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MCI, Inc. (formerly WorldCom and MCI WorldCom) was a telecommunications company. For a time, it was the second-largest long-distance telephone company in the United States, after AT&T. WorldCom grew largely by acquiring other telecommunications companies, including MCI Communications in 1998, and filed for bankruptcy in 2002 after an accounting scandal, in which several executives, including CEOBernard Ebbers, were convicted of a scheme to inflate the company's assets. In January 2006, the company, by then renamed MCI, was acquired by Verizon Communications and was later integrated into Verizon Business.
In 1989, it became a corporation as a result of a merger with Advantage Companies Inc.[4] The company name was changed to LDDS WorldCom in 1995, and it relocated to Clinton, Mississippi.
WorldCom's first major acquisition was in 1992 with the $720 million acquisition of Advanced Telecommunications Corporation, outbidding larger rivals Sprint Corporation and AT&T to secure the deal, making WorldCom a larger player in the telecoms market.[5]
Other acquisitions included: Metromedia Communication Corp. and Resurgens Communications Group in 1993,[6] IDB Communications Group, Inc (1994), Williams Technology Group, Inc. (1995), and MFS Communications Company (1996), and MCI in 1998. The acquisition of MFS included UUNET Technologies, Inc., which had been acquired by MFS shortly before the merger with WorldCom. In February 1998, WorldCom acquired CompuServe from its parent company H&R Block. WorldCom then retained the CompuServe Network Services Division, sold its online service to America Online, and received AOL's network division, ANS. WorldCom acquired the corporate parent of Digex, Intermedia Communications in June 2001 and then sold all of Intermedia's non-Digex assets to Allegiance Telecom.
MCI acquisition
MCI WorldCom logo (1998–2000)
On November 4, 1997, WorldCom and MCI Communications announced a $37 billion merger to form MCI WorldCom, making it the largest corporate merger in U.S. history. On September 15, 1998, the merger was consummated, forming MCI WorldCom. MCI divested itself of its "internetMCI" business to gain approval from the United States Department of Justice.[7]
Proposed Sprint merger
WorldCom logo (2000–2003)
On October 5, 1999, Sprint Corporation and MCI WorldCom announced a $129 billion merger. Had the deal been completed, it would have been the largest corporate merger in history. The merged company would have surpassed AT&T as the largest communications company in the United States. However, the deal floundered due to opposition from the U.S. Department of Justice and the European Union on concerns that it would create a monopoly. On July 13, 2000, the boards of directors of both companies terminated the merger. Later that year, MCI WorldCom renamed itself "WorldCom".[8]
Between September 2000 and April 2002, the board of directors of WorldCom authorized several loans and loan guarantees to CEO Bernard Ebbers so that he would not have to sell his WorldCom shares to meet margin calls as the share price plummeted during the bursting of the dot-com bubble. By April 2002, the board had lost patience with these loans. Directors also believed that Ebbers did not seem to have a coherent strategy after the Sprint merger collapsed. On April 26, the board voted to ask for Ebbers' resignation. Ebbers formally resigned on April 30, 2002 and was replaced by John W. Sidgmore, former CEO of UUNET. As part of his departure, Ebbers's loans were consolidated into a single $408.2 million promissory note.[9][10][11]:216–218 In 2003, Ebbers defaulted on the note and WorldCom foreclosed on many of his assets.[12]
Beginning modestly during mid-1999 and continuing at an accelerated pace through May 2002, Ebbers, CFO Scott Sullivan, controller David Myers and general accounting director Buford "Buddy" Yates used fraudulent accounting methods to disguise WorldCom's decreasing earnings in order to maintain the company's stock price.[12]
The fraud was accomplished primarily in two ways:
Booking "line costs" (interconnection expenses with other telecommunication companies) as capital expenditures on the balance sheet instead of expenses.
Inflating revenues with bogus accounting entries from "corporate unallocated revenue accounts".
In June 2002, a small team of internal auditors at WorldCom led by division vice president Cynthia Cooper and senior associate Eugene Morse worked together, often at night and secretly, to investigate and reveal what was ultimately discovered to be $3.8 billion worth of fraudulent entries in WorldCom's books.[13][14] The investigation was triggered by suspicious balance sheet entries discovered during a routine capital expenditure audit. Cooper notified the company's audit committee and board of directors in June 2002. The board moved swiftly, forcing Myers to resign and firing Sullivan when he refused to resign. Arthur Andersen withdrew its audit opinion for 2001.[11]:223–264 Cooper and her team had exposed the largest accounting fraud in American history, displacing the fraud uncovered at Enron less than a year earlier. It would remain the largest accounting fraud ever uncovered until the exposure of Bernard Madoff's giant Ponzi scheme in 2008.
