Two Ex-WorldCom Officials Charged With Securities Fraud

A pair of former WorldCom Inc. executives charged by federal prosecutors in New York Thursday are negotiating possible pleas that could result in their cooperation in the investigation, according to people familiar with the situation.

Former WorldCom executive Scott Sullivan, right, surrendered to federal authorities early Thursday.

Just 37 days after WorldCom disclosed what is considered the biggest corporate accounting fraud ever, prosecutors criminally charged former finance executives Scott D. Sullivan and David F. Myers in U.S. District Court in the Southern District of Manhattan with securities fraud for their alleged roles in moving around $3.83 billion in expenses to make the company look profitable.

A person familiar with the matter said that ousted WorldCom chief executive Bernard Ebbers may face charges in a "second wave" of federal action coming possibly weeks from now. But prosecutors are currently leaning away from filing charges against the company itself, this person said, because WorldCom has been cooperating with investigators and has been conducting a "first-class" internal probe of the accounting mess, this person said. Indicting the company is also considered to have potentially negative effects on WorldCom employees, consumers and creditors.

Mr. Ebbers's attorney, Reid Weingarten, said his client had no involvement in or knowledge of the accounting decisions at issue in this case. "He always believed Messrs. Sullivan and Myers to be competent, ethical and loyal employees devoted to the welfare of WorldCom. Today's actions may be good theater for the media and useful to the politicians, but they don't prove that Sullivan and Myers ever acted with criminal intent, an essential element we doubt the government will ever be able to prove in this case."

WorldCom spokesman Brad Burns said, "We're cooperating with all ongoing investigations and will continue to do so until there's full resolution."

Former executive David Myers

In a seven-count complaint unsealed Thursday in Manhattan federal court, Federal Bureau of Investigation agent Paul Higgins detailed how Mr. Sullivan, WorldCom's ousted chief financial officer, and former controller Mr. Myers allegedly directed employees to carry out the scheme. Over five quarters of financial results, they reallocated $3.85 billion in operating expenses from the income statement, where they should have been booked, to the balance sheet, where they could be classified as capital expenditures and deducted gradually, the sworn document said.

Mr. Myers and Mr. Sullivan, who spent Wednesday night at New York's posh Hotel Elysee off Madison Avenue, surrendered themselves to FBI agents Thursday at 7 a.m. They were handcuffed when led out of FBI headquarters and taken to court, but they later entered a courtroom unencumbered, dressed in dark-blue business suits and ties. Mr. Myers, who was accompanied to court by an Episcopal priest, sat erect and stared straight ahead; Mr. Sullivan hunched slightly and rocked slowly back and forth.

The two men were each charged with one count of conspiracy to commit securities fraud; one count of securities fraud and five counts of making false filings with the Securities and Exchange Commission. After a brief court hearing, Mr. Sullivan was released on $10 million bond; Mr. Myers was freed on $2 million bond.

The spectacle Thursday was a departure from the rough-and-tumble tactics used recently in the arrests of the Rigas family members, the founders of Adelphia Communications, who were seized by federal agents in the early morning hours and handcuffed. Samuel Waksal, the embattled former chief executive of ImClone Systems Inc., was also arrested at 6 a.m. at his Manhattan loft.

In the case of the former WorldCom executives, prosecutors filed a criminal complaint as opposed to an indictment by a grand jury and allowed the executives to surrender. People with knowledge of the matter say that the relative kid-glove treatment came about because lawyers for the men have indicated a willingness to continue plea negotiations.

Those talks are "much more substantial and farther along" with Mr. Myers, who is considered likely to sign a plea agreement cooperating with the government, a person familiar with the matter said. Mr. Sullivan's lawyers have held more preliminary talks with prosecutors, though even those helped "tip the balance" toward allowing him to surrender, the person said.

Another factor taken into account, several people familiar with the case said, is that Mr. Sullivan's wife, Carla, is ill with a serious diabetic condition and has been hospitalized recently. Mr. Sullivan, 40 years old, is now the main caregiver for the couple's two-year-old child.

With the issuance of a complaint, prosecutors have until Sept. 3 to seek a formal indictment or allow the two men to have a preliminary hearing at which evidence against them would be presented. A plea deal would allow prosecutors to avoid costly litigation and could also arm the Manhattan U.S. Attorney's office with additional fodder in its efforts to charge others who may have been involved, including Mr. Ebbers, according to people familiar with the matter.

Irvin Nathan, a lawyer for Mr. Sullivan, publicly thanked the government for allowing him to surrender himself and said that decision was made "because Mr. Sullivan is an honest and honorable man." He said he had called prosecutors and asked them not to arrest Mr. Sullivan at his home.

Mr. Nathan promised to vigorously contest the charges against Mr. Sullivan, adding that "there is substantial room for disagreement on accounting issues, including cost allocation."

Richard Janis, a lawyer for Mr. Myers, wouldn't comment beyond saying: "Whatever needs to be said ought to be said to the court, not to the press." Behind him, Mr. Myers, 44, linked arms with his wife and Buddy Stallings, the priest.

Neither Mr. Nathan nor Mr. Janis could be reached immediately to comment on whether they were working on plea agreements for their clients.

If convicted, Mr. Sullivan and Mr. Myers could each face five years in prison and a fine of $250,000 for the conspiracy count. They could face 10 years in prison and $1 million in fines for the securities fraud count and for each count of making false filings with the SEC. However, their actual sentences would likely be far less.

The charges further taint WorldCom, the nation's No. 2 long-distance carrier, which operates the MCI brand. Last week, the beleaguered company, facing a severe cash crunch and $41 billion in debt, was forced to file the largest bankruptcy in U.S. history just weeks after the alleged accounting fraud was unearthed.

-- Laurie P. Cohen contributed to this article.

Write to Jerry Markon at jerry.markon@wsj.com¹ and Jared Sandberg at jared.sandberg@wsj.com²

Updated August 2, 2002