WorldCom's Rise, Fall & Corporate Governance Failure

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Introduction

MCI WorldCom was among the biggest telecommunications companies in the world. Bernie Ebbers established WorldCom in 1983, after that WorldCom began as a re-seller of long-distance telephone services. WorldCom is located at Mississippi. After Ebbers purchased around 50 other small long-distance companies, he set his sight on MCI. Therefore MCI WorldCom would have ended up being the second most significant telecom provider in 1997. MCI WorldCom was formed on September-15-1998. WorldCom merged with the $37 billion MCI Communications Corporations, the business's operations were arranged around 3 departments:

* MCI WorldCom
* U.S. telecommunications
* WorldCom International

The MCI WorldCom department is the second largest far away company in the United States (after AT&T). It has fiber optic network of 45,000-mile long, which offers regional phone service in more than 100 markets and provides services such as information, Internet, and other communications services. UUNET WorldCom has an extremely relied on & & trusted foundation network which supplies local access to the Internet to a reach of more than 1,000 locations in and around the United States, Canada, Europe, and the Asia-Pacific area.

WorldCom International is not just a local however likewise facilities-based rival in 15 nations outside the United States, linking to the company's total international network to more than 5,000 structures in Australia, Ireland, Germany, Hong Kong, Italy, Japan, Mexico Belgium, Brazil, France, The Netherlands, Singapore, Switzerland, Sweden, and the UK.

Business-- Timeline:

Business starting

1983: Business Owners Murray Waldron and William Rector develop a strategy to create a discount long distance provider called LDDS (Long-Distance Discount Service). 1985: Early financier Bernard Ebbers ends up being the first chief executive officer of LDDS.

1989: LDDS ends up being public through its first
acquisition of Advantage Companies Inc. 1992: LDDS combines in an all-stock offer with discount cross country company Advanced Telecommunications Corp
.

MCI acquisition

1993: LDDS acquires long distance providers Resurgens Communications Group Inc and Metromedia Communications Corp. in a three-way stock. This creates cash transaction that becomes the fourth-largest long-distance network in the United States. 1994: LDDS continues its acquisition spree acquiring domestic and international communications network IDB Communications Group Inc. in an all-stock deal. 1995: LDDS acquires voice and data transmission company Williams Telecommunications Group Inc. for $2.5 billion and changes its name to WorldCom Inc. 1996: WorldCom merges with MFS Communications Company Inc. and UUNet Technologies Inc. 1998: WorldCom completes three mergers: with MCI Communications Corp. ($40 billion)—the largest in history at that time—Brooks Fiber Properties Inc. ($1.2 billion) and CompuServe Corp ($1.3 billion).

Proposed Sprint merger
1

999: WorldCom and Sprint Corp. agree to merge.
2000: U.S. and European regulators block proposed merger with Sprint; WorldCom and Sprint terminate agreement.

Accounting scandals & Bankruptcy

2002: A small team of internal auditors worked together secretly at WorldCom. During the night time, the auditors’ secret investigations revealed a $3.8 billion worth of fraud. WorldCom files for bankruptcy protection, listing some $107 billion in assets and $41 billion in debt, on a consolidated basis as of March 31. It was the largest such filing in U.S. history. 2003: The Company's total assets had been inflated by about $11 billion. Creditors had lost faith in the organization. 2004: MCI officially emerges from bankruptcy, 21 months after filing the largest Chapter 11 case in history. 2005: Verizon Communications Inc. announces a $6.75 billion deal to buy MCI Inc. Former WorldCom Inc. chief executive Bernard J. Ebbers is found guilty of conspiracy, securities fraud and making false filings with regulators.

