2004_oct_dec_113_126

M A N A G E M E N TC A S E

describes a real-life situation faced, adecision or action taken by an individualmanager or by an organization at thestrategic, functional or operationallevels

WorldCom Inc.

Satish C Pandey and Pramod Verma

KEY WORDS

Organizational Decline

Corporate Governance

Ethical Leadership

Corrupt Behaviour

BREAKING NEWS!WorldCom Announces Intention to Restate 2001 and First Quarter 2002 FinancialStatementsCLINTON, Miss., June 25, 2002 –- WorldCom Inc. (Nasdaq: WCOM, MCIT) todayannounced that it intends to restate its financial statements for 2001 and the first quarterof 2002. As a result of an internal audit of the company’s capital expenditure accounting,it was determined that certain transfers from line cost expenses* to capital accountsduring this period were not made in accordance with the generally accepted accountingprinciples (GAAP). The amount of these transfers was $3.055 billion for 2001 and $797million for the first quarter of 2002. Without these transfers, the company’s reportedEBITDA would be reduced to $6.339 billion for 2001 and $1.368 billion for the firstquarter of 2002, and the company would have reported a net loss for 2001 and forthe first quarter of 2002.

The company promptly notified its recently engaged external auditors, KPMG LLP,and asked them to undertake a comprehensive audit of the company’s financialstatements for 2001 and 2002. The company also promptly notified Andersen LLP, whichhad audited the company’s financial statements for 2001 and reviewed such statementsfor the first quarter of 2002, upon discovering these transfers. On June 24, 2002, Andersenadvised WorldCom that in light of the inappropriate transfers of line costs, its auditreport on the company’s financial statements for 2001 as well as its review of thecompany’s financial statements for the first quarter of 2002 could not be relied upon.

The company will issue unaudited financial statements for 2001 and for the firstquarter of 2002 as soon as practicable. When an audit is completed, the companywill provide new audited financial statements for all the required periods. Also, WorldComis reviewing its financial guidance.

The company terminated Scott Sullivan, the Chief Financial Officer (CFO) andSecretary, and accepted the resignation of David Myers, the senior Vice President andController.

WorldCom notified the Securities and Exchange Commission (SEC) of these events.The Audit Committee of the Board of Directors retained William R McLucas of thelaw firm of Wilmer, Cutler & Pickering, the former Chief of the Enforcement Divisionof the SEC, to conduct an independent investigation of the matter. The same evening,WorldCom also notified its lead bank lenders of these events.

The expected restatement of operating results for 2001 and 2002 is not expectedto have an impact on the company’s cash position and will not affect WorldCom’scustomers or services. WorldCom has no debt maturing during the next two quarters.

“Our senior management team is shocked at these discoveries,” said John Sidgmorewho was appointed the WorldCom CEO on April 29, 2002. “We are committed to operatingWorldCom in accordance with the highest ethical standards.”

“I want to assure our customers and employees that the company remains viableand committed to a long-term future. Our services are in no way affected by this matterand our dedication to meeting customer needs remains unwavered,” added Sidgmore.“I have made a commitment to driving fundamental changes at WorldCom and thismatter will not deter the new management team from fulfilling our plans.”

* ‘Line costs represent the fees WorldCom paid to third party telecommunication network providersfor the right to access the third parties’ networks. Under GAAP, these fees must be expensed andcould not be capitalized.

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This press release sent out clear signals about thefinancial lapses and the serious accounting mis-demeanors in WorldCom. As the news broke out,

it triggered off the biggest crash in the history of US stockmarkets. Technology and telecom stocks were especiallyhit hard. The stock markets in other countries experi-enced similar repercussions. Nasdaq halted trading onWorldCom and MCI Group shares. WorldCom sharesfell as low as nine per cent before the halt. Citing thehighest degree of uncertainty in WorldCom’s ability torepay its outstanding debt of some $ 30 billion, Standard& Poor (S & P) lowered its long-term corporate creditrating on WorldCom Inc. to ‘CCC-‘ from ‘B+’.

The losers included banks, pension funds, mutualfunds, and other financial services firms including Bankof America, Citigroup, Deutsche Bank, J P Morgan Chase,and GE. On June 26, 2002, US Securities and ExchangeCommission (SEC) filed a civil fraud suit against World-Com and requested the court for an order to prevent thecompany from disposing off assets, destroyingdocuments, and making extraordinary payments to seniorofficers. It also issued an order to WorldCom for filinga sworn statement describing facts and circumstancesconcerning the matter under investigation.

These events had very strong impact on the USgovernment. Aftershocks were felt even in the WhiteHouse. On June 27, 2002, the US House Financial Ser-vices Committee asked WorldCom top executives Ber-nard Ebbers and Scott Sullivan and its investmentbanker’s telecom analyst, Jack Grubman to testify onJuly 8, 2002. The US House Energy and CommerceCommittee also issued a notice to seek documents for

its own probe. On June 27, 2002, WorldCom CEO, JohnSidgmore wrote a letter to President George Bush aboutthe actions taken by WordCom regarding irregularitiesin accounting practices. The Securities and ExchangeCommission declared in its statement: “The WorldComdisclosures confirm that accounting improprieties ofunprecedented magnitude have been committed in thepublic markets.” On June 28, 2002, the US district courtJudge, Jed S Rakoff, issued an order to WorldCom topreserve documents and assets and to appoint a corporatemonitor to keep an eye on WorldCom’s activities.

The company now found itself in a whirlpool ofproblems. With each coming day, the situation worsenedfurther. The chronology of events listed in Box 1 givesan indication about the debacle of WorldCom.

COMPANY BACKGROUND

Business

WorldCom was a pre-eminent global telecommunica-tions company (fourth ranked Fortune 500 company fortelecom sector as per Fortune magazine, April 12, 2002issue), operating in more than 65 countries. The com-pany had established itself as a local, network facilities-based competitor in more than 21 countries throughoutEurope, North and South America, and the Asia-Pacificregion. Telecommunications services in these countriesaccounted for three quarters of the $800 billion globalmarket. Its global network reach was more than 96,000route miles and included high-capacity connections tomore than 70,000 buildings. WorldCom’s core businessactivities are divided into two major segments:

Actions to Improve Liquidity and Operational PerformanceAs Sidgmore previously announced, WorldCom will continue its efforts to restructure the company to better position itself for futuregrowth. These efforts include:• Cutting capital expenditures significantly in 2002: We intend the capital expenditures of 2003 to be $2.1 billion on an annual

basis.• Downsizing workforce by 17,000: Primarily composed of discontinued operations, operations and technology functions, attrition

and contractor terminations, this is expected to save $900 million annually.• Selling a series of non-core businesses: Exiting the wireless resale business would save $700 million annually. The company

is also exploring the sale of other wireless assets and certain South American assets. These sales would reduce losses associatedwith these operations and allow the company to focus on its core businesses.

• Paying Series D, E, and F preferred stock dividends in common stock rather than cash, deferring dividends on MCI QUIPS,and discontinuing the MCI tracker dividend: This would mean a saving of approximately $375 million annually.

