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"Bernard Ebbers/WorldCom I bet $408 million I didn't have.. and lost everything." — Karma Financiero — Transcript

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0:00He had a degree in physical education.
0:01But, he became the CEO of the fifth most
0:03widely held stock in America. And the
0:05company he built was sitting on the
0:06largest accounting fraud in the history
0:07of the United States. This is the story
0:09of Bernard Ebbers, and the woman who
0:11brought him down without ever raising
0:12her voice. It was July 21st, 2002, a
0:15Sunday. The news broke across every
0:17television network and every newspaper
0:19in America at almost the same moment.
0:21WorldCom, the second largest long
0:22distance telephone company in the United
0:24States, had filed for bankruptcy. $107
0:27billion in assets, 17,000 employees
0:30losing their jobs in a single week. And
0:32at the center of it all, a man in cowboy
0:34boots who had started his career running
0:36motels in rural Mississippi. But, the
0:37real [music] story, the story that would
0:39take years to fully uncover, didn't
0:41begin in a boardroom.
0:42>> [music]
0:42>> It began with a woman working alone at
0:443:00 in the morning in a windowless
0:46storage room the size of a parking
0:47space. Her name was Cynthia Cooper, and
0:49she was about to do what no one in
0:50corporate America had ever done before,
0:52bring down a Fortune 500 company from
0:54the inside without any help from
0:55regulators, without any help from the
0:57FBI, without any help from anyone
0:58outside her own small team of internal
1:00auditors. But, to understand how this
1:01happened, to understand why Bernard
1:03Ebbers made the choices he [music] made,
1:04you have to go back to the beginning, to
1:06a place where the American dream was
1:07still alive, and a man with a physical
1:09education degree and a pair of cowboy
1:10boots believed he could build an empire.
1:12[music]
1:12In 1983, Bernard Ebbers was 32 years
1:15old. He was running a small chain of
1:17motels in Mississippi, the kind of place
1:19where the parking lot had more potholes
1:20than cars, and the front desk had a bell
1:21that hadn't worked in years. He also ran
1:23a small chain of gyms. [music] But, he
1:25had no background in telecommunications.
1:26He had no background in accounting. He
1:29had no background in anything that would
1:30suggest he was about to build one of the
1:32largest companies in [music] American
1:33history. What Bernard Ebbers had was an
1:36instinct, an instinct for acquisition,
1:38an appetite [music] for risk that his
1:39own board of directors would later
1:41admit, under oath, they never fully
1:42understood. Started small, a tiny long
1:45distance reseller called LDDS, Long
1:47Distance Discount [music] Service. The
1:48company was so small that when Ebbers
1:50first walked through its doors, it had
1:51fewer employees than a single McDonald's
1:53[music] shift. But, Ebbers saw something
1:55nobody else saw. He saw that the
1:56telecommunications industry was about to
1:58explode, that the deregulation [music]
2:00of phone service in the 1980s was going
2:01to create the biggest land grab in
2:03American business since the railroads,
2:04and he was right. Over the next 15
2:06years, through a relentless string of
2:08mergers and acquisitions, more than 60
2:10of them, Ebbers turned that tiny
2:11reseller into WorldCom. By the late
2:131990s, WorldCom was the second largest
2:16long-distance telephone provider in the
2:17United States. [music] The crown jewel
2:19came in 1998, the acquisition of MCI for
2:21$47 billion. $47 billion. Dot at its
2:24peak, WorldCom's market value touched
2:26$175 billion.
2:28To put that in perspective, that was
2:30more than the gross domestic [music]
2:31product of several countries, and
2:33Bernard Ebbers became a legend. He wore
2:35cowboy boots to the [music] office, real
2:36ones scuffed, broken in, the kind you'd
2:38see on a ranch in Texas, not in a
2:40boardroom on Wall Street. He drove a
2:41pickup truck, not a limousine, not a
2:43town car, a pickup truck. Employees
2:45called [music] him the telecom cowboy.
