In 1998, the telecommunications industry began to slow down and WorldCom's stock was declining.

CEO Bernard Ebbers came under increasing pressure from banks to cover margin calls on his WorldCom stock that was used to finance his other businesses endeavors (timber, yachting, etc.). The company's profitability took another hit when it was forced to abandon its proposed merger with Sprint in late 2000. During 2001, Ebbers persuaded WorldCom's board of directors to provide him corporate loans and guarantees totaling more than $400 million. Ebbers wanted to cover the margin calls, but this strategy ultimately failed and Ebbers was ousted as CEO in April 2002. Beginning in 1999 and continuing through May 2002, WorldCom (under the direction of Scott Sullivan (CFO), David Myers (Controller) and Buford Yates (Director of General Accounting)) used shady accounting methods to mask its declining financial condition by falsely professing financial growth and profitability to increase the price of WorldCom's stock. The fraud was accomplished in two main ways. First, WorldCom's accounting department underreported 'line costs' (interconnection expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them. Second, the company inflated revenues with bogus accounting entries from 'corporate unallocated revenue accounts'. The first discovery of possible illegal activity was by WorldCom's own internal audit department who uncovered approximately $3.8 billion of the fraud in June 2002. The company's audit committee and board of directors were notified of the fraud and acted swiftly: Sullivan was fired, Myers resigned, and the Securities and Exchange Commission (SEC) launched an investigation. By the end of 2003, it was estimated that the company's total assets had been inflated by around $11 billion (WorldCom, 2005). On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection, the largest such filing in United States history. The company emerged from Chapter 11 bankruptcy in 2004 with about $5.7 billion in debt. At last count, WorldCom has yet to pay its creditors, many of whom have waited years for the money owed. On March 15, 2005 Bernard Ebbers was found guilty of all charges and convicted on fraud, conspiracy and filing false documents with regulators. He was sentenced to 25 years in prison. Other former WorldCom officials charged with criminal penalties in relation to the company's financial misstatements include former CFO Scott Sullivan (entered a guilty plea on March 2, 2004 to one count each of securities fraud, conspiracy to commit securities fraud, and filing false statements), former controller David Myers (pleaded guilty to securities fraud, conspiracy to commit securities fraud, and filing false statements on September 27, 2002), former accounting director Buford Yates (pleaded guilty to conspiracy and fraud charges on October 7, 2002), and former accounting managers Betty Vinson and Troy Normand (both pleading guilty to conspiracy and securities fraud on October 10, 2002) (MCI, 2006). Ebbers reported to prison on September 26, 2006 to begin serving his sentence.

WORLDCOM'S COLLAPSE: THE OVERVIEW; WORLDCOM FILES FOR BANKRUPTCY; LARGEST U.S. CASE
By SIMON ROMERO and RIVA D. ATLAS Published: July 22, 2002

WorldCom, plagued by the rapid erosion of its profits and an accounting scandal that created billions in illusory earnings, last night submitted the largest bankruptcy filing in United States history. The bankruptcy is expected to shake an already wobbling telecommunications industry, but is unlikely to have an immediate impact on customers, including the 20 million users of its MCI long-distance service. The WorldCom filing listed more than $107 billion in assets, far surpassing those of Enron, which filed for bankruptcy last December. The WorldCom filing had been anticipated since the company disclosed in late June that it had improperly accounted for more than $3.8 billion of expenses. Few experts or officials expect WorldCom's service to deteriorate noticeably, at least in the near term. ''I want to assure the public that we do not believe this bankruptcy filing will lead to an immediate disruption of service to consumers,'' Michael K. Powell, chairman of the Federal Communciations Commission, said last night. But industry consultants said they could not imagine how the belt-tightening expected in bankruptcy would improve service that is already, in some respects, sloppy. [Page A12.] WorldCom's collapse has already reverberated through jittery financial markets, and is likely to be felt in the wider economy, with banks, suppliers and other telephone companies devising strategies to contain their exposure. WorldCom, built through rapid acquisitions, accumulated $41 billion in debts. Founded in 1983 as LDDS Communications, it became the nation's second-largest long-distance company and the largest handler of Internet data. Company executives said they intended to remain in business, and have been promised new financing from banks to do so. ''We are going to aggressively go forward and restructure our operations,'' John W. Sidgmore, WorldCom's chief executive, said in an interview last night. ''I think ultimately we will emerge as a stronger company.'' While WorldCom has already cut its work force significantly, Mr. Sidgmore said last night that he did not expect further layoffs for the time being. He said he would remain WorldCom's chief but would be joined by a chief restructuring officer brought in by creditors.