• Continuing discussions with the bank lenders.• Creating a new position of Chief Service and Quality Officer: This would help in keeping an eye focused on customer services

during the restructuring.“We intend to create $2 billion a year in cash savings in addition to any cash generated from our business operations,” said

Sidgmore. “By focusing on these steps, I am convinced that WorldCom will emerge a stronger, more competitive player.”

Press release from WorldCom Inc. issued on June 25, 2002.Source: www.worldcom.com

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WorldCom Group Operations

Business operations attributed to this group included:• Data services such as frame relay, asynchronous

transfer mode, and internet protocol networks.• Internet-related services including dedicated access,

virtual private networks (VPN), digital subscriberlines, website management, and web-enabled prod-ucts.

• Commercial voice services.• Design, implementation, and on-going management

of customer’s communications system.• International communications services.

The assets attributed to WorldCom group includedall its network assets (except voice switches and dial-up internet modems), cash, investments, buildings,furniture, fixtures and equipment, other intangible as-sets, and other long-term and current assets as well asgoodwill. The businesses attributed to the WorldComgroup accounted for 60.7 per cent of the total revenues,101.7 per cent of the net income, and 88.4 per cent ofthe total assets for the year 2001; and for the year 2000,

it accounted for 58.2 per cent of the total revenues,62.0 per cent of the net income, and 85.2 per cent of thetotal assets.

MCI Group Operations

This included a broad range of retail and wholesalecommunications services (long distance voice and datacommunications, consumer local voice communications,wireless messaging, private line services, and dial-upinternet access services). MCI provided retail servicesto consumers and small businesses in the US. Thebusinesses attributed to MCI group had significant assets,including voice switches, dial-up internet modems, thenationally recognized brand, extensive customerrelationships, 19 call centres with highly effective salesrepresentatives, and a tradition of developing innova-tive calling plans that enhance customer retention. Thebusinesses attributed to MCI group accounted for39.3 per cent of the total revenues, 1.7 per cent of the netincome and 13.4 per cent of the total assets for the year2001. And, for the year 2000, the MCI group accountedfor 41.8 per cent of the total revenues, 38.0 per cent of

Box 1: Events Leading to the Debacle of WorldCom

June 28, 2002: Angry US investors holding WorldCom bonds filed a class-section suit in a Federal Court in Mississippi broughton behalf of the bondholders by New York’s Wechsler Harwood Halebian and Feffer for actions acquired between April 26, 2001and June 25, 2002.

July 1, 2002: WorldCom said in a sworn statement to the SEC that its Audit Committee was reviewing its financial records for1999 through 2001 regarding ‘certain material reversals of reserve accounts.’ The company had received notice from some of itslenders saying that they could demand immediate repayment for defaulted loans. WorldCom also said it could be delisted from theNasdaq market on July 5. The company’s shares were resumed on the Nasdaq, opening at about eight cents.

July 3, 2002: A former SEC Chairman, Richard Breeden, was named by a New York judge as a corporate monitor to overseeWorldCom operations.

July 8, 2002: WorldCom Chairman, Bert Roberts, and CEO, John Sidgmore, submitted their statements before the Committee onFinancial Services, US House of Representatives, mentioning WorldCom’s commitment to investigate the accounting problem honestly.They also reported about the appointment of William McLucas, former Chief of Enforcement Division, SEC, to perform independentinvestigation of the case. WorldCom also submitted its revised statement to SEC. But, Ex-WorldCom officials — Former CEO, BernardEbbers, and CFO, Scott Sullivan — refused to testify to the US Congress about the company’s $ 3.84 billion accounting fraud.

July 9, 2002: WorldCom said its options both for external funding or reorganization are open.

July 11, 2002: WorldCom said it would not pay $ 71 million dividend to shareholders of MCI group common stock that was scheduledto be paid on July 15, 2002.

July 12, 2002: A group of 25 banks charged in a lawsuit that WorldCom defrauded them out of nearly $ 2.5 million six weeksbefore publicly disclosing a $4 billion accounting cover-up.

July 15, 2002: WorldCom missed $79 million in debt payments.

July 15, 2002: WorldCom moved to finalize a debtor-in-possession funding (DIP) pact that would give it money to operate underpossible bankruptcy reorganization. It assured to secure a DIP funding agreement from Citigroup, J P Morgan Chase, and GeneralElectric’s GE Capital financing arm.

July 16, 2002: Three California pension funds sued WorldCom, its former executives, and the banks involved in its May 2001 bondoffering, seeking to recover $318.5 million in investment losses.

July 17, 2002: New York district court ordered a freeze on $2.5 million of WorldCom’s assets. WorldCom was ordered not to sellany of its stocks for the next 70 days from this date. WorldCom also accepted this court order. This increased their chances offiling for bankruptcy. Standard&Poor further downgraded WorldCom’s debt to ‘D.’

July 21, 2002: Under Chapter 11 of the Bankruptcy Code in US District Court, WorldCom filed for protection of the southern districtof New York. The filing allowed WorldCom to continue operating while it worked out a plan to pay its debts. In the bankruptcy petition,WorldCom listed its assets worth $107 billion as on March 31, 2002, against the debt of $41 billion (A brief note on Chapter 11is given in Exhibit 1).


the net income, and 14.8 per cent of the total assets.A consolidated historical financial data for the period

1997-2001, as per the WorldCom Annual Report 2001 andFortune data on telecommunications industry (1997-2001),are given in Exhibit 2.

HISTORY

WorldCom’s history dates back to 1983 when MurrayWaldron and William Rector sketched out a plan tocreate a discount long-distance provider called LDDS(Long-Distance Discount Service). In 1985, BernardEbbers, one of the early investors, became the CEO ofLDDS. In 1989, LDDS became a public company byacquiring Advantage Companies Inc. and, in 1992, itmerged itself with another discount long-distance ser-vice company, Advanced Telecommunications Corp. Thechronology of events given in Box 2 indicates how Ebbers’strategy of mergers and acquisitions played an impor-tant role in expanding the business operations ofWorldCom globally and in the US.

After merger with MCI Communications Corp.,WorldCom got control over one of the most advanceddigital networks connecting local markets in the US tomore than 280 countries and locations worldwide. Byacquiring CompuServe Corp., WorldCom got controlover its interactive and network services; and acquisi-tion of Brooks Fiber Properties gave control to World-Com over the state-of-the-art fibre optic networks andother facilities owned by Brooks.

After these mergers, MCI WorldCom became thesixth ranked company in the Fortune telecommunica-tions industry rankings, published by Fortune in April1999, as against its 11th rank in 1998 rankings.

In August 1998, MCI WorldCom collaborated withEmbratel, the largest domestic long distance and inter-national telecommunications services provider in Brazil.In 1999, WorldCom and Sprint decided to go for mergerbut, in 2000, the regulatory bodies in the US and Europeobjected to it; and, as a result, WorldCom and Sprint had

to terminate their merger agreement. But, in 1999,WorldCom was successful in acquiring another TelecomCompany, SkyTel Communications.

On June 7, 2001, WorldCom shareholders approveda recapitalization involving the creation of two separate-ly traded tracking stocks — WCOM (reflecting the per-formance of WorldCom’s data, internet, internationaland commercial voice businesses) and MCIT (reflectingthe performance of WorldCom’s consumer, small busi-ness, wholesale long distance voice and data, wirelessmessaging, and dial-up internet access businesses). Afterrecapitalization, each share of the existing common stockwas changed into one share of the WorldCom group and1/25 of a share of MCI group stock. But, all shareholderswere approved as shareholders of a single companycalled WorldCom. WCOM and MCIT refer to tradingsymbols as quoted in Nasdaq National Market.

