Ebbers, Sullivan plead the fifth

Under advice of counsel, former WorldCom CEO Bernard Ebbers and former CFO Scott Sullivan today invoked their Fifth Amendment rights to protection against self-incrimination during a hearing conducted by the House Financial Services Committee.

Ebbers and Sullivan both appeared before the committee under subpoena. Melvin Dick, an executive with Arthur Andersen, which was WorldCom’s auditor during the period in which the company’s inaccurate reporting of revenues occurred, and Jack Grubman, senior telecom analyst with Salomon Smith Barney, also appeared before the committee on a voluntary basis.

Ebbers raised the ire of many committee members when he attached a statement of innocence to his invocation of his fifth-amendment rights. “I don’t believe I have anything to hide in these or any future proceedings,” Ebbers said. “No one will conclude that I engaged in illegal or fraudulent conduct during my tenure as CEO of WorldCom.”

Ebbers said he invoked his fifth-amendment rights because the investigation into WorldCom’s financial misstatements “seemed to be open-ended, covering a wide variety of allegations, the details of which have not been provided to me.” Ebbers also said he was choosing not to testify at this juncture because preliminary statements made at the beginning of an investigation can be taken out of context later, and because he has not been informed of specific charges against him.

Several committee members attempted to force Ebbers to answer questions tied to his statement of innocence, reasoning that the statement constituted a waiver of his fifth-amendment rights. “There’s a correct way to invoke the Fifth Amendment and a wrong way. Mr. Sullivan did it correctly, but Mr. Ebbers waived his fifth-amendment rights and we should hold him in contempt [of Congress] and force him to testify,” said Rep. Max Sandlin, D-Texas.

Ultimately, Committee Chairman Michael Oxley, R-Ohio, ruled that Ebbers would not be subject to a contempt vote at this juncture, largely because a written transcript of his statement wasn’t available, but would be subject to recall, under subpoena, by the committee for future questioning tied to his statement.

Grubman was questioned extensively by the committee regarding what he knew before his final downgrade of WorldCom’s stock on June 21, four days before the company divulged a misapplication of $3.8 billion in expenses for the past five quarters. He denied having insider knowledge of WorldCom’s misdeed, even though he admitted attending WorldCom board meetings on at least three occasions.

“I had no advance knowledge of this fraud. Any rumors to the contrary are categorically false,” Grubman said, adding that Moodys [Financial Services] and others also downgraded WorldCom’s stock in the days leading up to the company’s announcement.

However, Rep. Richard Baker, R-La., questioned Grubman about internal and external e-mails at Salomon Smith Barney that allegedly indicate prior knowledge of the $3.8 billion misapplication. One of the e-mails allegedly tipped Grubman off that “things are nuts again at WorldCom,” said Baker.

“It’s hard to believe there was not some communication regarding the downside implication of WorldCom’s off-the-balance sheet transaction,” Baker said.

Grubman also defended his close relationship with Ebbers, Sullivan and other senior level executives at WorldCom.

“It’s very important for analysts to get to know management, because that’s what brings context to the numbers and helps us assess management’s ability to run their business,” Grubman said.

Dick was blistered by the committee for Arthur Andersen’s apparent inability to uncover WorldCom’s misapplication of expenses during routine audits. He attempted to deflect the attack by saying Andersen followed GAAP (generally accepted accounting principles) rules and generally accepted auditing practices. He said the company reviewed WorldCom’s financial statements on a line item basis using what he described as sophisticated software, and found “no trigger for additional work.”

“Financial statements are the responsibility of company management and not the outside auditor,” Dick said. “We relied on the honesty of the company, which we do with any audit,” said Dick.

Rep. Barney Frank, D-Mass., bristled at that answer. “What do you do, just check the math and give them a gold star for adding right?” asked Frank.

Later, Dick said there is no way for the accounting industry to develop a “fail-safe system” that would prevent something like the WorldCom scandal from occurring again.

Rep. John LaFalce, D-N.Y., criticized both Dick and Grubman for their respective firm’s inability to properly take into account an earlier lawsuit filed by WorldCom shareholders. The lawsuit alleged accounting misconduct similar to that which came to light on June 25, said LaFalce. It was ultimately dismissed, but not before, “the court noted there had been some misconduct,” said LaFalce.

“Shouldn’t WorldCom’s auditor and lead analyst been aware of this?” LaFalce asked.

Dick said his firm was aware of the suit, but after discussing the matter with WorldCom internal and external counsel, was satisfied that it had no merit. However, he admitted that the firm did not consult counsel for the plaintiffs.