- The Washington Times - Friday, August 2, 2002

Federal agents arrested two former WorldCom Inc. executives yesterday on charges of securities fraud, purportedly for hiding the company's losses from investors through a $3.8 billion accounting scam.
The Justice Department's quickest and most high-profile move against corporate crime to date comes five weeks after the telecommunications giant revealed the massive accounting deception in an announcement that rocked the markets and prompted the rapid enactment of anti-fraud legislation in Congress.
"Corrupt corporate executives are no better than common thieves whenever they betray their employees and steal from investors," said Attorney General John Ashcroft in announcing the charges against former WorldCom Chief Financial Officer Scott D. Sullivan and former Controller David F. Myers.
Mr. Ashcroft said that although putting corporate lawbreakers in jail cannot restore the trillions of dollars investors already have lost to accounting fraud, it will restore the integrity of the financial markets and "protect the savings and pensions of Americans" from further erosion at the hands of self-interested executives.
The stock market last month sunk to its lowest levels in five years in the wake of WorldCom's announcement and other accounting-fraud revelations at Enron Corp., Global Crossing Inc. and other major companies.
Many on Wall Street have been calling for aggressive prosecution of the perpetrators as one of the best medicines for the battered stock market. Investors collectively applauded July 24 when three Adelphia Communications Corp. executives were arrested on fraud charges, helping to send the Dow Jones Industrial Average up nearly 500 points.
Yesterday's widely televised arrests in Manhattan of once highly respected officers of the owner of MCI, the nation's second-largest long-distance telephone company, failed to spark a stock rally, however. Investors focused instead on news of the flagging economic recovery and sent the Dow down 230 points.
U.S. Magistrate Judge James Francis freed Mr. Sullivan, 40, on a $10 million bond and Mr. Myers, 44, on a $2 million bond. The men, both of whom are millionaires, had their passports seized and are under travel restrictions.
If convicted, the two face up to 65 years in prison and more than $2 million in fines.
Their attorneys said they will plead not guilty. "We deeply regret the rush to judgment here and political overtones in how this case is being handled," Irvan Nathan, an attorney for Mr. Sullivan, told reporters in New York after the arraignment.
Citing Mr. Ashcroft's news conference and Mr. Sullivan's arrest even after he turned himself in yesterday morning in a show of cooperation, Mr. Nathan said, "Unfortunately, politics are intruding into the criminal-justice system."
The government's complaint does not implicate WorldCom or its colorful founder and former Chief Executive Bernard Ebbers in the accounting fraud, although it leaves open the possibility that others were involved and will be charged.
The arrest puts pressure on Mr. Sullivan to cooperate with the government and testify against Mr. Ebbers. He is reported to have told company officials that Mr. Ebbers knew about the scheme.
For the moment, however, the complaint appears to track WorldCom's own findings, which put the primary responsibility on Mr. Sullivan and Mr. Myers. Both were forced out by the company in June.
The complaint charges the two men with a conspiracy to delude investors by hiding $3.8 billion of operating lease expenses in the company's capital budget, making the company appear profitable when it was sustaining losses.
The scheme was hatched in early 2001, the complaint says, when WorldCom's revenue started to erode, threatening its profitability. It was designed to ensure that the company continued to meet Wall Street earnings expectations through the first quarter of this year, the complaint says.
The government says the two former officers lied to Arthur Andersen, WorldCom's former auditor. By contrast, Justice's first move in the Enron case was to bring obstruction-of-justice charges against Andersen, which stood by while Enron artificially plumped its profits. Andersen was convicted in June and is no longer allowed to audit public companies.
Andersen helped blow the whistle on the former WorldCom officers, who are charged with violating basic accounting principles by treating the cost of network leases needed to serve the company's Internet customers as capital expenses. That enabled the costs to be written off over a longer period, thus making profits look higher.
Also in contrast to the Enron case, which the government has been investigating since the fall without taking action against any of the principals, Justice moved with unusual speed against the former WorldCom officers.
"Some cases are more complex than others," said Deputy Attorney General Larry D. Thompson, head of President Bush's corporate fraud task force.
Analysts say the WorldCom case is relatively straightforward and will be easy to explain to a jury.

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