Some creditors, however, have questioned whether Mr. Sidgmore, who has served on WorldCom's board for years, should remain in charge. Mr. Sidgmore took over as chief executive in late April after the board ousted Bernard J. Ebbers, one of the company's founders. Shareholders, who owned what was once one of the world's most valuable companies, worth more than $100 billion at its peak, are expected to be virtually wiped out. With the bankruptcy filing, control passes instead to the banks and bondholders who financed WorldCom's growth. Besides its own overambitious strategies and flawed accounting, WorldCom also fell victim to a glut of telecommunications capacity. Cheap and plentiful financing allowed companies rapidly to build transcontinental and transoceanic fiber optic networks in the 1990's. The additional capacity resulted in lower prices for WorldCom's services, which include basic phone service and the transmission of Internet data for large companies. Mr. Sidgmore said last night that he was opposed to breaking up WorldCom and selling its pieces, aside from an effort already under way to part with peripheral units like businesses in Latin America and some other operations. This approach would rule out selling UUNet, a large Internet backbone operation, or MCI. But once the company reorganizes, and investors gain a better understanding of its twisted finances, WorldCom could become an attractive acquisition target, analysts say.

MCI Inc.
MCI, Inc. (d/b/a Verizon Business) is an American telecommunications corporation, currently a subsidiary of Verizon Communications, with its main office in Ashburn, Virginia. The corporation was formed originally as a result of the merger of WorldCom and MCI Communications corporations, and used the name MCI WorldCom succeeded by WorldCom before changing its name to the present version on April 12, 2003 as part of the corporation's ending of its bankruptcy status. The company traded on NASDAQ with the symbols "WCOM" (pre-bankruptcy) and "MCIP" (post-bankruptcy). The corporation was purchased by Verizon Communications with the deal finalizing on January 6, [1] 2006, and is now identified as that company's Verizon Business division with the local residential divisions being integrated slowly into local Verizon subsidiaries. For a time, WorldCom was the United States's second largest long distance telephone company (after AT&T). WorldCom grew largely by acquiring other telecommunications companies, most notably MCI [citation Communications. It also owned the Tier 1 ISP UUNET, a major part of the internet backbone. needed] [2][3] It was headquartered in Clinton, Mississippi, before being relocated to Virginia.

Corporate founding
The company began as Long Distance Discount Services, Inc. (LDDS) during 1983, based in Hattiesburg, Mississippi. During 1985 LDDS selected Bernard Ebbers (born 1941) to be its chief executive officer (CEO). The company became traded publicly as a corporation during 1989 as a result of a merger with Advantage Companies Inc. The company name was changed to LDDS WorldCom during 1995. The company grew rapidly during the 1990s. Among the companies that were bought or merged with WorldCom were Advanced Communications Corp. (1992), Metromedia Communication Corp. (1993), Resurgens Communications Group(1993), IDB Communications Group, Inc (1994), Williams Technology Group, Inc. (1995), and MFS Communications Company (1996), and MCI during 1998. The acquisition of MFS included UUNET Technologies, Inc., which had been acquired by MFS shortly before the merger with WorldCom. During February 1998, WorldCom purchased, by a complex transaction, online pioneer company CompuServe from its parent company H&R Block. WorldCom then retained the CompuServe Network Services Division, sold its online service toAmerica Online, and received AOL's network division, ANS. The acquisition of Digex (DIGX) during June 2001 was also complex; Worldcom acquired Digex's corporate parent, Intermedia Communications, and then sold all of Intermedia's non-Digex assets to Allegiance Telecom.

