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United States v. Ebbers

458 F.3d 110 (2006)

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United States v. Ebbers

United States Court of Appeals for the Second Circuit

458 F.3d 110 (2006)

Facts

Bernard Ebbers (defendant) was the chief executive officer (CEO) of WorldCom, Incorporated. WorldCom was a successful international telecommunications company. In 2000, WorldCom’s business slowed when the dot-com bubble burst. Ebbers’s personal finances were inextricably linked to the performance of WorldCom. As WorldCom’s stock price declined, Ebbers faced margin calls from banks because he had used WorldCom stock as collateral for loans. As a result, Ebbers began taking actions to artificially prop up WorldCom’s stock price. He worked with WorldCom’s chief financial officer (CFO), Scott Sullivan, to implement some creative accounting with respect to WorldCom’s operating costs and capital expenditures. Essentially, line costs had increased significantly and severely disrupted WorldCom’s earnings expectations. Sullivan, at Ebbers’s direction, instructed the accounting department to reallocate line-cost expenses from operating expenses to capital expenditures in order to create the appearance that WorldCom hit its revenue projections. The creative accounting tactics were employed for nearly two years. The changes in accounting practices technically complied with Generally Accepted Accounting Principles (GAAP), but WorldCom failed to inform investors about the changes in allocations of line-cost expenses because it would have clued them in as to the declining state of the company. Sullivan and other subordinates occasionally raised concerns over the improper accounting methods, but Ebbers pressed on. Eventually, the accounting department could not manipulate the numbers enough to meet the revenue expectations of investors. The Securities and Exchange Commission (SEC) began investigating WorldCom, and WorldCom’s internal audit department discovered the improper accounting of the line costs. Ebbers was asked to resign as CEO. Later, Ebbers was indicted for securities fraud, conspiracy to commit securities fraud, and making false filings with the SEC. Ebbers was convicted by a jury and sentenced to 25 years in prison. Ebbers appealed to the United States Court of Appeals for the Second Circuit.

Rule of Law

Issue

Holding and Reasoning (Winter, J.)

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