2:47Wall Street called him a genius. And for
2:49Mississippi, a state with one of the
2:51lowest median incomes in the entire
2:52country, WorldCom was more than a
2:54company dot IT a point of pride. The one
2:56Fortune 500 company that called
2:57Mississippi home. People who lived their
2:59entire lives in small towns across that
3:01state invested their retirement savings
3:02in WorldCom stock. [music]
3:04Not because they understood the
3:05financials, but because it was theirs.
3:07It was from their state. It was their
3:08cowboy [music] on Wall Street. But there
3:10was something most people outside the
3:12company never saw, something that would,
3:14years later, turn a business problem
3:15into a criminal conspiracy. Bernard
3:17Ebbers was personally broke, not in the
3:20way you or I might be broke,
3:21>> [music]
3:21>> struggling to pay rent or worrying about
3:23groceries. He was broke in the way that
3:25only billionaires can be broke,
3:26leveraged to the hilt, drowning in
3:28personal debt. Every dollar he had
3:29borrowed against the value of his own
3:31company stock. Regulatory filings would
3:33later confirm what employees had
3:34suspected for years, a personal line of
3:36credit from WorldCom worth $408 million.
3:39$408 million. And the collateral for all
3:41of it, every loan, every margin call,
3:43every personal debt, was the same thing,
3:44WorldCom stock. As long as the stock
3:46price stayed high, those loans were
3:48safe. If the stock fell far enough,
3:50Bernard Ebbers would face margin calls
3:52he could not cover. His entire personal
3:54fortune, every dollar he had, existed on
3:56paper, propped up by a stock price that
3:58he himself was responsible for
3:59maintaining.
4:00Think about that for [music] a moment.
4:01The CEO of a Fortune 500 company needed
4:04his own stock price to stay high, not
4:06just for his shareholders, not just for
4:07Wall Street, but to avoid personal
4:08financial ruin. That is not a business
4:10problem. That is a ticking bomb. In
4:12March [music] of 2000, the dot-com
4:14bubble collapsed. Over $6 trillion in
4:16market value evaporated in a matter of
4:18months. Companies that had been worth
4:20[music] billions on Monday were worth
4:21nothing by Friday. Internet startups,
4:23the very customers that had fueled
4:25WorldCom's [music] explosive growth,
4:26disappeared almost overnight. The ones
4:28that didn't disappear slashed their
4:29spending to survive. And WorldCom's
4:31revenue, the revenue that Wall Street
4:33expected to keep climbing quarter after
4:34quarter, simply stopped. For most CEOs,
4:37this would have been a crisis. For
4:38Bernard Ebbers, it was something far
4:39worse.
4:40>> [music]
4:40>> As WorldCom's stock price began to
4:41weaken, dropping from $64 a share to 40,
4:44then to 20, then lower, his personal
4:45fortune, built entirely on borrowed
4:47money secured by that stock, was the
4:48first thing at risk.
4:50Every dollar the stock fell added
4:51millions to his personal debt. Every
4:53percentage point drop brought him closer
4:54to a margin call that would wipe him out
4:56completely. According to the report
4:57later filed with WorldCom's bankruptcy
4:59[music] court, a report that took
5:01investigators over a year to compile, it
5:03was precisely during this period of
5:04maximum personal financial pressure that
5:06the fraud accelerated. [music]
5:07The internal investigation would
5:08conclude, in language so carefully
5:09chosen it almost hides the horror
5:11[music] of what it describes, that
5:12Ebbers directed enormous energy toward
5:14protecting his personal financial
5:15empire, with little regard for the risk
5:17this created [music] for the company
5:18itself. Translation, a man who was
5:20supposed to be protecting the interests
5:21of his shareholders, his employees,
5:22[music] and the hundreds of thousands of
5:24small investors who had trusted him with
5:25their savings, was actually protecting
5:27himself.
