NEW YORK – The former finance chief of WorldCom Inc. (search) testified Thursday that the company called off 2001 merger talks with Verizon after he and CEO Bernard Ebbers (search) worried Verizon officials would discover WorldCom's cooked books.
Scott Sullivan (search) testified there were concerns that Verizon Communications Inc. (VZ) would uncover the fraud during a process called due diligence, in which companies considering a merger examine each others books.
• Click here to read the indictment against Bernard Ebbers
"I said to Bernie, if we get to the next step with Verizon where we start to exchange nonpublic information, the details of our financial statements, I have concerns ... because of the adjustments we have made," Sullivan testified.
"He said, you're right," Sullivan continued, referring to Ebbers. "This probably isn't a good time to be talking to Verizon anyhow because our stock price isn't where it needs to be."
WorldCom and Sprint Corp. had a potential merger voided by the Justice Department in 2000, but the talks with Verizon came in 2001, when WorldCom's $11 billion accounting fraud was well under way.
Earlier Thursday, Sullivan testified that Ebbers ordered him to remove information about out-of-control expenses from an internal budget document in 2001.
Sullivan told jurors Ebbers told him to remove documentation of line costs -- the soaring fees WorldCom was paying to local telephone carriers -- from an internal ledger called the budget variance report.
Sullivan said the company treasurer had asked him why line costs were just $800 million in March 2001 -- compared to the $1.6 billion reported for the previous two months.
WorldCom accountants had hid the difference, disguising the expense as a capital-expenditure asset, to make WorldCom's bottom line conform to Wall Street estimates.
Sullivan quoted Ebbers, referring to the treasurer, as asking: "Why she does get that information?"
"She's the treasurer of the company," Sullivan said he answered. "Bernie asked me to remove the information from the financial statement."
The next budget variance report, for April 2001, did not include information about line costs.
Sullivan is the star witness for the government against Ebbers, who is charged with orchestrating the $11 billion accounting fraud that drove WorldCom into bankruptcy in 2002.
On Thursday, his fourth day on the witness stand, he also described sharing a car service with Ebbers after the two had completed separate meetings in New York in May 2001.
Ebbers, who had been meeting with bankers at J.P. Morgan, slammed the door when he got into the car. "He made a statement to the effect of, 'They wouldn't loan me money,"' Sullivan testified.
Ebbers had $400 million in personal loans at Bank of America backed by WorldCom stock. Prosecutors say he ordered the books cooked at WorldCom because he wanted to keep its stock price high and protect his fortune.
Sullivan also said he alerted Ebbers at the close of the second quarter of 2001 that disguising hundreds of millions of dollars of expenses was the only way to meet Wall Street estimates -- just as in the first quarter.
"He said again, 'We have to hit our numbers for the quarter,"' Sullivan recalled.
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