Video: Sullivan testimony key

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CNBC
updated 3/15/2005 1:29:03 PM ET 2005-03-15T18:29:03

He ran the company, but said he didn't know how his employees ran the numbers.  That defense failed former WorldCom CEO Bernard Ebbers.  A jury has found him guilty of fraud and conspiracy charges linked to WorldCom’s $11-billion accounting scam.

In the end, it was apparently difficult for a jury to believe that the man who had built the fastest-growing telecommunications company in the world did not know the details of its massive accounting fraud.

“Essentially Bernie Ebbers had to argue that he was the only one who didn’t know,” said Scott Cleland, a telecom industry analyst who has followed the company through good times and bad. “And he was in the position to know more than anyone.”

To many observers, the defense just didn’t make sense. Ebbers had shown a relish for even the smallest details throughout his business career, whether as a small-time motel operator or high-rolling dealmaker.

“Bernie would have to know about the fact that I ordered $200 worth of pizza to feed the reps while they answered the phone,” Robert Hudspeth, a former WorldCom senior vice president, told CNBC.

Sprint CEO Bill Esrey recalled his dealings with Ebbers when the two were planning to merge their companies — a deal eventually scuttled by the U.S. Justice Department.

“Everything would have to end up going back to Bernie,” said Esrey. “At least that's what we were told by people working on different issues or different things: ‘We have to check with Bernie, we have to check with Bernie.’ If I were Bernie, I wouldn't have been smart enough to make all those decisions. I thought we had very good people that would do it." 

In fact, respect for Ebbers's acumen was held even in the highest levels of the government, as former Federal Communications Commission Chairman William Kennard told CNBC's David Faber two years ago.

“It’s hard for me to imagine. Hard to imagine,” said Kennard. “I think there’s an effort these days to remake the man into somebody who was not very detail-oriented. And that’s not the impression I got from the Bernie Ebbers that I interacted with. He had a pretty good sense of how the business worked.”

'Ignorance' defense won't fly
Despite efforts by the defense to pin the fraud largely on the shoulders of Chief Financial Officer Scott Sullivan, the jury thought otherwise. And Ebbers's know-nothing defense is unlikely to ever be invoked again in future fraud cases because of a new federal law, known as Sarbanes-Oxley, that requires top executives to take formal responsibility for the accuracy for their accounting.

For the 17 years he ran WorldCom, Bernie Ebbers honed an "aw-shucks" image. A telecom entrepreneur who didn't carry a pager or cellphone, the one-time basketball coach told BusinessWeek magazine in 1997 that “when you come to the table with a (physical education) degree like I do, you don't know a lot about the technical stuff."

Or about the financial stuff. That's how he defended his ignorance about the accounting fraud that took place at WorldCom under his watch. But the jury didn't buy it.

It's a defense that won't fly for today's executives, lawyers say.

“I think now with Sarbanes-Oxley and some other regulation, they are advising corporate officers at the top, ‘This is your responsibility,’” said Bryan Blaney, an attorney who specializes in white-collar crime at Lowenstein, Sandler.

The collapse of WorldCom was among the accounting scandals that quickly led to passage of the law and stricter regulation of corporate reporting. But that regulation was not in effect when Ebbers was running WorldCom.

President Bush signed the Sarbanes-Oxley Act into law on July 30, 2002, just nine days after WorldCom filed for bankruptcy, and a month after the telecom giant first disclosed the fraud that falsely inflated its profits.  WorldCom was the final straw for lawmakers in a string of corporate scandals that brought down energy trader Enron and the accounting firm Arthur Andersen, among others.

The government's response to these scandals was the most sweeping securities regulation since the 1930's. Though it's no guarantee fraud won't be committed, the new law aims to restore investor confidence by improving corporate governance.  

But for one governance expert, the guilty verdict for Ebbers should also serve to improve confidence.

“It will give some people the sense the system is fair and will encourage some people who might not otherwise invest in these companies to,” said Jay Lorsch, a professor at the Harvard Business School.

As Ebbers exits the legal stage, Enron's former CEO Ken Lay waits in the wings. While Lay’s "ignorance" defense is similar to Ebbers, lawyers say it doesn't mean that Lay is guilty. Given that each case is unique, it’s impossible to judge the outcome of one from another.

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