5:28>> [music]
5:28>> And the mechanism he used to do it was
5:29almost absurdly simple. WorldCom paid
5:32enormous fees to lease network capacity
5:33from other telecom companies. These were
5:35called
5:36>> [music]
5:36>> line costs. The payments WorldCom made
5:38to other companies to use their fiber
5:39optic cables, their switching stations,
5:41their infrastructure. In accounting
5:43terms, these were ordinary operating
5:44expenses, the kind that reduce the
5:46company's profit the same quarter
5:47they're paid. Think of it like renting a
5:49car. If you rent a car for a week,
5:51that's an expense you pay for the use of
5:52the car, and when the week is over, you
5:54give the car back.
5:55>> [music]
5:55>> You don't get to pretend you bought the
5:56car. But, that is exactly what WorldCom
5:58did. Starting around 1999, under direct
6:01instruction from Chief Financial [music]
6:02Officer Scott Sullivan, WorldCom's
6:03accounting team began reclassifying
6:05billions of dollars of these ordinary
6:06operating expenses as capital
6:07investments instead.
6:08>> [music]
6:08>> As if leasing a phone line for one
6:10quarter was the same as building a
6:11factory that would last for decades down
6:12on paper, and only on paper. This single
6:14accounting trick transformed enormous
6:16into reported profits that IT was like
6:18taking your monthly rent payment and
6:19>> [music]
6:19>> calling it a mortgage.
6:21The money was still leaving the
6:22building, but now the accounting books
6:24made it look like an investment instead
6:25of a cost. In the first quarter of 2002
6:27alone, just one quarter, internal
6:29auditors later calculated that without
6:31these fraudulent entries, WorldCom's
6:33reported $130 million profit would have
6:35[music] actually been a $395 million
6:37loss. A swing of more than half a
6:39billion dollars in a single quarter.
6:41Between 1999 and 2002, this scheme
6:44inflated WorldCom's earnings by more
6:46than $11 billion. $11 billion. And
6:48nobody outside a small circle of
6:50executives knew it was happening.
6:52>> [music]
6:52>> Nobody.
6:53Except a woman who worked two floors
6:54below the CFO's office, who had started
6:56asking questions that nobody wanted her
6:57to ask. Cynthia Cooper was the vice
6:59president of internal audit at WorldCom.
7:01She had grown up in Clinton,
7:02Mississippi, the same small town where
7:04WorldCom's headquarters sat. Her parents
7:06still lived there. Many of her neighbors
7:08had invested their savings in WorldCom
7:10stock. Proud that their state finally
7:12had a Fortune 500 company to call their
7:13own. She was not a dramatic person. She
7:16was not a crusader. She was an
7:17accountant, a meticulous, precise,
7:19methodical accountant who believed that
7:20numbers should add up. And when they
7:22didn't,
7:22>> [music]
7:23>> that someone needed to find out why. Dot
7:24in the spring of 2002, an internal audit
7:27manager brought Cooper a tip, a [music]
7:28complaint from an employee about strange
7:30spending patterns inside the company's
7:31network division. The complaint was
7:33vague, the kind of thing that most
7:34companies would file away and forget.
7:36But, Cooper made a decision that would
7:37change everything. She moved up the
7:39timeline of a routine audit.
7:41>> [music]
7:41>> Not because she suspected fraud, not
7:42yet. But because the numbers didn't make
7:44sense. And in Cynthia Cooper's world,
7:47>> [music]
7:47>> numbers that don't make sense are the
7:48only warning you get before something
7:50terrible happens. What her team found
7:51when they began digging made no sense at
7:53all. That a corporate finance director
7:55told them the discrepancies were related
7:56to something called prepaid capacity.
7:58>> [music]
7:58>> A term Cooper had never encountered in
8:00all her years of accounting. She asked
8:02for documentation. She was told the
8:04documentation was confidential. She
8:06asked again. She was told the CFO would
8:08handle it. When she pushed harder, when
8:10she insisted on seeing the actual
8:11entries, the actual journal records, the
8:12actual numbers behind the word prepaid
8:14capacity, [music]
8:15something changed. CFO Scott Sullivan
8:17emailed her directly. He called the
8:19audit a waste of resources. That he said
8:21it was tying up employees who were
8:22needed elsewhere. He tracked her down
8:24outside the office, in hallways, in
8:25parking lots, in places where you don't
8:27accidentally run into someone, to
8:28confront her about the investigation. He
8:30asked her to stop. He asked her to
8:32delay. [music] He asked her to wait
8:33until the next financial quarter. And
8:35Cynthia Cooper
8:36did something that almost no one in
8:38corporate America ever does.
