Ebbers says WorldCom's accounting was proper


NEW YORK - Former World-Com Inc. chief executive Bernard J. Ebbers, accused of accounting fraud, aims to show jurors that some of the transactions in question didn't amount to a crime, his lawyers said.

"We can represent with a virtual certainty that we would be defending the propriety of some of the accounting in this case," said Brian M. Heberlig, one of Ebbers' lawyers, at a final pretrial hearing yesterday in U.S. District Court in Manhattan.

Prosecutors say that one method used by WorldCom to inflate earnings was by making adjustments to the way it accounted for revenue. Heberlig said the defense would show that WorldCom's revenue policies were proper.

Jurors may acquit Ebbers if they conclude that accounting experts can't agree on the proper way to report World- Com's finances, said Michael A. Perino, a securities law professor at St. John's University School of Law.

The defense is seeking to create doubt by asking how a non-accountant like Ebbers could have known what was forbidden, he said.

"The government would like this to be a straight fraud case as to whether Bernie Ebbers knew what was going on," said Seth C. Farber, a former federal prosecutor and now a partner at Dewey Ballantine LLP in New York.

"The defense would like this to be a more complicated case - whether there was anything wrong with the accounting to begin with."

Jury selection is expected to be completed next week.

Ebbers is accused of leading an $11 billion fraud by helping illegally reduce reported expenses and overstating revenue. The company lost $184.6 billion in value between its high on June 18, 1999, and July 21, 2002, when it made the biggest U.S. bankruptcy filing ever.

WorldCom began restating earnings after Ebbers resigned as CEO in April 2002.

Prosecutors will rely on testimony from former Chief Financial Officer Scott D. Sullivan, who has pleaded guilty, to prove that Ebbers was part of the fraud. Defense lawyers say Sullivan kept Ebbers in the dark about accounting matters and is lying to win leniency from prosecutors.

Ebbers' lawyers question the accuracy of WorldCom's restatements. The defense also says it will show that WorldCom's auditor, Arthur Andersen LLP, approved its accounting.

Adverse ruling

But a federal judge in New York called into question Tuesday Andersen's accounting. The judge rejected a request by Andersen to dismiss an investor lawsuit that alleges the accounting firm was partly responsible for the collapse of WorldCom.

U.S. District Judge Denise Cote denied a motion to dismiss securities fraud claims against Andersen, which was convicted in 2002 of obstruction of justice in its handling of records at Enron Corp.

Cote said there was enough evidence "that Andersen acted in willful blindness to the realities at WorldCom and in abrogation of its duty as an auditor" to warrant a trial.

Cote's ruling means Arthur Andersen, once the fifth-largest accounting firm, must stand trial next month and gives investors an advantage in proving their case against the accounting firm.

Investors in WorldCom securities are seeking as much as $7 billion from the defendants. The investors claim that WorldCom's investment banks should have known that WorldCom was misrepresenting its financial condition.

In May, Citigroup Inc. agreed to pay $2.6 billion to resolve WorldCom investor claims. It was the second-largest payout in U.S. history in a securities-fraud case. Court-ordered settlement negotiations have been under way since late 2002.

WorldCom's accounting under Ebbers has been defended by some experts in accountancy.

Teresa John, an assistant accounting professor at New York University's Leonard N. Stern School of Business, said Ebbers will be able to defend some of WorldCom's revenue policies under generally accepted accounting principles.

"It actually is a gray area, and there is some flexibility, especially where it is a service being sold," she said. "It's a judgment issue in which two accountants could disagree."

Another way WorldCom inflated earnings was by hiding line costs - fees paid to other phone companies for use of their transmission lines - in the capital budget, rather than listing them as operating expenses, which would have reduced revenue, the indictment says.

Transfers called illegal

The company illegally transferred $3.8 billion from line cost expense accounts to capital expenditure accounts, the indictment says.

Edward I. Altman, a bankruptcy and reorganization professor at NYU, said an argument may be made in support of the capitalization of line costs.

For those who value a company based on the concept of free cash flow as opposed to earnings per share, the difference is very little, he said.

Prosecutors will argue that WorldCom began capitalizing line costs only after it depleted its reserves and ran out of revenue sources, the indictment says.

Heberlig declined to comment beyond his courthouse remarks.

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