Worldcom Top Management Team during Scandal:
CEO – Bernard Ebbers
CFO – Scott Sullivan
Comptroller - David Myers
Director of General Accounting - Buford "Buddy" Yates
Pre-Scam Days At WorldCom

LDDS changed its name to WorldCom in 1995. WorldCom was the second largest benchmarked long distance telecom provider in the USA and the biggest internet traffic carrier in the world, with a network stretching over 150,000km, and business presence in more than 65 countries. WorldCom faced explosive growth, at a scorching pace over the 15 years of its existence by acquiring many companies like MFS Communications Inc. and UUNet Technologies Inc. in 1996, MCI Communication Corp, Brooks Fiber Properties Inc., CompuServe Comp in 1998. In 2001, it made the largest merger with Intermedia Communication Inc., an internet and data services provider. With the acquisitions of UUNet and MCi, WorldCom had control over more than 50% of the Internet backbone infrastructure. Every acquisition led to higher stock price which in turn made way to finance another acquisition. The share price of WorldCom was at an all time high of $63.50, on June 18, 1999, with market value of $125 billion.

Its value rose to $180 billion during the peak of the telecom boom. As long as the stock market was booming and the dot com bubble was expanding, no one cared to look into the fundamental stability of the company. Auditors also failed to perform thorough due diligence.

WorldCom, in the late 1990’s was also an attractive takeover target for Nextel Communications, before the scandal. Scam – How it all happened?

WorldCom, the second biggest long-distance telecom company in US and also the biggest carrier of Internet traffic in the world was the new economy company when it was launched. In its operation of 15 years, the company grew at a very rapid pace, majorly due to the ambition of its former chief executive officer (CEO) Bernard J. Ebbers. It majorly expanded by acquiring other smaller companies who had a potential to be their future competitors. The stock market supported them and the company growth was exorbitant and no one cared about the fundamentals of the company as it was giving high return year on year. Below mentioned is the chronological order of occurrence of events and the exposure of fraud. * March 2002 - The U.S. Securities and Exchange Commission (SEC) questioned WorldCom about its accounting procedures and about loans it had extended to its officers as it was curious about the rationale behind the offers.

* April 2002 - The first sign of weakness came when company announced job cuts, the number was 3,700. Following the even, Standard & Poor's, Moody's and Fitch downgraded WorldCom's credit rating and it was the beginning of the Justice department launching a probe into the scandal. * April 2002 – This month itself J. Ebbers resigned as CEO after the shocking revelation of lending of $339.7 million to Ebbers to cover loans that he took to buy his own shares. * June 25 - The Company revealed that improper accounting of $3.8 billion in expenses had covered up a net loss for 2001 and the first quarter of 2002. The company also announced that it planned to shed more than 20% of its workforce counting to be around 17,000 jobs. * June 26 - The case was filed by SEC against WorldCom alleging them for a securities fraud. It alleged that WorldCom's top management "disguised its true operating performance" and "misled investors about its reported earnings".

Method that WorldCom adopted is been classified as an accounting scandal, the company used its balance sheet to boost revenues and profits while hiding expenditures. It did so by * Classifying ordinary day-to-day expenses and long-term expenses associated with the acquisition of capital assets as investments which led to WorldCom having a significant tax advantages. * WorldCom also tried to hide expenses to the amount of nearly $4 billion and instead showed them as profits in their account books. * Another ploy it employed was using WorldCom's major operating expenses related to its "line costs", the fees that it pays to third party telecom network providers for the right to access their networks. WorldCom capitalised these fees, terming them as investments, when, in fact, they were one of the most important day-to-day expenses.

Financial experts pointed out that WorldCom's accounting practices, made it impossible for investors to gauge the performance of the company. They not only overstated profitability they also misled the investors by the opaque nature of its regular operating performance. The shock for the people accentuated with revelation of Arthur Andersen, the disgraced auditing and consulting major as WorldCom's auditor too. The WorldCom's own internal audit department was the first one who unearthed the fraud of approximately $3.8 billion in June 2002. The company's audit committee and board of directors were notified of the fraud and acted swiftly: Sullivan was fired, Myers resigned. By the end of 2003, it was estimated that the company's total assets had been inflated by around $11 billion (WorldCom, 2005).

Post-Scam Days At WorldCom

Around 17,000 jobs were cut in order to save $1 billion.