RISE AND FALL OF WORLDCOM

The accounting disaster did not happen overnight. Thecompany grew with a sky-rocketing pace through mergersand acquisitions and, in 1999, its CEO, Bernard Ebberswas rated as one of the 200 richest Americans with a$1.4 billion net worth. Although the company’s stockprices had been in continuous decline since the fourthquarter of 1998 (Tables 2A-2D, Exhibit 2); it was a surprisethat it retained its position amongst the top five com-panies in Fortune rankings for the telecommunicationsindustry published in 2000, 2001, and 2002 (Tables 3Ato 3E, Exhibit 2). When the internet bubble burst earlyin 2000, it took down many of WorldCom’s biggestcustomers. In 2000, the telecommunications industryacross the globe slowed down and WorldCom groupcompanies found themselves in heavy debt and ineffi-cient in generating enough revenues. The slide acceler-ated further after the European and the US regulatorsblocked the firm’s $129 billion acquisition of SprintCommunications in July 2000. In 2001, WorldCom’sacquisitions of Intermedia Communications (worth $ 5.8

Box 2: Events Leading to Worldcom’s Expansion

1993: LDDS acquired long-distance providers, Resurgens Communications Group and Metromedia Communications, in a three-waystock and cash transaction that created the fourth largest long-distance network in the US.

1994: LDDS acquired domestic and international communications network, IDB Communications Group Inc., in an all-stock deal.1995: LDDS acquired voice and data transmission company, Williams Telecommunications Group, for $2.5 billion cash and changed

its name to WorldCom.1996: WorldCom merged with MFS Communications Company which owned local network access facilities via digital fibre to optic

cable networks in and around major US and European cities, and UUNet Technologies, an internet access provider for businesses.1998: WorldCom completed three mergers: with MCI Communications ($40 billion) — the largest in history at that time, Brooks Fibre

Properties ($1.2 billion), and CompuServe ($1.3 billion). In 1998, WorldCom also acquired ANS Communications Inc. fromAmerica Online Inc. for approximately $ 500 million. After its merger with MCI, the new company was named as MCI WorldCom.

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billion) also came under the probe of Anti-trust divisionof the US Department of Justice and it was ordered tosell all its assets (worth $ 12 million) related to Inter-media Communications. As per the order of the Anti-trust Division, WorldCom decided to dispose off allassets related to Intermedia operations slowly by thethird quarter of 2002.

WorldCom was unconsciously moving on the pathof a disaster. In March 2002, SEC launched a probe intohow and why WorldCom had loaned Ebbers more than$400 million at the charitable interest rate of 2.15 percent. Ebbers used these loans to pay off his personalliabilities most of which were secured by his WorldComstocks. On April 26, 2002, the board met for the first timeto discuss the issue of Ebbers’s delay in providingcollateral for his loans. The dissatisfied board askedEbbers to resign from the company. The board agreedto settle Ebbers’ exit with a golden handshake worth $1.5million a year for life and restructuring of his personalloans. Ebbers resigned on April 30, 2002 and, the sameday, John Sidgmore took over as the new CEO. WhenEbbers resigned, the company was sinking under $28billion debt, a shivering stock at $ 1.79 as against its mid-99 peak of $64.50.

In April 2002, two major credit rating agencies, S&Pand Moody’s Investors Services cut WorldCom’s short-term and long-term ratings. That was when Sidgmoretook over and asked Cynthia Cooper, Vice President ofInternal Audit, to take a close look at WorldCom’s books.She found errors in the book-keeping and alerted theWorldCom board. On May 9, 2002, Moody’s cutWorldCom’s long-term ratings to junk status, citing thecompany’s deteriorating operating performance, debt,and expectations for further weakness. On May 13, 2002,S&P removed WorldCom from its S&P 500 index. Further,on May 15, WorldCom disclosed that it would drawdown a $ 2.65 billion bank credit line as it decided tonegotiate for a new $ 5 billion funding pact with itslenders. On May 21, 2002, WorldCom said it would scrapdividend payments and eliminate its two tracking stocks— WCOM (internet and data business) and MCI group(residential long-distance telephone business). On May23, 2002, WorldCom secured $1.5 billion in new fundingto replace a larger $ 2 billion credit line. On June 5, 2002,WorldCom disclosed its willingness to exit from thewireless resale business and also to cut down jobs furtherto reduce expenses and pay massive debts. On June 20,2002, Cynthia Cooper and her internal audit team met

with the audit committee and disclosed findings of in-appropriate ‘line cost transfers’ to capital accounts. WhenSullivan could not provide an adequate explanation forthese transactions, the board asked Sullivan and Myersto resign immediately or they would be fired. Myersresigned but Sullivan did not. Finally, on June 25, 2002,WorldCom fired Sullivan and declared its intention todiscard financial results for the year 2001 and first quarterof 2002 in the official press release.

CORPORATE CULTURE AT WORLDCOM

WorldCom’s fast-paced growth under the leadership ofEbbers developed an ‘individualistic culture,’ whereloyalty to people was appreciated and rewarded morethan the loyalty to the company. The company was beingrun by Ebbers and his close associates such as ScottSullivan, the CFO, and David Myers, the Controller. Theculture which was rooted from top to the bottom wasthat no one should question plans, decisions, and actionsof top bosses. After the bankruptcy disaster, the mediapublished many stories that revealed how honest peoplewere treated at WorldCom. The media disclosed aboutthe case of Steve Brabbs, Vice President (InternationalFinance and Control), WorldCom, London office. InJanuary 2002, Steve was told by David Myers to keephis mouth shut and stop questioning the company’sauditor, Arthur Andersen, about the company’s book-keeping practices.

According to the US House Financial Services Com-mittee spokesperson, Peggy Peterson, it was Steve Brabbswho had found an accounting entry in early 2000 thatreduced the company’s line costs by $33.6 million.According to Brabbs, that made WorldCom’s interna-tional figures look better. WorldCom later admitted thatanother $3.3 billion of reserves had been improperlymanipulated on its balance sheets and $500 million inincome was wrongly booked. Another top official ofWorldCom, Mark Willson, also told Brabbs that he wasnot following the correct protocol in dealing with issueshe raised with Andersen’s British representatives. Will-son said, “asset writedowns and other accounting de-terminations would be made by Andersen officials in theUnited States.” “All of this information needs to beproperly communicated between the UK AA and the USAA. At that point, if there is an issue that needs to beaddressed, we will work accordingly,” Willson said ina separate e-mail exchange. The US Financial ServicesCommittee had shown its serious concern over the issueof Steve Brabbs.