The fraud came to light just days after Andersen was convicted of obstruction of justice in the Enron scandal, a verdict that effectively put Andersen out of business. In his post-mortem of the Enron scandal, Conspiracy of Fools, journalist Kurt Eichenwald argued that Andersen's failure to uncover WorldCom's deceit would have brought Andersen down even if it had escaped the Enron fraud unscathed.[16]
Bankruptcy
On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection in the largest such filing in United States history at the time (overtaken by the bankruptcies of both Lehman Brothers and Washington Mutual in a span of eleven days during September 2008). The WorldCom bankruptcy proceedings were held before U.S. Federal Bankruptcy Judge Arthur 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 were originated by referral from Gonzalez or the Department of Justice lawyers. By 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.[17]
Even before then, however, employees from the MCI side of the merger had taken over top executive posts, while many longtime executives from the old WorldCom were pushed out. In late 2002, the company began moving most of its operations to its campus in Ashburn, which had opened in 2000. Capellas, for instance, spent most of his time in Northern Virginia. After the name change, one executive from the old MCI said, "We're taking our company back." Another wrote in an email, "My company was not founded in a motel coffee shop."[11]:320
In May 2003, in a controversial deal, the company was given a $45 million no-bid contract by the United States Department of Defense to build a cellular phone service in Iraq as part of the U.S.-led reconstruction effort despite the fact that the company was not known for its expertise in building wireless networks.[20][21]
WorldCom agreed to pay a civil penalty of $2.25 billion to the U.S. Securities and Exchange Commission. The deal was approved by federal judge Jed Rakoff in July 2003.[22] 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 with 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".[23]
Post-bankruptcy
Bernard Ebbers
The company emerged from bankruptcy in 2004 with about $5.7 billion in debt and $6 billion in cash. About half of the cash was intended to pay various claims and settlements. Previous bondholders ended up being paid 35.7 cents on the dollar, in bonds and stock in the new MCI company. The previous stockholders' stock was cancelled.[24]
It had yet to pay many of its creditors, who had waited for two years for a portion of the money owed. Many of the small creditors included former employees, primarily those who were dismissed during June 2002 and whose severance and benefits were withheld when WorldCom filed for bankruptcy.
Citigroup settled with Worldcom investors for $2.65 billion on May 10, 2004.[25] In March 2007, 16 of WorldCom's 17 former underwriters reached settlements with investors.[26]
On March 15, 2005, Bernard Ebbers was found guilty of all charges and convicted of fraud, conspiracy and filing false documents with regulators—all related to the $11 billion accounting scandal. Other former WorldCom officials charged with criminal penalties in relation to the company's financial misstatements include 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),[27] former controller David Myers (pleaded guilty to securities fraud, conspiracy to commit securities fraud, and filing false statements on September 27, 2002),[28] former accounting director Buford Yates (pleaded guilty to conspiracy and fraud charges on October 7, 2002),[29] and former accounting managers Betty Vinson and Troy Normand (both pleading guilty to conspiracy and securities fraud on October 10, 2002).[30]
On July 13, 2005, Bernard Ebbers received a sentence that would have kept him imprisoned for 25 years. At time of sentencing, 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 Correctional Institution, to begin serving his sentence; he was released in late 2019 for health reasons and died in February 2020, after serving 13 years of his sentence.[31]
In December 2005, Microsoft announced a partnership with MCI to provide Windows Live Messenger customers voice over IP service to make telephone calls—called "MCI Web Calling".[32] After the merger with Verizon, this product was renamed "Verizon Web Calling".
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional companies. Before its bankruptcy on December 2, 2001, Enron employed approximately 20,600 staff and was a major electricity, natural gas, communications, and pulp and paper company, with claimed revenues of nearly $101 billion during 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive years.
Andrew Stuart Fastow is an American convicted felon and former financier who was the chief financial officer of Enron Corporation, an energy trading company based in Houston, Texas, until he was fired shortly before the company declared bankruptcy. Fastow was one of the key figures behind the complex web of off-balance-sheet special purpose entities used to conceal Enron's massive losses in their quarterly balance sheets. By unlawfully maintaining personal stakes in these ostensibly independent ghost-entities, he was able to defraud Enron out of tens of millions of dollars.
Arthur Andersen LLP was an American accounting firm based in Chicago that provided auditing, tax advising, consulting and other professional services to large corporations. By 2001, it had become one of the world's largest multinational corporations and was one of the "Big Five" accounting firms. The firm collapsed by mid-2002, as details of its questionable accounting practices for energy company Enron and telecommunications company WorldCom were revealed amid the two high-profile bankruptcies. The scandals were a factor in the enactment of the Sarbanes–Oxley Act of 2002.
Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices, but deviate from the spirit of those rules with questionable accounting ethics—specifically distorting results in favor of the "preparers", or the firm that hired the accountant. They are characterized by excessive complication and the use of novel ways of characterizing income, assets, or liabilities, and the intent to influence readers towards the interpretations desired by the authors. The terms "innovative" or "aggressive" are also sometimes used. Another common synonym is "cooking the books". Creative accounting is oftentimes used in tandem with outright financial fraud, and lines between the two are blurred. Creative accounting practices are known since ancient times and appear world-wide in various forms.
