Prosecutors seeking to convict former WorldCom chief executive Bernard Ebbers of securities fraud rested their case yesterday after calling...

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NEW YORK — Prosecutors seeking to convict former WorldCom chief executive Bernard Ebbers of securities fraud rested their case yesterday after calling 14 witnesses, but their success or failure continues to hinge on the credibility of former finance chief Scott Sullivan, the only witness to testify he told Ebbers about the multibillion-dollar fraud scheme.

After 16 days of testimony, Sullivan remained the only WorldCom official to directly link Ebbers to WorldCom’s scheme to improve financial results by making unannounced accounting changes to increase revenue and improperly hiding operating expenses. Sullivan testified that for seven consecutive quarters from 2000 to 2002, he told Ebbers he was making “adjustments that weren’t right” to help the company meet Wall Street analysts’ expectations for revenue and earnings growth.

Ebbers, 63, is charged with filing false documents with the Securities and Exchange Commission, committing securities fraud and conspiring to boost WorldCom’s bottom line. Defense lawyers contend Sullivan, not Ebbers, masterminded the fraud and is blaming his former boss to reduce his own prison time.

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WorldCom filed for bankruptcy protection in 2002 and now operates as Ashburn, Va.-based MCI.

Former WorldCom CEO Bernard Ebbers

Reclassified

Lower-level WorldCom accounting officials have described how they secretly reclassified billions of dollars in line costs — fees paid to other carriers — as capital expenses, but none could directly connect Ebbers to the fraud.

The closest corroboration has come from a couple of e-mails in which Ebbers appeared to know the company was making adjustments to revenue and in former controller David Myers’ testimony about an October 2000 hallway conversation he had with Ebbers. In that conversation, which occurred shortly after the firm’s accountants had secretly drawn down reserves to hide operating expenses, Myers said Ebbers told him, “I’m sorry you were asked to do what you were asked to do,” and promised it would never happen again.

But the Myers conversation was oblique and occurred six months before WorldCom officials launched the central fraud in this case — the false reclassification of line costs as capital expenditures.

The jury has seen no documents that directly link Ebbers to the line-cost fraud.

As a result, the defense, led by Reid Weingarten, has focused on Sullivan’s weaknesses as a witness and on the many reasons Ebbers might not have known about the fraud.

Yesterday, the defense introduced reports in which outside auditor Arthur Andersen certified that WorldCom’s financial reports for 2000 and 2001 were in accordance with accounting principles. The reports specifically gave a “green light” to the way the company accounted for both revenue and line costs, calling the controls “effective.”

Will Ebbers take stand?

Weingarten hasn’t said whether Ebbers will take the stand, but lawyers not connected to the case said his decision is likely to turn on how well the defense thinks Sullivan performed under a cross-examination that emphasized his history of lying to investors and other WorldCom officials.

“This verdict is going to turn on whether the jury really believes that a man who could have achieved such stature and success (as Ebbers) really could have missed such a massive fraud right under his nose,” said Charna Sherman, a defense attorney. “Since he was the only other witness in the room to (apparently) damning conversations with Sullivan, this jury is going to need to hear from him and believe him in order to acquit him.”

But Weingarten may not want to take the risk of exposing Ebbers — who is known to have a temper and a brusque manner — to hostile questioning from the prosecution, the lawyers said. “If the defense can create ambiguity about what he knew, that should be enough to avoid a conviction,” said Jacob Frenkel, a former government prosecutor.

Conflicts

To that end, the defense has sought to highlight instances in which Sullivan’s testimony conflicts with that of other witnesses.

Yesterday, the company’s former vice president for investor relations, C. Scott Hamilton, said Sullivan had defended WorldCom’s accounting in private conversations in the spring of 2002. “I recall (Sullivan) saying WorldCom’s accounting was appropriate. We also discussed the fact that it was aggressive. But aggressive is aggressive. It doesn’t mean it’s wrong,” Hamilton told the jury.

That testimony stands in opposition to Sullivan’s assertion that he knew from the beginning that the line-cost adjustments “weren’t right” and that he told Ebbers so as early as the fall of 2000.

Hamilton also said he had no memory of a meeting at which the company’s chief operating officer, Ronald Beaumont, referred to $2 billion in capital expenditures as “Scott’s stuff.” Sullivan had cited that meeting as evidence that Beaumont knew of the line-cost trickery.

The defense then renewed its request that U.S. District Judge Barbara Jones grant immunity to several high-level WorldCom officials, including Beaumont, so they would be willing to testify on Ebbers’ behalf. Beaumont “did not know about the line-cost capitalization … [and] he was positioned in a place far more likely to know” than Ebbers, Weingarten said.

Jones, who rejected a similar request before trial, said she would reread Beaumont’s statements to government investigators yesterday evening and reconsider the immunity issue.