After Bernie, Who's Next?

By Daren Fonda

Bernie Ebbers left no paper trail. He didn't like e-mail, preferring to give vague orders to subordinates, like telling his chief financial officer, Scott Sullivan, to "hit the numbers." According to Ebbers' trial lawyer, Reid Weingarten, there was no smoking gun, no hard evidence to implicate the former chief of WorldCom--a college dropout, Sunday-school teacher and small-town basketball coach--as the orchestrator of the largest accounting fraud in U.S. history. "You thought you could trust him," says Alex Bryant, an ex--WorldCom sales manager in Springfield, Mo. Soon after WorldCom bought MCI, Bryant recalls, Ebbers addressed a group of employees and urged them to hang on to their company stock. "He was a great motivator, a great speaker," says Bryant. Ebbers also was desperate to keep WorldCom's share price afloat as telecom prices were collapsing, to the point that he presided over $11 billion in phony book entries.

At least that's how a Manhattan jury saw it, delivering a guilty verdict in Ebbers' fraud trial and handing the feds a major coup in their crackdown on corporate crime. Convicted of securities fraud, conspiracy and false regulatory filings, Ebbers, 63, is the highest-profile chief executive to be found guilty in the recent wave of accounting scandals. Under federal sentencing guidelines, he faces up to 85 years in prison, and even if he receives about 20 years, as some legal analysts predict, when he's scheduled to be sentenced in June, he could spend the rest of his life in prison. That's a bad omen for four other prominent execs facing criminal charges: Richard Scrushy, the former chief of HealthSouth being tried for fraud in Alabama; the top two Enron guys, Kenneth Lay and Jeffrey Skilling, scheduled for trials next year; and Dennis Kozlowski, accused of looting Tyco and being retried following a mistrial last year.

Perhaps most unsettling for CEOs in the hot seat is that Ebbers was convicted despite scant evidence connecting him to the crime. The prosecution's star witness, former CFO Sullivan, admitted in court to drug use, lying to WorldCom's board and filing false financial statements. Yet while most of the jurors didn't find Sullivan very credible, it was even less plausible that Ebbers would not have detected accounting fraud on such a massive scale right under his nose. As the jury heard, this was a man so obsessed with saving a buck that he sniffed out $18,000 in cost overruns in a $3 billion budget, fretted about coffee-filter expenses and wanted the bottled-water machine filled with tap water. Penny pinching like that had made him a cult hero on Wall Street--and an improbable dupe to a jury.

Ebbers' conviction reflects a new calculus for corner-office occupants: that corporate crime may finally equate to lengthy prison terms. Many of the most notorious white collar villains of a generation ago received light sentences compared with what Ebbers faces. Junk-bond king Michael Milken, for instance, served only 22 months for securities fraud. Now CEOs must recognize the risks of an "I didn't know" defense and face the prospect of monumental consequences to go along with their monumental pay packages. That Ebbers lost hundreds of millions himself in the WorldCom collapse--buying more stock even as the company imploded--did nothing to insulate him from the wrath of the jury.

For folks fleeced by Ebbers & Co., the penalties brought a measure of satisfaction. WorldCom's 2002 bankruptcy wiped out stock worth $180 billion at its peak. Employees like Bryant who had much of their retirement savings in company stock saw their investments wiped out. Bryant's stake dwindled from $39,000 to $4,000. (It's scant solace that WorldCom emerged from bankruptcy under the less tainted name of MCI, now a takeover target likely to fetch upwards of $8 billion from Qwest or Verizon.) WorldCom bond investors had a second reason to cheer when J.P. Morgan Chase agreed last week to pay $2 billion to settle investor claims, joining Citigroup and other Wall Street firms that had underwritten a WorldCom bond issue only about a year before the telecom went bust. With some $6 billion now pledged--the largest securities class-action settlement in U.S. history--bondholders may get back up to half the value of their lost investments. Meanwhile, investment banks have new motivation to scrutinize a company's books more closely before endorsing a bond issue for investors.

The question now is whether another WorldCom-like debacle could occur despite the safeguards enacted in its wake. No doubt, corporate boards are flexing more muscle in an effort to improve accountability of all sorts. Former Boeing chief Harry Stonecipher recently lost his job for having an affair with a company employee. Disney's Michael Eisner and Hewlett-Packard's Carly Fiorina lost their posts for poor performance, and AIG directors just forced out the firm's longtime chief, Maurice (Hank) Greenberg (see "Another Titan Takes a Tumble," above), as the company's legal woes mounted. WorldCom's collapse hit directors where it counted: their wallets. Last week 11 former directors agreed to pay $20 million of their own money to settle a class action by investors. "Any time you put a gun to directors' heads, you'll get them to exercise more oversight," says Columbia Law School professor John Coffee.

If shareholders' lawsuits aren't enough to scare execs straight, they also face a raft of new regulations. Under the Sarbanes-Oxley law, chief executives must now personally sign off on financial statements. Auditors are poking around with greater impunity, and public companies must certify that they're documenting and testing internal accounting procedures, resulting in "an unprecedented level of scrutiny" for investors, according to a recent report by Huron Consulting. Finally, more cops are on the beat. From a budget of just under $400 million in 2000, the Securities and Exchange Commission's haul this year is estimated to be $900 million, paying the salaries of an additional 1,000 accountants, lawyers and economists. No one expects those changes to eliminate corporate fraud entirely. But CEOs may no longer claim, like the old joke about the drunk driver who gets in a car crash, that they were sitting in the backseat. --With reporting by Barbara Kiviat/ New York

With reporting by Barbara Kiviat/ New York