At WorldCom, most of the employees felt that theydid not have any outlet for expressing concerns aboutthe company’s policy and behaviour. Ebbers and Sul-livan rewarded those employees who had shown loyaltyto them by following their instructions and decisions,especially in finance, accounting, and investor relationsdepartments by special rewards, incentives, bonus, etc.The company’s HR department never objected to suchspecial rewards. Steve Brabbs was not alone; anotheremployee, Kim Emigh, Budget and Financial Analyst atWorldCom also witnessed first-hand the anger of exe-cutives when he questioned WorldCom’s practices. Evenwhen Cooper started a routine operational audit ofWorldCom’s capital expenditures in August 2001, Sul-livan asked Myers to restrict the scope of inquiry beingdone by Cooper. But, Cooper decided to go ahead alonewith her team and put her views before Sullivan, theAudit Committee, and the external auditor (ArthurAndersen) on several occasions. Ebbers and his closeassociates were so self-indulgent that they failed to seethe impact of their practices on people’s behaviour andcorporate culture at WorldCom. To understand relation-ships among various people in the company, a partialorganizational structure is given in Exhibit 3.

ROLES OF VARIOUS STAKEHOLDERS

Role of CEO

Bernard Ebbers, although not the founder of WorldCom,was the major force behind the transformation of a smallcompany LDDS into a global telecom giant — World-Com. In 1997, Ebbers was quoted by Fortune, “Our goalis not to capture market share or be global. Our goal isto be the No. 1 stock on Wall Street.” Ebbers was a firmbeliever of the notion that continuing revenue growthwas crucial to increasing WorldCom’s stock prices sothat stock could be used as currency for corporate ex-pansion through acquisitions. During his tenure from1985 to 2002, Ebbers orchestrated mergers with 75 com-panies including the biggest one with MCI. Ebbers wasalso described by the media as a risk-seeking, free-spending, over-zealous deal-maker whose accomplish-ments gained him tremendous respect. In 2001, Ebberswas at the top of Fortune’s list of ‘People to Watch 2001,’along with Mike Armstrong, CEO of AT&T. About hissuccess, Ebbers jokingly told Time reporter in 1997, “thething that helped me personally is that I don’t under-stand a lot of what goes on in this industry.”

Ebbers also had some other personal businessesbesides his full-time job as the CEO of WorldCom thatincluded hotels, real estate ventures, a Canadian cattleranch, timberlands, a rice farm, a luxury yacht buildingcompany, an operating marina, a lumber mill, a countryclub, a trucking company, and a minor league hockeyclub. Ebbers financed many of these businesses by com-mercial bank loans secured by his personal WorldComstock. When these stocks started declining in 2000, hereceived margin calls from his bankers and, in Septem-ber 2000, at his request, the Compensation Committeeapproved loans and guarantees from WorldCom to stopEbbers from selling his WorldCom stock to pay his bankloans. Later, by April 2002, these personal loans swelledup to $ 408 million and became the main cause of Ebbers’sexit from WorldCom.

Ebbers had been under scrutiny of the SEC and theUS government departments because of his mergers andtakeover strategy for a long time. In an interview to Timemagazine in July 2002, Mississippi Attorney General,Mike Moore, said that his office investigated Ebberswhen WorldCom was an upstart known as LDDS andhad found him playing loose with the rules. Ebbers’employees made a series of $200 campaign contributionsto a local politician and were illegally reimbursed by thecompany. In 1995, WorldCom pleaded guilty to a felonycharge and paid a $1,20,000 penalty. Moore also addedthat the evidence “showed that it was Bernie Ebbers whoasked those employees to write those cheques.”

Role of CFO

Besides Ebbers, the other person who enjoyed the atten-tion of media was the CFO of WorldCom, Scott Sullivan.Sullivan was also awarded the CFO Excellence Awardby the CFO magazine in 1998. At the age of 37, he wasearning $19.3 million a year. It was only he who designedstrategies to keep WorldCom’s revenue growth in double-digits as expected by Ebbers. But, when business starteddeclining in 2000, Sullivan decided to use accountingentries to achieve targeted performance. Sullivan and hisstaff used two main accounting tactics: accrual releasesin 1999 and 2000, and capitalization of line costs in 2001and 2002. He instructed David Myers, Controller andBuford Yates, Director, General Accounting, to handleany resistance from other managers in relation to thesetasks. Over a seven-quarter period between 1999 and2000, WorldCom released $ 3.3 billion of accruals mostlyat the direct request of Sullivan or Myers. Sullivan assured

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people who resisted his tactics (including TimothySchneberger, Director, International Fixed Costs, BettyVinson, Director, Management Reporting, and TroyNormand, Director, Legal Equity Reporting) that theywere not doing anything illegal and he would take fullresponsibility for their actions. Sullivan and Myerscontinuously pressurized Vinson and Normand totransfer ‘line costs’ to capital expenditures.

Sullivan, Stephanie Scott, David Myers, and MarkWilson instructed WorldCom staff about what informa-tion could or could not be shared with Andersen. Theywere asked to prepare special monthly reports forAndersen. Sullivan also manipulated the informationrelated to capital expenditures and line costs that werepresented to the board. About the role of Scott Sullivan,Ken Johnson, US House Energy and Commerce Com-mittee spokesperson, said in a public release on July 12,2002,”There is no question, absolutely none, that a numberof middle management people at WorldCom had a verygood idea that someone was cooking the books. It’s clearto us that they tried to get to the bottom of it only tobe rebuffed by Scott Sullivan.”

Role of Internal Auditor

Cynthia Cooper joined WorldCom (then LDDS) in 1994to start the internal audit department. Ebbers and histeam had little interest in this type of internal control.He even directed Cynthia never to use the word ‘internalcontrol’ for her department. At WorldCom, the role ofCooper’s department was to handle operational auditswhich set company budget standards and evaluateperformance. To verify the company’s financial reportwas, in fact, the concern of the independent auditor,Arthur Andersen.

In August 2001, Cooper began a routine operationalaudit of WorldCom’s capital expenditure. Sullivan in-structed Myers to restrict the scope of Cooper’s inquiry.Cooper’s team revealed that the corporate had capitalexpenditure of $2.3 billion as against $2.9 billion ofcapital expenditure of Operations and Technology Groupfor the entire network of WorldCom. Cooper asked forexplanation of capital expenditure of $2.3 billion, but shegot explanation only for $ 174 million; the remainingamount was attributed to line costs, corporate accruals,and lease buyouts.

In March 2002, the head of the Wireless BusinessUnit complained to Cooper about a $ 400 million accrualin his business for expected future cash payments and

bad debt expenses that had been transferred to pumpup company earnings. When Cooper approached An-dersen for an explanation, it supported these transfers.Later, Cooper put this issue before the Audit Committee;at this, Sullivan became furious and asked her to keepaway from such inquiries.

Cooper decided to go ahead with her team memberson inquiring ‘suspicious accounting entries in the com-pany records.’ After the Enron scandal, she had becomevery doubtful about the audit practices adopted byAndersen. In May 2002, her team disclosed before theAudit Committee how Sullivan’s ‘line cost’ tactics con-verted $662 million loss into $2.4 billion profit in the year2001. On June 11, 2002, Cooper met Sullivan who askedher to delay the capital expenditure audit until the thirdquarter of 2002. Cooper refused to comply with hisrequest. On this issue, Cooper along with her team, metthe heads of Audit Committee, Betty Vinson, BufordYates, and David Myers; but she could not get a satis-factory explanation from them. Her arguments forcedMyers to admit ‘inappropriate accounting entries incompany records.’ Later, Sullivan and Myers failed tojustify their decisions and actions before the AuditCommittee. The board asked them to resign. Myers choseto resign but Sullivan refused and he was fired by theboard from the position of CFO. Later, Cooper waschosen by the Time magazine as ‘the Person of the Year2002’ for her ethical work behaviour.

