It was 1983 when Bernard J. (aka "Bernie") Ebbers founded Long Distance Discount Service (LDDS), a discount long-distance telephone company, \({ }^{148}\) Local legend has it that Mr. Ebbers, a former junior high school basketball coach from Edmonton, Alberta, launched the plan for what would become a multibillion-dollar, international company in a diner at a Days Inn in Hattiesburg, Mississippi. \({ }^{149}\) The telephone industry in the United States was about to be deregulated, and a new industry, telecommunications, would be born. Because competitors to the once-formidable Ma Bell, long the nation's dominant phone company, would now be welcome, Mr. Ebbers and a group of small investors saw an opportunity. They followed a basic economic model in developing their company: buy wholesale and sell retail, but cheaper than the other retailers. Their strategy was to buy long-distance phone network access wholesale from AT\&T and other long-distance giants and then resell it to consumers at a discount. They were about to undercut long-distance carriers in their own markets, using their own lines. There was enough money even in the planned lower margins to make money for LDDS. \({ }^{150}\)

By 1985, Mr. Ebbers was growing weary of the new telephone venture because LDDS was in constant need of cash infusions, and the 13-unit budget motel chain Mr. Ebbers owned was the source of the cash. Following another coffee shop meeting, Mr. Ebbers agreed to take over the management of the company. \({ }^{151} \mathrm{Mr}\). Ebbers's strategy upon his ascent to management was different from and bolder than just running a Mississippi phone company. Mr. Ebbers envisioned an international phone company and undertook to grow the company through acquisition. One business writer has described the next phase of LDDS as a 15-year juggernaut of mergers. \({ }^{152}\) LDDS began regionally, and Ebbers acquired phone companies in four neighboring states. Ebbers also expanded the core business of LDDS from cheaper long distance by expanding into local service and data interchange.

By the time LDDS went public in 1989, it was offering telephone services throughout 11 Southern states and had taken on a new name, WorldCom. \({ }^{153}\) By 1998, World-Com had merged 64 times, including mergers with MFS Communications, Metromedia, and Resurgens Communications Group. \({ }^{154}\) World Corn's 65 th merger was its biggest acquisition...............

Discussion Questions 1. Consider the following statement by a government official. Securities Exchange Commissioner Cynthia Classman included the following in a speech she gave to the American Society of Corporate Secretaries on September 27, 2002: [T]he distribution of securities by companies that had not made a previous public offering reached the highest level in history. This activity in new issues took place in a climate of general optimism and speculative interest. The public eagerly sought stocks of companies in certain "glamour" industries, especially the electronics industry, in the expectation that they would rise to a substantial premium- an expectation that was often fulfilled. Within a few days or even hours after the initial distribution, these so-called hot issues would be traded at premiums of as much as 300 percent above the original offering price. In many cases the price of a "hot" issue later fell to a fraction of its original offering price.
What impact do you think the psychology of the market had on allowing WorldCom, Mr. Ebbers, and others to engage in creative accounting? Is this a case of "everyone does it"?
2. Consider the following:This phenomenon of confusion ruling in a bullish market is not unique to the 1990s stock market. Following the 1929 stock market crash, one of the biggest collapses, and a shocker to the investment world, was the bankruptcy of Middle West Utilities. The company was run by Samuel Insull according to the prevailing, and confusing, structure of the time, "elaborate webs of holding companies, each helping hide the others' financial weaknesses, an artifice strangely similar to what Enron did with its partnerships." 305 Following the bubble burst in the early 1970 s, accounting firm Peat Marwick, Mitchell was censured for its failure to conduct proper audits of five companies that crashed after PMM had given the firms clean and ongoing entity opinions. After the October 1987 crash, Drexel, Burnham \& Lambert, Michael Milken's junk bond firm, collapsed along with a host of other companies and the savings and loan industry. 306 What does this market history tell you about WorldCom? How could the employees in WorldCom who went along benefit from this information? What fears did these employees have?
3. Bill Parish, investment manager for Parish \& Co., explained the collapse of Enron, World Com, and others with this insight: "There's massive corruption of the system. Earnings are grossly overstated. "307 Accounting Professor Brent True man at the University of California, Berkeley, added, "Reported numbers may not reflect the true income from operations." The phenomenon accompanies bubbles. "It is absolutely what almost invariably happens after every bubble. You should expect them [bankruptcies, scandals, and accounting disclosures], but that doesn't mean that people who haven't been through it before aren't going to be surprised. The bigger the binge, the longer and more severe the hangover."308 Is he right? Is fraud inevitable in a fast-paced market? Are these just natural market corrections? Is this "everyone does it"?
4. WorldCom was eerily meeting its earnings targets precisely. One analyst did, however, notice that WorldCom was making its targets for several quarters in a row within fractions of cents.
"When you see that they're making it by one one-hundredth of a penny you know the odds of that happening twice in a row are very slim. It indicates they're willing to stretch to make the quarter." 309 Are investors to blame for relying on the precise numbers and predictions? Shouldn't they have acted with greater skepticism?
5. Mr. Ebbers's conduct shows that he still believes he has done nothing wrong. At church services in Mississippi immediately following the revelation of the WorldCom accounting impropriety, Mr. Ebbers arrived as usual to teach his Sunday school class and attend services. He addressed the congregation, saying, "I just want you to know you aren't going to church with a crook. This has been a strange week at best.... On Tuesday I received a call teliing me what was happening at World-Com. I don't know what the situation is with all that has been reported. I don't know what all is going to happen or what mistakes have been made.... No one will find me to have knowingly committed fraud. More than anything else, I hope that my witness for Jesus Christ [will not be jeopardized]." The congregation gave Mr. Ebbers a standing ovation. \({ }^{310} \mathrm{Mr}\). Ebbers continued to teach Sunday school each Sunday at 9:15 a.m. and stay for the 90-minute service held afterward until he reported to prison. \({ }^{311}\) What relationship do religious views and affiliations play in business ethics?
6. What did Scott Sullivan miss in making his analysis to capitalize ordinary expenses? What skills that you learned in Units 1 and 2 might have helped him see the decision and the impact of his decision dif. ferently? Why did he not listen to employees and block questions?
7. Even when the first multibillion-dollar restatement came, many near Clinton, Mississippi, appeared to be more in mourning than angry. One employee, sharing the shock with bar patrons at Bravo Italian Restaurant \& Bar, said, "People are taking it with exceptional grace. In my experience with \(\mathrm{MCI}\), I have never worked for a better company." \({ }^{312}\) Others, such as Bernie's minister, give him the benefit of the doubt, concluding that he might not have known about the distortion of the numbers: "We've kind of held judgment until we know the entire story and whether he had knowledge." \({ }^{313}\) Evaluate the effect of these companies on the hometowns in which they operate. What role do hubris and the fear of letting the locals down play in situations such as WorldCom's?