- The Washington Times - Wednesday, February 9, 2005

From combined dispatches

Former WorldCom Inc. Chairman Bernard Ebbers asked his top deputy, Scott Sullivan, how he hid millions of dollars in monthly expenses from Wall Street analysts, the ex-finance chief told jurors at Mr. Ebbers’s criminal trial yesterday.

Mr. Sullivan said he informed Mr. Ebbers in April 2001 that WorldCom would have to mask $771 million in fees it paid to other telephone carriers for the use of their lines, so-called line costs, in order to meet analyst expectations for the first quarter. “I told Bern we had made an adjustment to line-cost expenses,” Mr. Sullivan testified.

Mr. Ebbers responded by inquiring “how we were doing it, what effect it would have, and where it was going,” Mr. Sullivan said. He said he told Mr. Ebbers the adjustments were wrong.

Mr. Ebbers’ response, after learning WorldCom planned to issue phony results, may be enough to convict him of securities fraud, former federal prosecutor John Fahy said.

Even if Mr. Ebbers never explicitly ordered his chief financial officer to alter the books, he could not sit silently by, quarter-after-quarter, as WorldCom touted results that Mr. Ebbers knew were false, Mr. Fahy said.

Mr. Ebbers, 63, is on trial in Manhattan federal court in New York on charges of securities fraud and conspiracy. He has denied responsibility for the $11 billion fraud that led to the company’s 2002 collapse.

In other court action yesterday:

• Tyco International Ltd.’s former head of human resources testified she thought at the time that the company’s board was aware of millions of dollars in loan forgiveness awarded to top executives L. Dennis Kozlowski and Mark H. Swartz in 2000.

Patricia Prue, senior vice president of human resources at the Bermuda conglomerate from 1998 to 2002, said Mr. Swartz, Tyco’s former chief financial officer, and Mr. Kozlowski, the former chief executive officer, told her that Phil Hampton, chairman of the compensation committee, had signed off on the loan forgiveness.

Prosecutors have claimed that Mr. Kozlowski and Mr. Swartz granted themselves more than $48 million in loan forgiveness and payments to cover taxes, known as “gross ups,” to themselves in summer 2000 at Tyco without authorization from the company’s compensation committee or board of directors.

• The former chief financial officer of American Tissue Inc. testified that his ex-boss had intimate knowledge of business dealings in the months leading up to the company’s demise, countering defense arguments that the man was not familiar with sophisticated business tactics.

Mehdi Gabayzadeh, 60, of Great Neck, N.Y., is accused of swindling banks, financial institutions and investors of nearly $300 million while he was chief executive officer of the company, once the nation’s fourth-largest maker of toilet tissue.

• Jurors in Richard Scrushy’s corporate fraud trial heard a secret recording in which the former HealthSouth chief instructed aides to tell investigators the company’s financial statements were accurate, after warning: “This conversation did not take place.”

While prosecutors assert that the digital recordings prove Mr. Scrushy’s guilt, the defense contends parts of them exonerate Mr. Scrushy.

In a recording made for the FBI by former HealthSouth Chief Financial Officer Bill Owens, Mr. Scrushy was heard discussing his testimony to the Securities and Exchange Commission three days earlier on March 14, 2003.

Mr. Owens said that besides him and Mr. Scrushy, Assistant Controller Ken Livesay was present for the meeting at HealthSouth headquarters. Mr. Owens, Mr. Livesay and 13 others since have pleaded guilty in what prosecutors describe as a $2.7 billion fraud.

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