The company had yet to pay many of its creditors. Many of the small creditors included former employees, primarily those who were dismissed during June 2002. On August 7, 2002, the exWorldCom 5100 group was formed. It included former WorldCom employees with a common goal of seeking the benefits and full payment of severance pay under the WorldCom Severance Plan. The "5100" signifies the number of WorldCom employees dismissed in June 2002 before WorldCom filed for bankruptcy. In 2004, the company emerged from bankruptcy, with $5.7 billion in debt and $6 billion in cash. It was renamed MCI. About half of the cash was intended to pay various claims and settlements. Previous bondholders were paid 35.7 cents on the dollar, in bonds and stock in the new MCI company. The previous stockholders' stock was cancelled, causing huge loss to stockholders. On February 14, 2005, Verizon Communications acquired MCI for $7.6 billion.

On March 15, 2005 the CEO , Bernard Ebbers, was found guilty of all charges and convicted of fraud. He was accounted for the $11 billion accounting scandal, conspiracy and filing false documents with regulator. Many other officials were also charged with criminal penalties in relation to the company's financial misstatements. These included former CFO Scott Sullivan (entered a guilty plea on March 2, 2004 to one count each of securities fraud, conspiracy to commit securities fraud, and filing false statements), former comptroller David Myers (pleaded guilty to securities fraud, conspiracy to commit securities fraud, and filing false statements on September 27, 2002), former accounting director Buford Yates (pleaded guilty to conspiracy and fraud charges on October 7, 2002), and former accounting managers Betty Vinson and Troy Normand (both pleading guilty to conspiracy and securities fraud on October 10, 2002).

On July 13, 2005 Bernard Ebbers received a sentence of imprisonment for 25 years. At that time, Ebbers was 63 years old. On September 26, 2006, Ebbers surrendered himself to the Federal Bureau of Prisons prison at Oakdale, Louisiana, the Oakdale Federal Corrections Institution to begin serving his sentence. During March 2005, 16 of WorldCom's 17 former underwriters reached settlements with the investors. During December 2005, MCI joined Microsoft Corporation by providing Windows Live Messenger customers "Voice Over Internet Protocol" (VoIP) service to make telephone calls. This was MCI's last new product—- called "MCI Web Calling". This product was renamed "Verizon Web Calling", after the merger.

Corporate governance Failure

In 2002, when world’s second largest telecom giant WorldCom filed for bankruptcy at federal court in Manhattan, United States witnessed one of the largest accounting frauds in history. Former CEO of WorldCom, Mr. Bernie Ebbers was held responsible for orchestrating the USD 11 billion accounting fraud and sentenced to 25 years in federal prison on July 13, 2005. WorldCom fiasco is a clear case of corporate governance failure. How could a fraud of such enormity go unnoticed by the Board of Directors at WorldCom? What happened to industry watchdogs? In WorldCom’s case, most of the deviations from proper corporate behaviour resulted from the failure of Board of Directors to recognize and effectively deal with the aftermaths of “greed culture”.

WorldCom’s former CEO Bernie Ebbers’ desire to build and protect his personal wealth was the driving factor behind the fraud. For this reason, he had to show continually growing net worth in order to avoid margin calls on his own WorldCom stock that he had pledged to secure loans [1]. While probing this enormous failure in corporate governance and what could have been done to evade it, we came across an interesting document entitled "Report of Investigation" dated March 31, 2003. This Report was prepared for, among others, the Federal Bankruptcy Court overseeing WorldCom case [1]. From the report, we have drawn various points to understand the corporate governance failure at WorldCom.

Accounting Misstatements

WorldCom made major accounting misstatements that hid the increasingly perilous financial condition of the company. The Report described the accounting tomfoolery as follows: "... As enormous as the fraud was, it was accomplished in a relatively mundane way: more than $9 billion in false or unsupported accounting entries were made in WorldCom's financial systems in order to achieve desired reported financial results.”

Drivers of the fraud

The motivating factor behind this fraud was the business strategy (personal) of WorldCom's CEO, Bernie Ebbers. Here was a man who put his personal gain above organization’s growth. In the 1990s, Ebbers wanted to achieve spectacular growth through a series of acquisitions. But, there was a catch – He did NOT have the necessary resources to fund his acquisition binge. So, he used WorldCom stocks to accomplish his shopping (acquisition) spree. But, the most important thing was, WorldCom stock had to continually increase in value to be of any use to Ebbers personal agenda. He felt the need to prove ever-growing revenue and income. His only option to accomplish this end was financial gimmickry. However, he faced the age-old problem which all conmen face – It is difficult to sustain deception in the long run!

