WorldCom was a U.S telecommunications company who provided phone and mobile services. The company was valued at over $100 billion, making them one of the largest telecom companies of the 90s and 2000s. How on earth do you destroy a $100 billion company in a matter of months? Let’s ask its former CEO Bernie Ebbers.

The story begins in 1983 when AT&T broke up into smaller companies and left a gaping hole in the telephone market. A group of men, including Bernie Ebbers, met at a coffee shop in Jacksonville Mississippi to discuss the opportunity that arose, the company created to meet the surging demand it was incorporated as LDDS, Long Distance Discount Service. In 1995, LDDS was renamed to WorldCom. 

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          WorldCom’s business model was simple—they did not build landline cables or phone towers—they would rather rent out the infrastructure. This expense was known as line cost (a point that will be vital to the understanding of the crux of the story). While using the existing infrastructure, WorldCom provided cell phone and landline services at a discounted rate, and the income made from the operations would hopefully to offset any expenses.

Until 1985 WorldCom would be operating at a loss repeatedly throughout the years, scaling a debt equal to $1.5 million. The owners handed the reign to Ebbers, making him both CEO and president of the corporation.

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          Bernie was not a known name before the telecom business, he was a former high school coach who later worked in the Motel business. He was known for saving every cent possible—he would clean the rooms of the motel and stopping the free coffee policy. Ebbers took his knowledge to WorldCom. In a matter of a year, revenue rose to $8,6 million and a year later, $18 million.

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          The market was tough, multiple companies were offering the same services as WorldCom, and Ebbers had to adapt his strategy by investing in inorganic growth. They either acquired regional rivals or merged with other companies. Over the next 10 years, Ebbers purchased thirty companies and watched his sales reach a little less than a billion dollars. Its largest merger took place in 1998 when it merged with MCI communications who was two and a half time its size. The merger cost $37 billion and was the biggest merger ever recorded at the time of its announcement.

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          Ebbers became a wall street renegade hero—with his causal dress sense and his salesmen attitude. He employed over eighty-eight thousand people and owned sixty thousand miles of line. Its reveues were to cross $40 billion and the stock was outperforming the market. Bernie would receive $27 million in WorldCom stock options to fund a lavish lifestyle. He would take out loans and secure them with WorldCom stock, and it is said that a total of $408 million were taken out to buy a yacht building company.

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          The genesis of the WorldCom fraud was its failure to merge with Sprint due to anti-trust laws. By the late 90s and early 20s the market had a couple of giants that made inorganic growth difficult to sustain in the long run. Even if the internet was getting started, it seemed the telecom cash cow was drying up. People started getting desperate when in the share went from $62 in 1999 to $18 in 2000. 

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          One sunny morning, Head Accountant David Meyers brought the term’s financial earning to the CFO Scott Sullivan. To his surprise, the company profits were down the drain. And asked the Head Accountant to conduct a sanity check since he was certain that could not be possible. Meyers returned with the same number. He was sent once more to triple check the numbers. Nothing was wrong with them. Sullivan insisted and instructed Meyers to write down financial entries to make the numbers look like they should be. The CFO said that by the next release they would have found the issue, and all of this would be forgotten – something wrong does not seem right here. When the next release came around, Meyers was instructed to repeat the fraud once more. And then again.

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          After realizing that making fake entries would not sustain the company in the public’s eyes. The CFO asked the accountant to do something drastic (and rather illegal)—take the line costs and book them down as assets to make WorldCom appear financially healthy. Instead of expensing cost of infrastructure rental al a monthly basis, they were taking those costs and moving them to the balance sheet, where that would be expensed over ten to fifteen years, making the costs appear lower per month (Glenn Smith, internal auditor). This in turn would make income look better when viewed through short term lenses.

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          It would not take long until internal auditors noticed something strange in the accounting books of the company. Vice president of internal audit Cynthia Cooper and Glenn Smith started becoming suspicious when she came across “prepaid capacity”. The auditors inquired what the term meant but nobody knew. After further investigation, there was a total of $3 billion of bogus entries in the balance sheet. She questioned Mr. Sullivan and received a less than satisfactory answer: “Prepaid capacity was the cost of leasing fiber optic lines that were being underutilized.” The ideas was that these purchases would yield in income as the internet became popular. The auditors were not convinced that these needed to be booked as assets instead of expenses. While the house burned down and multiple investigations were being opened, Bernie Ebbers kept reassuring the public that nothing was wrong, and that buying WorldCom stock was still a worthwhile buy.

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          The Stock price started to plummet, and the banks wanted the money back from Bernie. But if he sold the stock the company would follow. This resulted in WorldCom having to loan the CEO $408 million so that the price of the stock would not drop significantly. He was then asked to resign due to his personal loan problems. WorldCom made the investigations public, and re-released the statements for 1999, 2000 and 2001—a total of $11 billion misplaced in the balance sheet. WorldCom was rebranded to MCI and bought by Verizon for $6,6 billion.

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          Charges were filed and Bernie and the main artists were all arrested. Some claim Bernie had nothing to do with the fraud, and some others claim he is in the top 10 most corrupt CEOs of all time. The court says he’s guilty. What’s your verdict?