Role of External Auditors

Arthur Andersen had been WorldCom’s independentauditor from 1990 to 2002. Andersen considered World-Com to be its ‘flagship’ and most ‘highly coveted’ client,the firm’s ‘Crown Jewel.’ Between 1999 and 2001, An-dersen identified WorldCom as a ‘high risk’ client be-cause of volatility in the telecom industry, the compa-ny’s active mergers and acquisition plans, and its reli-ance on high stock price for acquisitions. But, theAndersen audit team on WorldCom ignored its ownassessment and rated WorldCom as a ‘moderate risk’client. Despite having its serious concerns over certainaccounting entries, Andersen reported in the auditcommittee meeting on February 6, 2002 that the balancesheets and income statements “present fairly, in allmaterial respects, the financial position of WorldCom… in conformity with accounting principles generallyaccepted in the United States.” In the Audit Committeemeeting held on March 6, 2002, Judith Areen, a member


of the WorldCom Audit Committee, asked a question,“If Andersen had to prepare WorldCom’s financialstatements again, would they be prepared in the sameway?” Kenny Avery, Andersen representative, replied‘Yes’ (Bobbit, 2002).

Role of the Board

Between 1999 and 2002, non-executive members com-prised more than 50 per cent of WorldCom’s Board ofDirectors. Although Bert Roberts, Jr., former CEO ofMCI, was the chairman from 1998 to 2002, his role wasmore of an honorary nature. Most of the board memberswere former owners, officers or directors of companiesacquired by WorldCom and included experts of law,finance, and telecom industry. Exhibit 4 gives detailedinformation about board members and board commit-tees. According to the investigative committee, theWorldCom’s Board was “distant and detached from theworking of the company.” It did not establish processesto encourage employees to contact outside directors aboutany concerns they might have had about accountingentries or operational matters.

The board took an active role for the first time inNovember 2000 when it came to know about Ebbers’srequest to grant him low-interest loans for paying offhis personal liabilities but the compensation committeepassed Ebbers’s proposal. The board also oversawAndersen’s comments over the company’s accountingentries in its audit committee meetings held on February6 and March 6, 2002. The audit committee reported,“There were no significant changes in accounting pol-icies in the current year… no significant or unusualtransactions or material transactions in controversial oremerging areas for which there is lack of authoritativeguidance or consensus. Regarding accounting problems,the board took an active stance only when Cynthia Cooperdisclosed her findings to the board in May 2002.

Role of Investment Bankers

In another disclosure on Monday, August 26, 2002,Citigroup stated that its investment banking unit, Salo-mon Smith Barney, allocated on average 6,400 shares toabout four WorldCom officers and directors starting inlate 1997. Its predecessor company, Salomon Brothers,had allocated an average of 1,01,500 shares, the firm saidin a letter to a US House of Representatives Committee.Those who purchased shares included the former CEO,Bernard Ebbers, former CFO, Scott Sullivan, current

WorldCom Chairman, Bert Roberts, and current BoardDirector Stiles Kellett, among others, according to docu-ments released by the US House Financial ServicesCommittee. They received shares in offerings rangingfrom Rhythms NetConnections, Williams Communica-tions Group, and rival long-distance telephone carrier,Qwest Communications International, to other indus-tries like United Parcel Service (UPS) and Kraft Foods.In the late 1990s through early 2000, technology IPOswere almost guaranteed to skyrocket in the open marketmeaning that investors who got in at their offer priceswould be likely to reap risk-free gains. Rhythms soaredmore than 200 per cent in its April 6, 1999 debut offeredat $21 and rose as high as $64 that day. UPS jumpedby 30 per cent to $65 from its initial price of $50.

All these companies later went bankrupt. The datasurrendered by Salomon’s parent, Citigroup, did notinclude information of when, if ever, the shares weresold and for how much.

Amongst executives who were allotted shares,Ebbers was the biggest recipient, getting 8,69,000 sharesfor about $17 million in 21 IPOs, between June 1996 andAugust 2000, including 2,05,000 shares of Qwest. Ebbersalso bought shares in several firms that went bankruptlater, including KPNQwest, Teligent, and MetromediaFiber Net as well as in other companies like UPS, JunoOnline Services Inc., and TyCom Inc. The company’sformer CFO, Scott Sullivan, and his wife Carla bought32,300 shares in nine IPOs for $6,80,350 from April 1996to March 2002 according to the documents. He was firedon June 25, 2002 for his role in the accounting scandal.The shares bought included 7,000 of Rhythms, 2,000 ofKraft, and 10,000 of Williams Communications.

This share allotment story raises a big questionmark about the role of Citigroup unit, Salomon SmithBarney and its telecom analyst, Jack Grubman, who usedto deal with WorldCom. Grubman was a star telecomanalyst at Salomon Smith Barney and he was paid $ 20million a year for covering the stocks of companies likeWorldCom that sent billions of dollars in investmentbanking business to Salomon. Grubman also came underthe scrutiny of US House Financial Committee for hisdeep involvement with WorldCom. He was also chargedof advising Ebbers on his takeover strategy. Grubmanwas also subpoenaed by the US House Financial Com-mittee Chairman, Mike Oxley, along with John Sidg-more, Scott Sullivan, and Bernard Ebbers to July 8, 2002hearing. Angry investors who had invested millions of

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Even today, the word ‘bankruptcy’ has negative connotations andit is unfortunately true that most people consider Chapter 11 tobe just a form of bankruptcy. In reality, however, the conventionalmeaning of the term ‘bankruptcy’ does not apply to Chapter 11.

Under Chapter 7 of the US Bankruptcy Code, the assets ofthe debtor are liquidated and the proceeds are distributed to creditors.Promptly upon the filing of a Chapter 7 petition, an interim trusteeis appointed to administer the debtor’s estate. For a corporate debtor,Chapter 7 merely provides a method to liquidate and distribute itsassets. A Chapter 7 petition is very similar to the concept of ‘filingfor bankruptcy’ in non-US countries.

Chapter 11, on the other hand, is unique to the US BankruptcyCode and provides the debtor a vehicle for operating its businessunder protection from its creditors while developing a plan forresolving its financial problems. In a successful Chapter 11 case,the debtor is able to have a plan of reorganization confirmed thatenables the debtor to operate successfully in the future free fromthe burdens that precipitated its Chapter 11 filing. In general, aChapter 11 plan is a contract among the parties in interest in thedebtor’s Chapter 11 case. If accepted by the requisite majoritiesof each class of affected creditors and equity owners and confirmedby the Bankruptcy Court, the plan is binding on all affected partieseven if they did not vote in favour of the plan. In certaincircumstances, a plan may be confirmed even if some (but notall) classes do not accept the plan.

Exhibit 1: A Note on Chapter 11

• Chapter 11 of the Bankruptcy Code is often used by a companythat has a fundamentally strong business and loyal customerbase to restructure its financial position and debts to strategicallystrengthen its businesses.

