Securities and Exchange Commission (SEC) launched an investigation into these matters on June 26, 2002 (see accounting scandals). By the end of 2003, it was estimated that the company’s total assets had been inflated by around $11 billion.
Bankruptcy
On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection in the largest such filing in United States history at the time (since overtaken by the collapses of both Lehman Brothers and Washington Mutual in a span of eleven days in September 2008). The WorldCom bankruptcy proceedings were held before U.S. Federal Bankruptcy Judge Arthur J. Gonzalez who simultaneously heard the Enron bankruptcy proceedings which were the second largest bankruptcy case resulting from one of the largest corporate fraud scandals. None of the criminal proceedings against WorldCom and its officers and agents was originated by referral from Gonzalez or the Department of Justice lawyers.
On April 14, 2003, WorldCom changed its name to MCI and moved its corporate headquarters from Clinton, Mississippi, to Dulles, Virginia. Under the bankruptcy reorganization agreement, the company paid $750 million to the SEC in cash and stock in the new MCI, which was intended to be paid to wronged investors. In May 2003, the company was given a no-bid contract by the United States Department of Defense to build a cellular telephone network in Iraq. The deal has been criticized by competitors and others who cite the company’s lack of experience in the area. The SEC and Worldcom reached a deal in which Worldcom agreed to pay a civil penalty of $2.25 billion. The deal was approved by federal judge Jed Rakoff in July 2003. In a sweeping consent decree, the SEC and Rakoff essentially took control of Worldcom. Rakoff appointed former SEC chairman Richard C. Breeden to oversee Worldcom’s compliance with the SEC agreement. Breeden actively involved himself in the management of the company, and prepared a report for Rakoff, titled Restoring Trust, in which he proposed extensive corporate governance reforms, as part of an effort to “cast the new MCI into what he hoped would become a model of how shareholders should be protected and how companies should be run.” – Information from Wikipedia
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