8:39>> [music]
8:39>> She said no. She didn't say no loudly.
8:41She didn't say no dramatically. She
8:43didn't go to the press. She didn't call
8:45a lawyer. She didn't stage a
8:46confrontation. She simply kept working.
8:49Her team began working at night,
8:51specifically, deliberately, to avoid
8:52[music] the spike in server activity
8:53that might tip off the finance
8:54department to what they were extracting.
8:56One member of [music] her team, a man
8:58named Gene Morse, worked out of a 12 by
9:0012 windowless storage room in the
9:01WorldCom basement.
9:02>> [music]
9:02>> He bought his own CD burner, with his
9:04own money. Not a company purchase, his
9:06own money. He did it because he wanted
9:08to make sure that if anyone tried to
9:09destroy the evidence on the company
9:10servers,
9:11>> [music]
9:11>> a copy would already exist somewhere
9:13else. Somewhere that no one in the
9:14executive suite could reach. On June
9:1610th, 2002, working through the night,
9:18working in silence, working while the
9:20rest of the company slept, Cooper's team
9:22found the pattern.
9:23>> [music]
9:23>> Enormous transfers of money moving from
9:25the income statement to the balance
9:26sheet, quarter after quarter after
9:28quarter, with no legitimate accounting
9:30basis. It wasn't [music] a single
9:31mistake. It wasn't a rounding error. It
9:34wasn't a miscalculation. It was
9:35systematic. It was deliberate. And it
9:38had been going on for years. When
9:39Sullivan realized how far the
9:41investigation had progressed,
9:42>> [music]
9:42>> when he understood that Cooper had found
9:43the entries, that she had the evidence,
9:45that she was not going to stop, he asked
9:47her one final time to delay the
9:48investigation until the next financial
9:49[music] quarter. She refused. Cooper and
9:51her colleague brought their findings
9:52directly to the chairman of the
9:54company's audit committee, the board
9:55member responsible for financial
9:56oversight. The board ordered Sullivan to
9:58resign. He refused. They fired him. On
10:01June 25th, 2002, 23 days after Cooper's
10:04[music] team found the pattern in that
10:05windowless storage room, WorldCom told
10:07the world what its own internal auditors
10:09had found. The company had overstated
10:11its income by $3.8 billion. It was, at
10:14that moment, the largest [music]
10:15accounting fraud in American history.
10:16Further investigation would later push
10:18that number past 11 billion. Three days
10:20after [music] the disclosure, WorldCom
10:22cut 17,000 jobs. 17,000 people in a
10:25single week in a single state. The
10:27company's stock, [music] which had once
10:28traded near $64 a share, became
10:31worthless. People who had worked at the
10:33company for 20 years lost their jobs and
10:35their retirement savings in the same
10:36week. Pensions evaporated. 401K plans
10:39that had been heavily invested in
10:40WorldCom stock, because the company
10:42encouraged it, because employees
10:43believed in it, because it was their
10:44state's pride, went to zero. People
10:46Cynthia Cooper had known for years,
10:47neighbors, colleagues, people whose
10:49children she had watched grow up, lost
10:50everything. She could hear it in the
10:52hallways. She could see it in the
10:53parking lot. Cars that had been there
10:55every day for years suddenly gone. She
10:57could feel it in the silence. The sound
10:59of a building emptying out floor by
11:00floor,
11:01>> [music]
11:01>> desk by desk. Bernard Ebbers told
11:03Congress under oath on national
11:05television with the eyes of the country
11:06on him that he had no knowledge of the
11:08fraudulent entries. [music]
11:09He said the scheme was engineered
11:10entirely by Scott Sullivan. He invoked
11:12his Fifth Amendment right and refused to
11:14answer further questions from lawmakers.
