Fraud Trial Begins for Ex-WorldCom Chief

A federal court in New York was the stage today as former WorldCom Inc. chief executive officer Bernard Ebbers went on trial on charges he committed an $11 billion fraud that caused the company's collapse.

Ebbers is accused of criminal fraud and conspiracy that resulted in WorldCom, one of the world's largest telecommunications companies, filing the largest U.S. bankruptcy ever in 2002. If convicted on all charges, including seven counts of false filings with the Securities and Exchange Commission, Ebbers could face up to 85 years in prison.

Ebbers built a small long-distance company into a telecom giant that merged with MCI in 1997 and at its peak, was worth more than $160 billion. But was it all a shell game?

Federal prosecutors have accused Ebbers of lying and actively hiding the company's true financial standing from employees, investors, Wall Street and regulators. WorldCom filed for bankruptcy with an estimated accounting fraud totaling $11 billion.

Ebbers has insisted he is innocent of the charges, and the defense maintains there is no concrete evidence implicating him.

Star Witness

The prosecution's star witness will be WorldCom's former chief financial officer, Scott Sullivan, who pleaded guilty in 2004 before his own trial was to start.

Prosecutors are expected to play a voicemail message Sullivan left for Ebbers in June 2001 in which Sullivan told his boss he was worried about "accounting fluff" and that the company was "disguising what is going on."

It is expected that Ebbers' attorneys will argue that the former CEO left accounting decisions to Sullivan and was too high up the corporate ladder to concern himself with day-to-day accounting issues.

And the testimony promises to get personal. On Tuesday U.S. District Judge Barbara Jones ruled that defense attorneys could quiz Sullivan about alleged marital infidelity so jurors can weigh his honesty as a witness.

Defense attorneys had also hoped to show that Ebbers discussed the collapse of Enron Corp. with Sullivan to show that Ebbers was aware that WorldCom's accounting practices were also illegal, but Jones ruled any Enron testimony irrelevant.

CFO vs. CEO

That could give rise to a "he-said he-said" trial, leaving the jury to decide whose story is the most believable.

"The prosecution will have to show evidence from other witnesses or other evidence that Ebbers was aware of the accounting treatment Sullivan originated," says John Coffee, a securities law professor at Columbia Law School.

But unlike other high-profile white-collar crime trials, prosecutors don't appear to have a paper trail from Ebbers, who supposedly rarely used e-mail.

"If it's only Sullivan telling the jury what he was doing, the jury may see it as a credibility contest and that could give rise to some reasonable doubt," Coffee said.

Civil Suits

In civil suits filed against the company by investors, 10 of 12 former WorldCom directors recently agreed to pay $18 million of their own money to settle. This amount is in addition to $36 million from insurance policies. In settling, the 10 directors did not admit to any wrongdoing. Civil suits continue against the other two WorldCom directors.

This $54 million is pennies, however, compared to the $2.6 billion that Citigroup has agreed to pay investors and debt holders for the work the bank performed for WorldCom. Other investment banks face a class-action lawsuit scheduled to begin Feb. 28.

Criminal Trial

Today, potential jurors were given questionnaires. Actual jury selection will begin Monday and opening statements are expected to begin next week. The trial could last up to two months.

The Ebbers trial kicks off as another prominent corporate fraud saga continues in New York. On Tuesday, jury selection began in the retrial of two former Tyco International executives accused of stealing $600 million from the conglomerate. A judge declared a mistrial last year in the first trial of former CEO Dennis Kozlowski and former CFO Mark Swartz.

With additional reporting by Sheila Marikar.

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