• Upon approval of a Chapter 11 plan by the court and afterconsummation of proposed transactions and payments in theplan, a company can emerge from Chapter 11. The plan isusually developed by the company in conjunction with itscreditors.

• There are clear differences between the definitions of bankruptcyin the US and overseas. Chapter 11 provides our US entitiesthe ability to restructure and shore up its financial arrangements.There is not a Chapter 11-equivalent for corporations outsidethe US. Outside the US, bankruptcy implies termination ofoperations without restructuring.

• The filing does not affect petitioner company’s operationsoutside of the US; as such it is business as usual for thesenon-US entities. Business will proceed as dictated by respectivecontracts and agreements.

• The petitioner company is prohibited by bankruptcy law frompaying any amounts due for services rendered and goodsdelivered prior to filing for bankruptcy on the petition date.Pre-Chapter 11 claims are paid at the conclusion of the Chapter11 case in accordance with the plan of reorganization thatwill be voted upon and subsequently approved by the court.

Source: www.worldcom.com/restructuringinformationdesk.

Exhibit 2: Overview of WorldCom’s Financial Data and its Position in the Telecommunications Industry

Table 1: Consolidated Historical Financial Data for the Year Ended December 31

(US$ million except per share data)

1997 1998 1999 2000 2001

Operating ResultsRevenues 7,643 17,617 35,908 39,090 35,179Operating income (loss) 982 (942) 7,888 8,153 3,514Income (loss) before cumulative effect of accounting change and extraordinary items 185 (2,560) 4,013 4238 1,501Cumulative effect of accounting change — (36) - (85) -Extraordinary items (3) (129) - - -Net income (loss) applicable to common shareholders 143 (2,767) 3,941 4088 1,384

Earnings (Loss) per Common ShareIncome(loss) before cumulative effect of accounting change and extraordinary items Basic 0.10 (1.35) 1.40 1.46 — Diluted 0.10 (1.35) 1.35 1.43 —Net income (loss) Basic 0.10 (1.43) 1.40 1.43 — Diluted 0.09 (1.43) 1.35 1.40 —

dollars on WorldCom stock on the basis of Grubman’sratings and lost their money filed lawsuits against himand Citigroup questioning the integrity of his research.Later, in August 2002, Grubman resigned from SalomonSmith Barney and the National Association of SecurityDealers started investigations on his ‘research.’

As on July 21, 2002, the CEO, John Sidgmore hada challenge to start the recovery process so that thecompany might emerge from bankruptcy after one year

(the time period granted under chapter 11 of US Bank-ruptcy Code). He needed to address the followingconcerns:

• What went wrong with WorldCom?

• Who were the people responsible for the debacle ofWorldCom? Could it have been avoided?

• What are the major challenges before the companynow and what should be done to recover from theorganizational disaster?

Contd.


WorldCom group proforma net income per share (1) Basic — — 0.81 0.88 0.48 Diluted — — 0.78 0.87 0.48MCI group proforma net income (loss) per share (1) Basic and Diluted — — 14.32 13.52 (0.20)Dividend declared per MCI group share — — — — 1.80Weighted average shares Basic 1,470 1,933 2,821 2,868 — Diluted 1,516 1,933 2,925 2,912 —Financial PositionTotal assets 24,400 87,092 91,072 98,903 103,914Long-term debt 7,811 16,448 13,128 17,696 30,038Subsidiary trust and other mandatorilyredeemable preferable securities — 798 798 798 1,993Shareholders’ investment 14,087 45,241 51,238 55,409 57,930

Table 2A: Performance of WorldCom Common Stock Before June 7, 2001 (US$)

Year First Quarter Second Quarter Third Quarter Fourth QuarterHigh Low High Low High Low High Low

1996 23.31 16.20 27.72 21.30 28.88 18.30 26.13 21.00

1997 27.88 21.70 32.97 21.20 37.75 29.80 39.88 28.50

1998 29.92 18.67 32.29 27.75 38.59 26.67 50.50 26.00

1999 62.83 46.00 64.50 53.54 60.92 47.92 61.33 44.04

2000 55.00 40.63 47.00 35.88 49.97 25.25 30.44 13.50

2001 23.50 14.25 21.52 17.25 - - - -

Table 2B: Performance of WorldCom Common Stock After June 7, 2001 (US$)

Year WCOM Group Stock MCIT Group StockHigh Low High Low

Third quarter (Starting June 7, 2001) 18.10 13.27 22.50 15.02

Third quarter 2001 15.90 11.50 17.22 11.00

Fourth quarter 2001 16.06 11.79 15.40 10.90

Table 2C: Performance of WorldCom Group Stock for the Period 1996-2001 (US$)

12/30/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01

WorldCom—WorldCom group stock 100.0 111.6 264.6 293.5 77.8 81.0

S&P 500 stocks 100.0 133.5 172.2 208.5 190.0 167.6

Nasdaq telecommunicationsstocks SIC 4800-4899 US and foreign 100.0 146.0 241.6 431.0 183.6 122.9

Note: These figures refer to cumulative shareholder returns indexed with the Centre for Research in Security Prices or CRSP.

Table 2D: Performance of MCI Group Stock (US$)

06/08/01 12/31/01

WorldCom—MCI group stock 100.0 76.6

S&P 500 stocks 100.0 88.1

Nasdaq telecommunications stocks SIC 4800-4899 US and foreign 100.0 76.9

Sources: 1. WorldCom Annual Report, 1999, 2001.2. WorldCom Proxy Statement April 2002 (available at www.worldcom.com).

1997 1998 1999 2000 2001

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Table 3: Fortune Data on Telecommunications Industry from 1997-2001 (Top Ten Companies)

(A) Year 2001 (Fortune, April 12, 2002)

Rank Company Revenues Profits Employees$Million % Change $Million % Change Number % Change

from 2000 from 2000 from 2000

1 Verizon Communications 67,190 4 389 (97) 247,000 (6) 2 AT&T 59,142 (10) 7,715 65 117,800 (29) 3 SBC Communications 45,908 (11) 7,242 (9) 193,420 (10) 4 WorldCom 35,179 (10) 1,501 (64) 85,000 (6) 5 Sprint 26,071 10 (1,401) (1,607) 83,700 (91) 6 BellSouth 24,130 (8) 2,570 (39) 87,875 (15) 7 Qwest Communications 19,743 19 (4,010) N/A 61,306 (9) 8 Comcast 9,674 18 609 (70) 37,000 6) 9 Alltel 7,599 8 1,067 (45) 23,955 (2)10 Nextel Communications 7,574 N/A -898 N/A 19,500 0)

(B) Year 2000 (Fortune, April 16, 2001)



1 AT&T 65,981 6 4,669 36 165,600 12 2 Verizon Communications 64,707 95 11,797 181 263,552 81 3 SBC Communications 51,476 4 7,967 (2) 215,552 5 4 WorldCom 39,090 5 4,153 3 90,000 17 5 BellSouth 26,151 4 4,220 22 103,918 8 6 Sprint 23,613 18 93 - 84,100 8 7 Qwest Communications 16,610 323 (81) (118) 66,984 570 8 COMCAST 8,219 32 2,022 90 35,000 36 9 Alltel 7,067 12 1,929 146 27,257 1210 Nextel Communications 5,714 72 (815) - 16,000 24

