A former attorney general appointed to investigate the accounting fraud that forced WorldCom Inc. to file the largest bankruptcy in U.S. history said in a third and final report released today the company has cause to sue former chief executive Bernie Ebbers and other former company executives.
Richard Thornburgh, who was appointed by the bankruptcy court as an independent examiner, said MCI, the former WorldCom, has the right to make claims against Ebbers for “awarding investment banking business … in return for lucrative financial favors,” and has cause to sue other former executives, including those who have pleaded guilty in connection with the multibillion dollar accounting fraud.
“The company is reviewing and considering the potential causes of action against outside parties discussed in the examiner’s report,” Stasia Kelly, executive vice president and general counsel of MCI, said in a statement today. “We were already in the process of evaluating many of the potential claims raised by the examiner as part of our own assessment, and will move forward with actions that we determine are appropriate, represent a prudent use of company resources and have a strong likelihood of a positive outcome.”
From mid-1996 to 2002, WorldCom paid Salomon and Salomon Smith Barney north of $100 million in investment banking business. The bank, meanwhile, allocated shares of telecom IPOs to Ebbers, through which he earned about $12 million in gross profits, according to the report. For example, Salomon allocated to Ebbers 200,000 shares in McLeod Inc. He invested $4 million, Thornburgh said, and realized profits of about $2.2 million when he sold the shares four months later.
The 542-page report also made accusations against Ebbers in relation to the more than $400 million in loans WorldCom granted its boss. In 2002, Ebbers provided the company’s compensation committee “misleading” and “inaccurate” information regarding his financial condition, according to the report.
In the report, Thornburgh also criticized KPMG for advising WorldCom to adopt a program that would provide tax savings. WorldCom likely avoided paying millions of dollars in state taxes based on questionable royalty programs, the report said.
“The examiner concludes that these royalty programs, which were based largely on KPMG’s advise, were not well conceived or implemented, and are vulnerable to challenge by various states.”
MCI has carefully reviewed KPMG’s involvement in the tax program and “concluded that the tax program recommended by KPMG in 1997 and 1998 was appropriate,” Kelly said. “As a result the company has no plans to pursue claims against KPMG.”
MCI plans to emerge from bankruptcy next month.
