Two Former WorldCom Execs Arrested

NEW YORK – Two former top executives of bankrupt telecommunications firm WorldCom Inc. (WCOM) were arrested Thursday for their role in the $3.85 billion accounting scandal that has rocked confidence in corporate America, according to the FBI.

A week after executives from cable operator Adelphia Communications Corp. were led away in handcuffs, former WorldCom Chief Financial Officer Scott Sullivan and former Controller David Myers surrendered to federal authorities in New York and were charged with securities fraud, conspiracy to commit securities fraud, and making false filings with the Securities and Exchange Commission.

The two former executives were led handcuffed into federal custody in downtown Manhattan Thursday morning and were later released on bail -- set at $10 million for Sullivan and $2 million for Myers. Both men had their passports seized and were given a series of travel restrictions.

If convicted, Sullivan, 40, of Boca Raton, Florida and Myers, 44, of Madison, Mississippi, could face a prison term of up to five years and a $250,000 fine on the conspiracy counts and 10 years and a $1 million fine on each of the fraud and false filings counts.

Sullivan and Myers were dismissed from WorldCom in June after the company admitted it falsely accounted for $3.8 billion in expenses, allowing executives to continue reporting profits when the company was actually losing money. Chief Executive Bernie Ebbers resigned under pressure in April.

WorldCom, which owns MCI, the nation's second-largest long distance carrier, filed for bankruptcy under Chapter 11 on July 21, the largest such filing in U.S. history. On Thursday, former U.S attorney general Richard Thornburgh was appointed examiner in the bankruptcy hearings.

The complaint alleges that the two men were involved in an accounting scheme that began in early 2001 and lasted through June 2002 aimed at hiding expenses to artificially inflate earnings to meet Wall Street expectations.

As part of the scheme, they allegedly hid information from the company's external auditor, Andersen, and from the SEC.

Ebbers, the most public face of WorldCom, was credited with building WorldCom into the behemoth it became through a string of 60 acquisitions before being forced out -- owing WorldCom $400 million in loans.

The complaint states that in July 2000 WorldCom's expenses as a percentage of its total revenue began to increase, resulting in a drop in the rate of its earnings growth. The decline created a substantial risk that the company's earnings would fail to meet Wall Street's expectations.

Prosecutors allege that Sullivan and others schemed to hide the company's expenses by recording substantial portions of its current expenses as capital expenditures.

This allegedly allowed WorldCom to report higher earnings by delaying the reporting of certain expenses.

The complaint alleges that Sullivan told Myers to direct employees of the company's accounting department to make various journal entries necessary to carry out the scheme.

The men are also accused of filing false financial reports with the SEC in May, August and November of last year and in March and May of this year.

The scandal at WorldCom, coming after the collapse of energy trader Enron Corp. , fanned a political firestorm that led to the legislation signed on Tuesday that quadruples penalties for accounting fraud.

The new law, designed to make it harder for executives to deceive investors, was spurred by weak stock markets, voter anger, and approaching congressional elections.

WorldCom CEO John Sidgmore told a congressional hearing on Tuesday that the company also plans on pursuing executives guilty of wrongdoing in the accounting scandal.

On Monday, WorldCom tapped two members of a corporate turnaround firm to oversee its restructuring and straighten out its finances.

The arrests of the WorldCom officials is just the most recent sorry chapter for corporate America in the past year. In late July, several members of Adelphia Communications Corp.'s founding Rigas family were arrested for, among other things, looting company funds.

Also, ImClone Systems' former Chief Executive Sam Waksal was arrested in June for insider trading.

The many scandals have so incensed investors and battered confidence in the stock markets that some stockholders appear to be reaching the boiling point.

One federal worker on the scene in Manhattan Thursday morning clapped as the two walked by slowly.

"I work for the federal government and I lost $9,000. We've been snookered. We've been lied to," said the worker.

WorldCom shares closed trading at 15 cents on Thursday.

Reuters and the Associated Press contributed to this report.