A court-appointed examiner investigating MCI said Monday the bankrupt telephone company can sue former Chief Executive Bernie Ebbers and other top executives should it seek reparations for their roles in its $11 billion accounting scandal.
Dick Thornburgh, a former U.S. attorney general appointed by the bankruptcy court as an independent examiner, issued a report that laid out a road map for pursuing legal claims against several former executives and outside companies.
As an example of an issue that might merit reparation, Thornburgh said Ebbers likely awarded investment banking business for financial favors.
Ebbers’ attorneys could not be immediately reached to comment, but have previously said they believed the government investigators would fail to conclude he engaged in any criminal or fraudulent conduct.
Thornburgh’s two previous reports examined scores of controversial issues and dissected MCI’s corporate culture in which top executives ran the company unchecked. The reports detailed $408 million in loans made to Ebbers and said a board of directors filled with Ebbers’ friends provided limited oversight.
Ashburn, Virginia-based MCI, whose legal name is WorldCom , filed for bankruptcy in 2002 after the accounting scandal came to light. The No. 2 U.S. long distance telephone and data services company expects to emerge from bankruptcy protection next month, virtually debt-free.
MCI may choose not to pursue the claims based on several factors, including whether it could collect any money or the potential cost of litigation, Thornburgh said.
“The company is reviewing and considering the potential causes of action against outside parties discussed in the examiner’s report,” Stasia Kelly, MCI’s general counsel, said in a statement.
“We were already in the process of evaluating many of the potential claims raised by the examiner as part of our own assessment, and will move forward with actions that we determine are appropriate ... and have a strong likelihood of a positive outcome,” she added.
According to Monday’s report, MCI could pursue legal claims against its former investment banker, Citigroup, and former accounting firm Arthur Andersen.
Even if MCI seeks reparations from its former officers and other companies involved in the company’s downfall, it would be impossible for shareholders and bondholders to be compensated for the roughly $200 billion they lost in the company’s implosion.
Lawyers for former Chief Financial Officer Scott Sullivan could not be immediately reached. He has been indicted in New York federal court on fraud and conspiracy charges and is fighting those charges. His trial has been delayed to April 7 from Feb. 2, MCI said.
According to Monday’s report, among MCI’s potential claims are that Ebbers breached his fiduciary duty to the company by awarding investment banking business to Citigroup units in return for financial favors, including shares in hot initial public offerings.
He also borrowed more than $400 million from the company without warning of his inability to repay, the third and final report said.
Other claims include that Citigroup’s Salomon and Salomon Smith Barney units helped Ebbers violate his responsibilities to MCI and the company’s accountant, Arthur Andersen, failed to catch the fraud, the report said.
Citigroup had no immediate comment. Last April, it was one of 10 financial services companies to settle regulators’ charges of issuing biased research to win investment banking business. It has separated research from investment banking.
KPMG also faces potential claims based on flawed advice it gave MCI related to a program that likely helped MCI avoid paying hundreds of millions of dollars in state taxes from 1998 to 2001, the 542-page report said. MCI said its tax strategy was appropriate and it had no plans to pursue claims against KPMG.