(C) Year 1999 (Fortune, April 17, 2000)



1 AT&T 62,391 16 3,428 (46) 147,800 37 2 SBC Communications 49,489 72 8,159 103 204,530 58 3 MCI WorldCom 37,120 110 4,013 - 77,000 0 4 Bell Atlantic 33,174 5 4,202 42 145,415 4 5 GTE 25,336 (1) 4,033 86 100,000 (17) 6 BellSouth 25,224 9 3,448 (2) 96,200 9 7 Sprint 19,930 16 (935) (326) 77,600 20 8 US West 13,182 6 1,342 (11) 58,772 7 9 Alltel 6,302 21 784 49 24,440 1410 Comcast 6,209 11 1,066 10 25,700 51

(D) Year 1998 (Fortune, April 26, 1999)



1 AT&T 53,588 1 6,398 38 107,800 (16) 2 Bell Atlantic 31,566 5 2,965 21 140,439 (0) 3 SBC Communications 28,777 16 4,023 173 129,850 10 4 GTE 25,473 10 2,172 (22) 120,000 5 5 BellSouth 23,123 12 3,527 8 88,450 9 6 MCI WorldCom 17,678 140 (2,669) (796) 70,000 245 7 Ameritech 17,154 7 3,606 57 70,525 (5) 8 Sprint 17,134 15 415 (56) 74,900 27 9 US West 12,378 - 1,508 - 54,483 -10 Tele Communications 7,351 (3) 1,508 - 32,000 (9)


(E) Year 1997 (Fortune, April 27, 1998)



1 AT&T 52,261 (29) 4638 (21) 128,000 2 2 Bell Atlantic 30,194 131 2455 30 141,000 125 3 SBC Communications 24,856 79 1474 (30) 118,340 92 4 GTE 23,260 9 2794 (0) 114,359 12 5 BellSouth 20,561 8 3261 14 81,000 (0) 6 MCI Communications 19,653 6 2 (100) 59,000 7 7 Ameritech 15,998 7 2296 8 74,359 12 8 US WEST 15,352 19 697 (41) 67,461 (3) 9 Sprint 14,874 4 953 (20) 51,000 610 Tele Communications 7,570 (6) (626) (325) N. A. -11 WorldCom 7351 64 384 - 20,300 56

Exhibit 3: Partial Organization Chart of WorldCom (As on June 25, 2002)

Source: Adapted from cases titled “Accounting Fraud at WorldCom” and “Behind Closed Doors at WorldCom: 2001.”

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The following information pertains to each director or nominee’sand each executive officer’s age, principal occupation, presentposition with, and the year in which each director was first electeda director (each serving continuously since first elected except asset forth otherwise). Unless indicated otherwise, each individual hasheld his or her present position for at least five years.James C Allen, 55, a nominee, has been a director of WorldComsince March 1998. Mr Allen is currently an investment director andmember of the general partner of Meritage Private Equity Fund,a venture capital fund specializing in the telecommunicationsindustry. He is the former Vice-Chairman and Chief Executive Officerof Brooks Fiber Properties where he served in such capacities from1993 until its merger with WorldCom in January 1998. He servedas President and Chief Operating Officer of Brooks Telecommuni-cations Corporation, a founder of Brooks Fiber Properties, from April1993 until it was merged with Brooks Fiber Properties in January1996. He serves as a director of Completel LLC, Xspedius, Inc.,Masergy, Inc., David Lipscomb University, and Family DynamicsInstitute.Judith Areen, 57, a nominee, has been a director of WorldComsince September 1998. Ms Areen has been Executive Vice-Presidentfor Law Center Affairs and Dean of the Law Center, GeorgetownUniversity, since 1989. She has been a Professor of Law, GeorgetownUniversity, since 1976.Carl J Aycock, 53, a nominee, has been a director of WorldComsince 1983. Mr Aycock served as Secretary of WorldCom from 1987to 1995 and was the Secretary and Chief Financial Officer of MasterCorporation, a motel management and ownership company, from1989 until 1992. Subsequent to 1992, he has been self employedas a financial administrator.Ronald R Beaumont, 53, who is an executive officer but not anominee, has been the Chief Operating Officer of the WorldComgroup since December 2000. From 1998 to December 2000, MrBeaumont served as the President and Chief Executive Officer ofWorldCom’s Operations and Technology unit. From December 1996to 1998, he was President of WorldCom Network Services, asubsidiary of WorldCom. He is a director of Digex, Incorporated,or Digex.Max E Bobbitt, 57, a nominee, has been a director of WorldComsince 1992. Mr Bobbitt is currently a director of Verso Technologies,Inc., and Metromedia China Corporation. From July 1998 to thepresent, he has been a telecommunications consultant. From March1997 until July 1998, he served as President and Chief ExecutiveOfficer of Metromedia China Corporation. From January 1996 untilMarch 1997, he was President and Chief Executive Officer of AsianAmerican Telecommunications Corporation which was acquired byMetromedia China Corporation in February 1997.Bernard J Ebbers, 60, a nominee, has been President and ChiefExecutive Officer of WorldCom since April 1985. Mr Ebbers hasserved as a director of WorldCom since 1983. He is a directorof Digex.Francesco Galesi, 71, a nominee, has been a director of WorldComsince 1992. Mr Galesi is the Chairman and Chief Executive Officerof the Galesi Group, which includes companies engaged in realestate, telecommunications and oil and gas exploration and production.He serves as a director of Keystone Property Trust.Stiles A Kellett, Jr., 58, a nominee, has served as a director ofWorldCom since 1981. Mr Kellett has been Chairman of KellettInvestment Corp. since 1995. He serves as a director of Netzee,Inc., Air2web, and Virtual Bank.Gordon S Macklin, 73, a nominee, has been a director of WorldComsince September 1998. Mr Macklin has been a corporate financialadvisor since 1992. From 1987 through 1992, he was Chairmanof the Hambrecht and Quist Group, an investment banking andventure capital firm. Previously, he was President of the NationalAssociation of Securities Dealers, Inc. from 1970 through 1987. He