MCI acquisition

MCI WorldCom logo (Used from 19982000).

On November 4, 1997, WorldCom and MCI Communications announced their US$37 billion merger to form MCI WorldCom, making it the largest corporate merger of US history. On September 15, 1998 the new company, MCI WorldCom, opened for business, after MCI divested itself of its successful [4] "internetMCI" business to gain approval from the U.S. Dept. of Justice. [edit]Proposed

Sprint merger

WorldCom logo (Used from 20002003).

On October 5, 1999 Sprint Corporation and MCI WorldCom announced a $129 billion merger agreement between the two companies. Had the deal been completed, it would have been the largest corporate merger of history, causing MCI WorldCom to be even larger than AT&T and therefore the largest communications company in the United States. However, the deal did not finalize because of opposition from the US Department of Justice and the European Union on concerns of it creating a

monopoly. On July 13, 2000, the boards of directors of both companies terminated the merger process. Later that year, MCI WorldCom renamed itself simply "WorldCom".

[edit]Accounting

scandals

CEO Bernard Ebbers became very wealthy from the increasing price of his holdings in WorldCom [5] common stock. However, during the year 2000, the business of the telecommunications industry began decreasing and WorldComs aggressive growth strategy suffered a serious setback when it was forced by the US Justice Department to abandon its proposed merger with Sprint during mid[5] 2000. By that time, WorldComs stock price was decreasing and banks were demanding increasingly that Ebbers cover margin calls on his WorldCom stock that was used to finance his other [5] businesses (timber and yachting, among others). During 2001, Ebbers persuaded WorldComs board of directors to provide him corporate loans and guarantees in excess of $400 million to cover [5] his margin calls. The board hoped that the loans would avert the need for Ebbers to sell substantial amounts of his WorldCom stock, as his doing so would result in further decrease of the stock's price. However, this strategy failed and Ebbers resigned as CEO during April 2002 and was replaced by John Sidgmore, former CEO of UUNET Technologies, Inc. Beginning modestly during mid-year 1999 and continuing at an accelerated pace through May 2002, the company (directed by Ebbers (as CEO), Scott Sullivan (CFO), David Myers (Comptroller) and Buford "Buddy" Yates (Director of General Accounting)) used fraudulent accounting methods to [5] disguise its decreasing earnings to maintain the price of WorldComs stock. The fraud was accomplished primarily in two ways: 1. Booking line costs (interconnection expenses with other telecommunication companies) as capital on the balance sheet instead of expenses. 2. Inflating revenues with bogus accounting entries from "corporate unallocated revenue accounts". During 2002, a small team of internal auditors at WorldCom worked together, often at night and [6][7][8] secretly, to investigate and reveal $3.8 billion worth of fraud. Soon thereafter, the companys audit committee and board of directors were notified of the fraud and acted swiftly: Sullivan was dismissed, Myers resigned, Arthur Andersen company withdrew its audit opinion for 2001, and theU.S. Securities and Exchange Commission (SEC) began an investigation into these matters on June 26, 2002 (see accounting scandals). By the end of 2003, it was estimated that the company's [5] total assets had been inflated by about $11 billion.

