CASE NO. 1 WorldCom Inc.5 The largest corporate fraud in history entailed the falsification of $11 billion in operating profits at WorldCom Inc. WorldCom was among the three largest longdistance telecommunications providers in the United States, the creation of a rollup acquisition strategy by its CEO, Bernard Ebbers. WorldCom's largest acquisition, MCI Communications in 1998, capped the momentum-growth story. This, combined with the buoyant stock market of the late 1990s, increased the firm's share price dramatically. By early 2001, it dawned on analysts and investors that the United States was greatly oversupplied with long-distance telecommunications capacity. Much of that capacity had been put in place with unrealistic expectations of growth in Internet use. With the collapse of the Internet bubble, the future of telecom providers was suddenly in doubt. WorldCom had leased a significant portion of its capacity to both Internet service providers and telecom service providers. Many of those lessees declined and, starting in 2000, entered bankruptcy. In mid-2000, Ebbers and WorldCom's chief financial officer (CFO), Scott Sullivan, advised Wall Street that earnings would fall below expectations. WorldCom's costs were largely fixed-the firm had high operating leverage. With relatively small declines in revenue, earnings would decline sharply. In the third quarter of 2000, WorldCom was hit with $685 million in write-offs as its customers defaulted on capacity-lease commitments. In October 2000, Sullivan pressured three midlevel accounting managers at WorldCom to draw on reserve accounts set aside for other purposes to cover operating expenses, which reduced the reported operating expenses and increased profits. The transfer violated rules regarding the independence and purpose of reserve accounts. The three accounting managers acquiesced, but later regretted their action. They considered resigning, but were persuaded to remain with the firm through its earnings crisis. They hoped or believed that a turnaround in the firm's business would make their action an exception. Conditions worsened in the first quarter of 2001. Revenue fell further, producing a profit shortfall of $771 million. Again, Sullivan prevailed on the three accounting managers to shift operating costs-this time, to capital-expenditure accounts. Again, the managers complied. This time, they backdated entries in the process. In the second, third, and fourth quarters of 2001, they transferred $560 million, $743 million, and $941 million, respectively. In the first quarter of 2002, they transferred $818 million. The three accounting managers experienced deep emotional distress over their actions. In April 2002, when they discovered that WorldCom's financial plan for 2002 implied that the transfers would continue until the end of the year, the three managers vowed to cease making transfers and to look for new jobs. But inquiries by the U.S. Securities and Exchange Commission (SEC) into the firm's suspiciously positive financial performance triggered an investigation by the firm's head of internal auditing. Feeling the heat of the investigation, the three managers met with representatives from the SEC, the U.S. Federal Bureau of Investigation (FBI), and the U.S. attorney's office on June 24, 2002. The next day, WorldCom's internal auditor disclosed to the SEC the discovery of $3.8 billion in fraudulent accounting. On June 26, the SEC charged WorldCom with fraud.