also served as Chairman of the National Clearing Corporation (1970- 1975) and as a partner and member of the Executive Committeeof McDonald & Company Securities, Inc., where he was employedfrom 1950 through 1970. He serves on the boards of MartekBiosciences Corporation, MedImmune, Inc., Overstock.com,Spacehab, Inc., White Mountains Insurance Group, Ltd., and director,trustee or managing general partner, as the case may be, of 48of the investment companies in the Franklin Templeton Group ofFunds.Bert C Roberts, Jr., 59, a nominee, has been the Chairman ofthe Board and a director of WorldCom since September 1998. From1992 until September 1998, Mr Roberts served as Chairman ofthe Board of MCI Communications Corporation or MCI. He wasChief Executive Officer of MCI from December 1991 to November1996. He was President and Chief Operating Officer of MCI fromOctober 1985 to June 1992 and President of MCI TelecommunicationsCorporation, a subsidiary of MCI, from May 1983 to June 1992.He is a director of the News Corporation Limited, Valence Technology,Inc., CAPCure and Digex and is on the Board of Trustees at JohnsHopkins University.John W Sidgmore, 51, a nominee, has been the Vice-Chairmanof the Board and a director of WorldCom since December 1996.From December 1996 to September 1998, Mr Sidgmore served asChief Operations Officer of WorldCom. He was President and ChiefOperating Officer of MFS Communications Company, Inc. fromAugust 1996 until December 1996. He was Chief Executive Officerof UUNET Technologies, Inc. from June 1994 until October 1998,and President of UUNET from June 1994 to August 1996 and fromJanuary 1997 to September 1997. He is a director of MicroStrategyIncorporated.Scott D Sullivan, 40, a nominee, has been a director of WorldComsince 1996. Mr Sullivan has served as Chief Financial Officer,Treasurer, and Secretary of WorldCom since December 1994. Heis a director of Digex from November 1, 2000.Lawrence C Tucker, 59, became an advisory director of WorldCom.Mr Tucker served as a director of WorldCom from May 1995 untilNovember 1, 2000, and previously served as a director of WorldComfrom May 28, 1992 until December 1992. His compensation as anadvisory director is the same as that of a director. He has beena general partner of Brown Brothers Harriman & Co., a privatebanking firm, since 1979 and currently serves as a member of theSteering Committee of the firm’s partnership. He is also a directorof Riverwood Holding, Inc., National Healthcare Corporation, VAALCOEnergy Inc., US Unwired, Inc., Network Telephone, Xspedius, Inc.,Z-Tel Technologies, Inc. and Digex.Compensation and Stock Option Committee• Stiles A Kellett, Jr. (Chairman)• Max E Bobbitt• Gordon S Macklin• Lawrence C TuckerAudit Committee• Max E Bobbitt, (Chairman)• James C Allen• Judith Areen• Francesco GalesiIndependent Public Accountants: Arthur Andersen LLPAs per supplement to proxy statement released on May 20, 2002,people holding important portfolios in the Board of Directors were:• John W Sidgmore: President and Chief Executive Officer• Scott D Sullivan: Executive Vice-President and Chief Financial

Officer• Ronald R Beaumont: Chief Operating Officer (WorldCom and

MCI group operations)• Bert C Roberts: Chairman, Board of DirectorsIndependent Public Accountants: KPMG LLPAs per annual meeting proxy statement released on April 22, 2002.

Exhibit 4: Information about Nominees and Executive Officers in the Board of WorldCom (As per Annual MeetingProxy Statement released on April 22, 2002)

Source: www.worldcom.com


BIBILIOGRAPHYThis case draws extensively from the following sources:

Internet Sources

Official website of WorldCom Inc., (www.worldcom. com,now changed to www.mci.com)“Why WorldCom will Thrive,” a Published Document for

the General Public, 2002, available on Worldcom website.WorldCom Annual Report 2001, available on WorldCom

website.Official website of US Security and Exchange Com- mission,

for legal documents related to the WorldCom bankruptcyfiling, (www.sec.gov).

The Times of India, (available at, www.timesofindia.indiatimes.com).

“Chronology of WorldCom Death Foretold,” The Times ofIndia, July 22, 2002.The Economic Times, (available at www.economictimes.indiatimes.com).

“WorldCom Aftershock: Markets Go into a Tailspin, DollarPlunges” and “Another Scam: WorldCom Owns Up To$ 4-bn Fraud,” The Economic Times, June 27, 2002.

“Top WorldCom Events from 1983 to Present,” The EconomicTimes, June 27, 2002.

“WorldCom Exec was Told to Stop Questioning Auditors,”The Economic Times, August 27, 2002.

“WorldCom Workers told to Keep Quiet,” The EconomicTimes, August 28, 2002.

“WorldCom Brass Got IPO Shares Free, Admits Citigroup,”The Economic Times, August 28, 2002.

“Ex-WorldCom’s Exec Got Big IPO Shares,” The EconomicTimes, August 28, 2002.The Reuters, (www.reuters.com,, main resource for newsitems available on The Times of India and The EconomicTime” also).

“More at WorldCom Knew of Accounting Issue: US Panel,”Reuters, July 12, 2002.

Published Sources

Beresford, D R; Katzenbach, N deB and Rogers, C B Jr(2003). “Report of Investigation,” Special InvestigativeCommittee of Board of Directors of WorldCom Inc.,March 31.

Bobbit, M (2002). Minutes of the Regular Meeting of theAudit Committee of the Board of Directors of WorldComInc. March 6 (as cited in “Behind Closed Doors atWorldCom:2001,” Issues in Accounting Education,February, 115).

Charan, R; Useem, J and Harrington, A (2002). “WhyCompanies Fail,” Fortune (Asia), May 27, 50-58.

Gasparino, C and Craig, S (2002). “Salomon’s GrubmanResigns; NASD Finds ‘Spinning’ at Firm,” Wall StreetJournal-240 (34),

Kaplan, R S and Kiron, D (2004). “Accounting Fraud atWorldCom,” HBR Case 9-104-971, Boston, MA: HarvardBusiness School Publishing.

Kadlec, D (2002). “WorldCom: The Fall of a TelecomTitan,” Time, July 8.

Padgett, T and Baughn, A J (2002). “The Rise and Fall ofBernie Ebbers,” Time, May 13, 54-55.

Ripley, A (2003). “The Night Detective,” Time, December–January, 44-49.

Reeves, G (2002). “Accounting for Anguish,” Fort WorthWeekly Online, May 16.

Zekany, K. E; Braun, L W and Warder, Z T (2004). “BehindClosed Doors at WorldCom:2001,” Issues in AccountingEducation, 19 (1), February.

“Fortune 500 Ratings 1998,” Fortune , April 27, (fortelecommunications industry)

“Fortune 500 Ratings 1999,” Fortune, April 26.“Fortune 500 Ratings 2000,” Fortune, April 17.“Fortune 500 Ratings 2001,” Fortune, April 16.“Fortune 500 Ratings 2001,” Fortune, April 15.

Acknowledgement • The authors sincerely acknowledge ProfSridhar Chari, Visiting Professor (Finance), MICA, Dr Seema Gupta,Assistant Professor (Marketing Management), MICA, Prof AtulTandan, Professor (Marketing Management) and Director, MICAand Dr Rishikesha Krishnan, Professor (Corporate Strategy), IIM,Bangalore for their valuable comments and suggestions indeveloping and modifying this case.

Satish C Pandey is currently working with Mudra Institute ofCommunications, Ahmedabad (MICA) as Assistant Professor inOrganizational Behaviour area. He is a Ph. D. in Psychology fromGurukul Kangri Vishwavidyalaya, Haridwar. He has publishedpapers on topics like stress management, personality, organi-zational learning, etc. His current areas of interests are stress mana-

gement, personality, organizational culture, learning organizations,organizational transformation and corporate governance.e-mail: [email protected]

Pramod Verma is a retired professor from Indian Institute ofManagement, Ahmedabad. He had been associated with PersonnelManagement and Industrial Relations area at IIMA. He is a Ph.D.in Economics from University of Manchester, UK. He has publisheda number of papers in refereed national and international journals.He is currently associated with Idea Foundation, Gandhi LabourInstitute, Ahmedabad and various other academic bodies ashonorary professor. His areas of interests are human resourcemanagement, organizational transformation, and corporategovernance.

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