11:16Dot he walked out of the hearing room in
11:17his cowboy boots and said nothing. But
11:20Scott Sullivan, the man Ebbers blamed
11:21for everything, made a different choice.
11:23Facing his own charges, his own
11:25potential prison sentence, his own ruin,
11:27Sullivan pleaded guilty to securities
11:28fraud and conspiracy. And he agreed to
11:30testify [music] against the man who had
11:32built the company around him. The man
11:34who had pressured him relentlessly to
11:36hit financial targets that no longer
11:37reflected reality. The man who had been
11:39told directly, specifically, in terms
11:41that left no room for misunderstanding
11:43how those targets were being achieved.
11:44In 2005, the case went to a federal
11:46jury. The trial lasted [music] 6 weeks.
11:49Sullivan's testimony was central to the
11:50prosecution's case. Not just because he
11:52had been the CFO, not [music] just
11:53because he had executed the fraud, but
11:55because he described a pattern of
11:56behavior that the jury could recognize.
11:58A CEO who demanded results.
11:59>> [music]
12:00>> A CEO who didn't ask how those results
12:01were achieved. A CEO who created an
12:03environment where the only thing that
12:05mattered was the number, not how you got
12:07there. The jury found Bernard [music]
12:08Ebbers guilty on all nine counts.
12:10Conspiracy,
12:11securities fraud, filing false
12:13statements with regulators. All nine.
12:15The trial judge, a man who had presided
12:17over dozens of corporate fraud [music]
12:18cases in his career, stated plainly, for
12:21the record, that the evidence showed
12:22Ebbers had been a leader of the criminal
12:24activity, not a bystander,
12:26>> [music]
12:26>> not a CEO who was too busy to notice
12:28what his executives were doing. A
12:29leader. He was sentenced to 25 years in
12:31federal prison. He was 65 years old.
12:34When he walked into that prison, he left
12:36behind a world that had once called him
12:37a genius. A world that had written
12:39profiles about him, that had invited him
12:40to speak [music] at conferences, that
12:42had bought his stock and trusted his
12:43judgment. Outside the courthouse, his
12:45own lawyer called it, simply, [music]
12:47"Not a happy day." Scott Sullivan, the
12:49man who cooperated with prosecutors, who
12:50testified against his own boss, who told
12:52the truth when the truth was the most
12:53expensive thing he could offer, received
12:555 years. He served four.
12:57>> [music]
12:57>> WorldCom's controller and another senior
12:59accountant who had carried out the
13:00fraudulent entries each served roughly a
13:02year. The people who made the smallest
13:03decisions [music] served the least time.
13:05The man who made the biggest decision
13:07served the longest. Bernard Ebbers
13:09served [music] 13 years of his 25-year
13:11sentence. In December 2019, citing his
13:13declining health, citing the fact that a
13:1578-year-old man in a federal prison
13:17hospital was no longer the same person
13:18[music] who had built WorldCom, he was
13:20released to home confinement. He died 2
13:22months later, in February 2020, at the
13:24age of 78. He maintained his [music]
13:26innocence until the end. Until his last
13:28breath, he said he didn't know. Until
13:30his last breath, he said Sullivan did
13:31it. Until his last [music] breath, he
13:33never once said the words that Cynthia
13:35Cooper and the thousands of WorldCom
13:36employees who lost their savings deserve
13:39to hear. Cynthia Cooper left the company
13:41after the bankruptcy. She didn't stay
13:43for the trial. She didn't seek the
13:44spotlight. [music]
13:45She didn't write a press release or give
13:47a victory speech. She quietly packed up
13:48her office, walked out of the building
13:50she had entered [music] a thousand times
13:51before, and drove home. She later wrote
13:54a book about the investigation. [music]
13:56She called it Extraordinary
13:57Circumstances. In it, she wrote
13:59something that every single person who
14:00has ever been tempted to cross a line,
14:02any line in business, in life, in the
14:04quiet moments when no one is watching
14:05should read. She wrote that the story
14:07was, in the end, about human nature,
14:09about how power and money can change
14:11people, about how easily a person can