MCI Communications Corporation was a telecommunications company headquartered in Washington, D.C. that was at one point the second-largest long-distance provider in the United States.
UUNET Technologies, Inc., formerly UUNET Communications Services, was an American commercial Internet service provider. Founded in 1987, it was one of the first and largest commercial ISPs and one of the early Tier 1 networks. It was based in Northern Virginia. Today, UUNET is an internal brand of Verizon Business.
Bernard John Ebbers was a Canadian-American businessman and the co-founder and CEO of WorldCom. Under his management, WorldCom grew rapidly but collapsed in 2002 amid revelations of accounting irregularities, making it at the time one of the largest accounting scandals in the United States. Ebbers blamed his subordinates but was convicted of fraud and conspiracy. In December 2019, Ebbers was released from Federal Medical Center, Fort Worth, due to declining health, having served 13 years of his 25-year sentence, and he died just over a month later.
Jeffrey Keith Skilling is an American businessman who in 2006 was convicted of federal felony charges relating to the Enron scandal. Skilling, who was CEO of Enron during the company's collapse, was eventually sentenced to 24 years in prison, of which he served 12 after multiple appeals.
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Lernout & Hauspie Speech Products (L&H) was a Belgium-based speech recognition technology company, founded by Jo Lernout and Pol Hauspie, that went bankrupt in 2001 because of a fraud engineered by the management. The company was based in Ypres, Flanders, in what was later called Flanders Language Valley.
"The idiot defense" is a satirical term for a legal strategy where a defendant claims innocence by virtue of having been ignorant of facts of which the defendant would normally be expected to be aware. Other terms used for this tactic include "dumb CEO defense", "dummy defense", "ostrich defense", "Ken Lay defense", and "Sergeant Schultz defense". The first known instance of the idiot defense was by John Henry Stafford, a lawyer in Jackson, Tennessee who was also known as Yankee John. He used it in the defense of Marlin Heady, a moonshiner. The charges were all, allegedly, dropped.
CUC (Comp-U-Card) International Inc. was a membership-based consumer services conglomerate with travel, shopping, auto, dining, home improvement and financial services offered to more than 60 million customers worldwide based in Stamford, Connecticut, US, and founded in 1973 by Kirk Shelton and Walter Forbes. In 1998, it became involved in a Securities and Exchange Commission investigation into what, at the time, was the biggest accounting scandal in corporate history.
Cynthia Cooper is an American accountant who formerly served as the Vice President of Internal Audit at WorldCom. In 2002, Cooper and her team of auditors worked together in secret and often at night to investigate and unearth $3.8 billion in fraud at WorldCom which, at that time, was the largest corporate fraud in U.S. history.
Jed Saul Rakoff is a senior United States district judge of the United States District Court for the Southern District of New York.
The Enron scandal was an accounting scandal involving Enron Corporation, an American energy company based in Houston, Texas. When news of widespread fraud within the company became public in October 2001, the company filed for bankruptcy and its accounting firm, Arthur Andersen—then one of the five largest audit and accountancy partnerships in the world—was effectively dissolved. In addition to being the largest bankruptcy reorganization in U.S. history at that time, Enron was cited as the biggest audit failure.
Qwest Communications International, Inc. was a United States telecommunications carrier. Qwest provided local service in 14 western and midwestern U.S. states: Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Texas, Utah, Washington, and Wyoming.
Accounting scandals are business scandals which arise from intentional manipulation of financial statements with the disclosure of financial misdeeds by trusted executives of corporations or governments. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets, or underreporting the existence of liabilities; these can be detected either manually, or by the means of deep learning. It involves an employee, account, or corporation itself and is misleading to investors and shareholders.
"Tone at the top" is a term that originated in the field of accounting and is used to describe an organization's general ethical climate, as established by its board of directors, audit committee, and senior management. Having good tone at the top is believed by business ethics experts to help prevent fraud and other unethical practices. The very same idea is expressed in negative terms by the old saying "A fish rots from the head down".
Gregory F. Rayburn is an American businessman. He formerly served as Chairman and CEO of Hostess Brands.
The WorldCom scandal was a major accounting scandal that came into light in the summer of 2002 at WorldCom, the USA's second-largest long-distance telephone company at the time. From 1999 to 2002, senior executives at WorldCom led by founder and CEO Bernard Ebbers orchestrated a scheme to inflate earnings in order to maintain WorldCom's stock price.
Cooper, Cynthia (2008). Extraordinary Circumstances: The Journey of a Corporate Whistleblower. Wiley. ISBN978-0-470-12429-1. A book by the former chief audit executive of Worldcom on the demise of the company.
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