United States Securities and Exchange Commission
Litigation Release No. 18605 / March 2, 2004
Accounting and Auditing Enforcement Release No. 1966 / March 2, 2004
SEC Charges Scott D. Sullivan, WorldCom’s Former Chief Financial Officer, with Engaging in Multi-Billion Dollar Financial Fraud
Sullivan Consents to Anti-Fraud Injunction, Permanent Bar from Serving as an Officer and Director of a Public Company, and Permanent Suspension from Practicing as an Accountant Before the Commission
Sullivan Also Pleads Guilty to Criminal Charges Filed by the Department of Justice, which Announces Related Indictment of Former WorldCom CEO Bernard J. Ebbers
Securities and Exchange Commission v. Scott D. Sullivan, Civil Action No. 04 CV 1706
The Securities and Exchange Commission today filed a civil enforcement action against Scott D. Sullivan, the former Chief Financial Officer of WorldCom, Inc. The Commission charged Sullivan with engaging in a fraudulent scheme to conceal WorldCom’s poor financial performance. The Commission alleged that Sullivan, with the consent and knowledge of WorldCom’s former Chief Executive Officer, caused numerous improper adjustments and entries in WorldCom’s books and records, often in the hundreds of millions of dollars, to make the Company’s quarterly and yearly financial results appear to meet Wall Street’s expectations. In addition, the Commission alleged that Sullivan made numerous false and misleading public statements about WorldCom’s financial condition and performance, and signed a number of SEC filings that contained false and misleading material information.
Also today, in connection with the same conduct, Sullivan pleaded guilty to criminal charges filed by the U.S. Attorney’s Office for the Southern District of New York. In addition, that office announced today the related indictment of Bernard J. Ebbers, WorldCom’s former Chief Executive Officer.
The Commission’s complaint against Sullivan alleges that by September 2000, Sullivan and other senior WorldCom executives knew that WorldCom’s true operating performance and financial results were materially below the financial guidance they had given to Wall Street analysts and investors. Rather than disclose WorldCom’s true financial condition and suffer the resulting decline in the company’s share price, from approximately September 2000 through June 2002, Sullivan engaged in a scheme that fraudulently concealed WorldCom’s true operational and financial results. The scheme involved improperly manipulating WorldCom’s reported revenue, expenses, net income, earnings before interest, taxes, depreciation and amortization (EBITDA), and earnings per share.
The complaint charges that as part of the scheme, Sullivan instructed subordinates to book certain fraudulent adjustments and entries in WorldCom’s general ledger. The adjustments and entries were designed to falsely increase WorldCom’s reported revenue and falsely decrease WorldCom’s reported expenses. The false adjustments and entries, among other things, improperly reduced expenses by drawing down certain reserves and improperly capitalizing certain operating expenses commonly referred to in the telecommunications industry as “line costs.” The complaint also alleges that Sullivan misrepresented or failed to disclose material changes in WorldCom’s revenue recognition practices. During the same period, Sullivan and others made materially false or misleading statements or omissions to WorldCom’s independent auditors in connection with audits and the preparation of filings with the Commission.
Simultaneously with the filing of the complaint, Sullivan has agreed, without admitting or denying the allegations of the complaint, to the entry of an order permanently enjoining him from violating, directly or indirectly, numerous provisions of the federal securities laws, including the antifraud, reporting, books and records, internal controls, and lying-to-auditors provisions, Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2 thereunder. Sullivan has also agreed to the entry of an order that would permanently bar him from serving as an officer or director of a public company. The order further provides that any monetary relief will be decided by the Court at a hearing to be held upon motion of the Commission or the instance of the Court and that the Court will retain jurisdiction of the action for all purposes, including the imposition of additional equitable remedies or sanctions, if any, as determined following a hearing. Sullivan has agreed that for the purpose of any such hearing, the allegations of the complaint shall be deemed true. The settlement is subject to the review by and approval of the Court.
In addition, Sullivan has agreed to a Commission administrative order, based on the injunction, suspending him from appearing or practicing before the Commission as an accountant, under Rule 102(e) of the Commission’s Rules of Practice. Sullivan has been licensed in the State of New York as a certified public accountant since 1985, although his registration lapsed in 1989.
The Commission’s action against Sullivan is its fifth civil enforcement action related to the WorldCom fraud. The first was filed against WorldCom, Inc. on June 27, 2002, the day after WorldCom announced that it intended to restate its financial results for five quarters—all quarters in 2001 and the first quarter of 2002. (Litigation Release No. 17588). The Commission sought, among other things, the appointment of a corporate monitor for WorldCom, and on July 3, 2002, U.S. District Judge Jed S. Rakoff appointed former SEC Chairman Richard Breeden to that position. Since then, WorldCom has admitted that beginning in 1999, as a result of undisclosed and improper accounting, it materially overstated the income it reported in its financial statements by at least $9 billion. It also filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code.
On Nov. 26, 2002, the Commission obtained a judgment against WorldCom that provided the full injunctive relief sought against the company. In addition, the judgment ordered WorldCom to undertake extensive reviews of its corporate governance and internal controls, as well as required the company to establish a training and education program for WorldCom officers and employees to minimize the possibility of future violations of the federal securities laws (Litigation Release No. 17866).
Subsequently, the U.S. District Court ordered WorldCom to satisfy the SEC’s civil monetary penalty judgment by paying $500 million in cash and transferring $250 million worth of common stock in the reorganized company when it emerges from bankruptcy into a fund for later distribution to victims of the company's fraud, pursuant to Section 308 (Fair Funds for Investors) of the Sarbanes-Oxley Act of 2002. (Litigation Release Nos. 17829, 18219 and 18277).
Previously, the Commission filed civil actions against former WorldCom Controller David F. Myers (Litigation Release No. 17753); former WorldCom Director of General Accounting Buford "Buddy" Yates, Jr. (Litigation Release No. 17771); and Betty L. Vinson and Troy M. Normand, former accountants in WorldCom's General Accounting Department (Litigation Release No. 17783). All of these actions are pending.
The Commission acknowledges the assistance and cooperation of the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation.
The Commission’s investigation into matters related to WorldCom’s financial fraud is continuing.