14:13rationalize one small wrong decision
14:14into a much larger one, not by deciding
14:16to be bad, but simply by refusing to
14:18stop, by deciding that the next quarter
14:20matters more than the truth, by deciding
14:22that the stock price matters more than
14:24the people who trusted you with their
14:25savings, by deciding that your personal
14:27financial survival matters more than the
14:2917,000 people who are about to lose
14:30their jobs. In 2002, Time magazine named
14:33Cynthia Cooper one of three persons of
14:34the year, alongside the whistleblowers
14:36who exposed the Enron scandal that same
14:38year. She was the first internal auditor
14:39in history to receive that [music]
14:41honor. And the collapse she exposed, the
14:43fraud she uncovered in a windowless
14:44storage room at 3:00 in the morning,
14:46>> [music]
14:46>> did something that no amount of
14:47regulation had been able to do before,
14:49change the law. WorldCom's collapse
14:51helped trigger the passage of the
14:52Sarbanes-Oxley Act,
14:53>> [music]
14:53>> a sweeping reform of how American
14:54companies are required to report their
14:56finances. The IT was designed
14:57specifically to [music] make a fraud
14:58like this one harder to hide and harder
15:00to get away with. Every public company
15:02in America today operates under rules
15:03that exist in part because a woman in
15:05Mississippi refused to stop asking
15:07questions when the most powerful men in
15:08her company told her [music] to. Bernard
15:10Ebbers built an empire on debt,
15:12acquisitions, and a decade of relentless
15:14growth. When that growth stopped, he had
15:15a choice. He could have told the truth.
15:18He could have told Wall Street that the
15:19numbers weren't there anymore, that the
15:20bubble had burst, that the revenue had
15:22[music] dried up, that the party was
15:23over. It would have been painful. The
15:25stock would have fallen. He would have
15:27lost money, a lot of money. But the
15:28people who trusted him, the 17,000
15:30employees, the small investors in
15:31Mississippi, the [music] pensioners, the
15:33neighbors, they would have had a chance
15:34to prepare. Instead, he chose the
15:36accounting trick.
15:37>> [music]
15:37>> He chose the lie that protected his
15:39personal fortune at the expense of
15:40everyone else's. And the woman who
15:42caught him
15:43didn't need a badge or a subpoena or
15:44[music] a team of FBI agents. She needed
15:46a laptop, a CD burner bought with her
15:48own money,
15:49>> [music]
15:49>> and the courage to keep working when the
15:50most powerful executives in her company
15:52told her to stop. That is karma. Not the
15:54mystical kind, not the universe
15:55balancing [music] some cosmic scale. The
15:57real kind, the kind that arrives when
15:59one person in a small room at 3:00 in
16:01the morning
16:02>> [music]
16:02>> decides that the truth matters more than
16:03the consequences of telling it. Before
16:05you go, if the story hit you, drop a
16:07number from [music] 1 to 10 in the
16:08comments. One if it left you cold. 10 if
16:11it made you think differently about
16:12[music] the next time someone tells you
16:13the numbers are fine. Subscribe if you
16:15want to hear what happens next episode,
16:17because the next story we're covering
16:18makes this one look like a parking
16:19ticket. And trust me, you don't want to
16:22miss it. [music] This has been financial
16:23karma, and if the story moved you,
16:25subscribe to Karma Unleashed. Every
16:27episode we follow the money
16:29>> [music]
16:29>> and the consequences that never stop
16:30arriving. Next, another name, another
16:33empire, another fall. The history of
16:35financial karma is far from [music]
16:37over. We will see you on the other side.

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This page contains the full transcript of "Bernard Ebbers/WorldCom I bet $408 million I didn't have.. and lost everything." — Karma Financiero by Karma Unleashed, generated from the public captions YouTube serves with the video. The transcript has 3,778 words across 620 segments, with the original timestamps preserved so you can click any line to jump to that moment in the embedded player.

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