WORLDCOM EXEC'S PORTFOLIO CREATED CONFLICTS OF INTEREST

Last week’s news that former WorldCom CEO Bernard Ebbers and other executives were allocated millions of shares of hot IPOs during the late 1990s boom was seen as further proof of the era’s corruption. More important, though, are the implications of these executives holding shares in other communications companies—including WorldCom competitors.

Among the stock Ebbers received were shares in carriers such as Williams Communications, Qwest Communications and now-defunct DSL provider Rhythms NetConnections. Putting aside the manner in which these shares were acquired, holding stock in Rhythms is defensible for an executive of an IXC. Rhythms’ goal, after all, was to create the kind of traffic WorldCom’s network was built to carry.

More troubling was Ebbers’ stake in Williams and Qwest, both direct competitors of WorldCom that would appear to create a natural conflict of interest.

Though many may object to an executive having a financial stake in a competitor, business ethicists find the practice acceptable because an executive will always be more vested in his own company’s success than in another’s, and will therefore act accordingly.

“I don’t see any concerns,” said Vefa Tarhna, professor of free enterprise at Loyola University in Chicago. “Let’s say this guy has $100. Ninety-nine dollars are already in WorldCom stock. His interests are mostly aligned with WorldCom. He’s not going to do anything to hurt the company because he’d be hurting himself.”

But some members of the investment community were troubled by the conflict of interest. Ownership of a competitor’s stock, they said, can get in the way of an executive’s ultimate goal. Former Lucent CEO Richard McGinn came under fire immediately after he left the company, in part because he had invested in Lucent competitors.

By owning shares in a competitor, executives put themselves in the position of working against their own investments, presenting a clear conflict of interest, regardless of where most of their equity lies, said Patrick Comack, telecom analyst at Guzman & Co. “His objective is to destroy the other company, so why on earth would he want to own shares of a competitor?” Comack said.

Ownership of a competitor’s stock has other downsides, not the least of which is the signal it sends to other investors. Investors could interpret such a holding as a signal that an executive lacks confidence in his company’s ultimate success.

“It’s almost like betting on the other team,” said Comack. And such a bet could alienate investors, particularly in the current skittish markets.

“In this day and age when we’re dealing with so much uncertainty in the markets, now more than ever you want to avoid the appearance of impropriety,” said Laura Hartman, professor of Business Ethics at Chicago’s De Paul University.

Indeed, caution seems to be the rule of day when industry insiders consider investing in other industry companies. At AT&T, for instance, employees are instructed to discuss with their supervisors any investments that could appear improper. Verizon Communications goes so far as to forbid employees—including executives—from holding a “significant” financial stake in vendors, suppliers or customers.

In related WorldCom news, three former company executives are reportedly on the verge of striking a plea bargain with prosecutors.

The executives, including former controller David Myers, are said to be on the verge of pleading guilty to a variety of charges related to the company’s $7.1 billion accounting fraud.

In exchange, they will testify against other WorldCom executives, presumably including former CFO Scott Sullivan. While cutting such a deal is par for the course in this type of case, legal experts say it enhances the probability of winning later convictions on more serious charges.

To convict an individual of charges related to corporate fraud, prosecutors must show they intentionally falsified their records—a task made much easier by having witnesses who can testify to the actions and motivations of the individual on trial.

“It typically makes the chance of a prosecutor succeeding much greater if you have an insider who cooperates and helps you prove your case,” said Kirby Behre, a partner at the law firm Paul Hastings and author of “Federal Sentencing for Business Crimes.”

“If you don’t get this cooperation, you’d wonder whether they’d be able to prove the case,” Behre added.