Complicating Ebbers' circumstances was an industry-wide slump in telecommunications. During this time, Wall Street had continuing expectations of double-digit growth for WorldCom. After all, they had accomplished so much in such a relatively short period of time. But, WorldCom needed time to learn managing the new businesses it had acquired. To continue on the path of double digit growth, WorldCom had to consolidate the acquired businesses and turn them into money minting machines. However, Ebbers did not have the backbone to stand up and accept that WorldCom needed time. Instead he went ahead and presented Wall Street what it expected from WorldCom – Ever-growing revenues and income even when in reality none existed. He fudged the company books and met Wall Street’s expectations.

Another major reason motivating this fraud was Ebbers' very obvious aspiration to build and guard his personal financial situation. For this reason, he had to show continually growing net worth in order to avoid margin calls on his own WorldCom stock that he had pledged to secure loans [1]. He did that.

While most of the reports blame Ebbers for the entire episode, the Board of Directors are not blameless. WorldCom supported revisionist model of Corporate Governance – though the Board reigns (de jure), the imperial CEO rules (de facto). WorldCom’s corporate governance failure resulted in the following:

* Company filed for bankruptcy
* CEO was sentenced to 25 years of imprisonment
* Shareholders saw their shares become useless
* Lenders were strained to take losses on their loans
* Employees lost jobs

Court Ordered Fix

The Bankruptcy Court directed the newly constituted Board of Directors and the newly appointed Corporate Monitor to fix this horrible example of corporate failure. The measures suggested..,

* A corporate culture of openness, in which ethical conduct is encouraged and expected, as exemplified by the ethics pledge that the Company and the Corporate Monitor have developed and that senior management has signed * A corporate culture in which the counsel of lawyers is sought and valued; * Formalized and well-documented policies and procedures, including a clear and effective channel through which employees can raise concerns or report acts of misconduct

References:
1. http://www.referenceforbusiness.com/history2/10/MCI-WorldCom-Inc.html#ixzz2IriwULfD 2. http://en.wikipedia.org/wiki/MCI_Inc.
3. http://www.fundinguniverse.com/company-histories/mci-worldcom-inc-history/ 4. http://www.washingtonpost.com/wp-dyn/articles/A49156-2002Jun26.html 5. http://www.ecommercetimes.com/story/45542.html

6. http://www.sec.gov/Archives/edgar/data/723527/000093176303001862/dex991.htm 7. http://www.frontlineonnet.com/fl1915/19150810.htm
8. http://www.guardian.co.uk/business/2002/aug/09/corporatefraud.worldcom2 9. http://www.nytimes.com/2002/07/22/us/worldcom-s-collapse-the-overview-worldcom-files-for-bankruptcy-largest-us-case.html 10. http://voices.yahoo.com/worldcom-scandal-look-back-one-biggest-225686.html?cat=3 11. http://www.nytimes.com/2002/07/22/us/worldcom-s-collapse-the-overview-worldcom-files-for-bankruptcy-largest-us-case.html 12. http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=3&cad=rja&ved=0CDkQFjAC&url=http%3A%2F%2Fmoney.cnn.com%2F2005%2F03%2F15%2Fnews%2Fnewsmakers%2Febbers%2F&ei=yOkAUZbcKcbirAeVwIC4BA&usg=AFQjCNHSfWmXHV-ryl3POQ1NU_MMYLmvjA&bvm=bv.41524429,d.bmk 13. http://www.nytimes.com/2002/07/22/us/worldcom-s-collapse-the-overview-worldcom-files-for-bankruptcy-largest-us-case.html 14. http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=3&cad=rja&ved=0CDkQFjAC&url=http%3A%2F%2Fmoney.cnn.com%2F2005%2F03%2F15%2Fnews%2Fnewsmakers%2Febbers%2F&ei=yOkAUZbcKcbirAeVwIC4BA&usg=AFQjCNHSfWmXHV-ryl3POQ1NU_MMYLmvjA&bvm=bv.41524429,d.bmk