[edit]Bankruptcy On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection in the largest such filing in United States history at the time (since overtaken by the bankruptcies of both Lehman Brothersand Washington Mutual in a span of eleven days during September 2008). The WorldCom bankruptcy proceedings were held before U.S. Federal Bankruptcy Judge Arthur J. Gonzalez who simultaneously heard the Enron bankruptcy proceedings which were the second largest bankruptcy case resulting from one of the largest corporate fraud scandals. None of the criminal proceedings against WorldCom and its officers and agents was originated by referral from Gonzalez or the Department of Justice lawyers. By the bankruptcy reorganization agreement, the company paid $750

million to the SEC in cash and stock in the new MCI, which was intended to be paid to wronged investors. On April 14, 2003, WorldCom changed its name to MCI and relocated its corporate headquarters from Clinton, Mississippi, to Dulles, Virginia. During May 2003, the company was given a no-bid contract by the United States Department of Defense to build a cellular telephone network in Iraq. The deal has been criticized by competitors and others who cite the company's lack of experience with that technology. The SEC and Worldcom concluded a deal in which Worldcom agreed to pay a civil penalty of $2.25 [9] billion. The deal was approved by federal judge Jed Rakoff during July 2003. In a sweeping consent decree, the SEC and Rakoff essentially took control of Worldcom. Rakoff appointed former SEC chairman Richard C. Breeden to oversee Worldcom's compliance with the SEC agreement. Breeden actively involved himself with the management of the company, and prepared a report for Rakoff, titled Restoring Trust, in which he proposed extensive corporate governance reforms, as part of an effort to "cast the new MCI into what he hoped would become a model of how shareholders should be [10] protected and how companies should be run."

[edit]Post-bankruptcy

Bernard Ebbers.

The company emerged from Chapter 11 bankruptcy during 2004 with about $5.7 billion in debt and $6 billion in cash. About half of the cash was intended to pay various claims and settlements. Previous bondholders ended up being paid 35.7 cents on the dollar, in bonds and stock in the new MCI company. The previous stockholders'stock was cancelled, making it totally worthless. It had yet to pay many of its creditors, who had waited for two years for a portion of the money owed. Many of the small creditors included former employees, primarily those who were dismissed during June 2002 and whose severance and benefits were withheld when WorldCom filed for bankruptcy. On August 7, 2002, the exWorldCom 5100 group was begun. It was composed of former WorldCom employees with a common goal of seeking full payment of severance pay and benefits based on the WorldCom Severance Plan. The "5100" stands for the number of WorldCom employees dismissed on [11] June 28, 2002 before WorldCom filed for bankruptcy. On February 14, 2005, Verizon Communications agreed to acquire MCI for $7.6 billion.

On March 15, 2005 Bernard Ebbers was found guilty of all charges and convicted of fraud, conspiracy and filing false documents with regulators- all related to the $11 billion accounting scandal. Other former WorldCom officials charged with criminal penalties in relation to the company's financial misstatements include former CFO Scott Sullivan (entered a guilty plea on March 2, 2004 to one count each of securities fraud, conspiracy to commit securities fraud, and filing false [12] statements), former comptroller David Myers (pleaded guilty to securities fraud, conspiracy to [13] commit securities fraud, and filing false statements on September 27, 2002), former accounting director Buford Yates (pleaded guilty to conspiracy and fraud charges on October 7, [14] 2002), and former accounting managers Betty Vinson and Troy Normand (both pleading guilty to [15] conspiracy and securities fraud on October 10, 2002). On July 13, 2005 Bernard Ebbers received a sentence that would keep him imprisoned for 25 years. At time of sentencing, Ebbers was 63 years old. On September 26, 2006, Ebbers surrendured himself to the Federal Bureau of Prisons prison at Oakdale, Louisiana, the Oakdale Federal Corrections Institution to begin serving his sentence. During March 2005, 16 of WorldCom's 17 former underwriters reached settlements with the [16] [17] investors. Citigroup settled for $2.65 billion on May 10, 2004. During December 2005, the Microsoft corporation announced that MCI will join it by providing Windows Live Messenger customers "Voice Over Internet Protocol" (VoIP) service to make telephone calls. This was MCI's last new product- called "MCI Web Calling". After the merger, this product was renamed "Verizon Web Calling".