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T h e D a rlin g O f W a ll S tre e t

A Castle of cards,
built on fire turned
smoking mirrors….
T h e C o m p a n y p u b licly d isclo se d
o n Ju n e 2 5 , 2 0 0 2 th a t it h a d
d isco v e re d su b sta n tia l a cco u n tin g
irre g u la ritie s to ta lin g m o re th a n
$ 3 . 8 b illio n .
O n Ju ly 2 1 , 2 0 0 2 , W o rld C o m ,
In c . file d v o lu n ta ry p e titio n s
se e k in g re lie f u n d e r C h a p te r
1 1 o f th e U n ite d S ta te s
B a n k ru p tcy C o d e .
UNITED STATES
BANKRUPTCY COURT
SOUTHERN DISTRICT
NEW YORK
• Case No. 02-15533 (AJG)
• DICK THORNBURGH,
BANKRUPTCY COURT
EXAMINER.
• Counsel
Kirkpatrick & Lockhart LLP

1800 Massachusetts Avenue, N.W.

Washington, D.C. 20036


rld C o m b e g a n in 1 9 8 3 a s a sm a ll co m p a n
F irst B o a rd o f
D ire cto rs
Long Distance Discount
Services,Inc. in Jackson,
Mississippi.
 Since 1983, the United
States
telecommunications
industry has been
transformed from a
monopoly to an
extremely competitive
marketplace.
P rin cip a l
G ro w th
F a cto rs
E lim in a tio n a n d re la x a tio n o f le g a l
a n d re g u la to ry b a rrie rs to m a rk e ts .
A d v a n ce m e n t
of new
te ch n o lo g ie s
a n d se rv ice s .
C

O

N

S

O

L

I

D

A

T

I


 Prior to 1984
monopoly of AT&T
The government’s
breakup of AT&T and
divestiture order.
Two types of companies

in market.
 Facilities-based
Carriers
F a cilitie s - b a se d C a rrie rs o r “ R e se ll
Dependence on transmission

expenses or “line costs.”


With Their Higher Fixed
Costs,
Difficult To Generate

Sufficient Traffic.
 1985: Licensed Service to
LDDS Communications,
Inc
 $1
 In 1985, the BoD’s of LDDS
elected Bernard Ebbers as
the Company’s chief
executive officer
 (“CEO”).
 With Mr. Ebbers at the
helm, the Company
quickly began acquiring
resellers of
telecommunication
services in other states.
 1987, LDDS Communications, Inc.,
a
 Tennessee corporation, was
formed as a holding company for
the operating entities acquired
by LDDS, Inc.
By
1989,
te le co
m
se rv ic
e s in
e ig h t
so u th
e rn
sta te s
and
 Reported Annual
Revenues: $53
In August 1989, LDDS became a

public company through a


reverse merger with Advantage
Companies, Inc. (“Advantage”), a
long distance reseller based in
Atlanta, Georgia.
1990 –
1995
Expansion
Presence in
Central , South
America with huge
network capacity .
Presence
in almost
whole of
North
America
 Reported Annual
Revenues: $948
million.
December 1992,

Acquired Texas-based
reseller that providing
services in 26 states.
1993
 Through a complicated
series of stock
 conversions, and payment
of $150 million in cash.
F o llo w
ed a
la rg e
se rie s
of
sto ck s
tra n sfo
rm -
a tio n .
19
94

N e w M a rk e t
O p p o rtu n itie
s fo r
1 9 9 4 , L D D S a cq u ire d ID B
C o m m u n ica tio n s G ro u p ,
In c . ( “ ID B ” )
 1995, WorldCom
completed a $2.5 billion
cash purchase of
Williams Technology
Group, Inc. (“WilTel”)
L e v e ra g e d h u g e
n e tw o rk o f W ilT E l
Decemb
er
31,

1995,
Annual

Reporte

d
$
Revenue

s
Billi
on
Telecom Act in
1996
D e ce m b e r 1 9 9 6 ,
co m p a n y a cq u ire d M F S
C o m m u n ica tio n s
U U N e t Te ch n o lo g ie s , In c .
( “ UUNet ” ) , a subsidiary of
M F S , w a s a sig n ifica n t
 By end of 1996, the Company
reported annual revenues of
approx $4.8 billion.
In 1997 and 1998, WorldCom
completed three
 major acquisitions for Consolidation
of Its

 The most significant: MCI
Communications
Corporation (“MCI”) valued
at approximately $40 billion
 MCI shareholders generally
received 1.2439 shares of
WorldCom common stock
(a market value of
approximately $51 per
share) for each share of
MCI common stock.
 With the acquisition of MCI, the
Company
 changed its name to MCI
WorldCom, Inc. and
 increased its local service to over
100 domestic
 U.S. markets.
 WorldCom acquired economic
interest in Embratel
Participacoes S.A. for approx.
$2.3 billion in cash in August
1998.
WorldCom acquired a
significant
 equity interest in Avantel,
 January 1998, WorldCom
acquired
 Brooks Fiber Properties,
Inc. (“BFP”).
 January 1998, WorldCom
merged with CompuServe
Corporation (“CompuServe”).
 WorldCom acquired ANS
Communications (“ANS”)
from AOL.
 December 31, 1998, WorldCom
reported annual revenues billion.
• In 1999, WorldCom acquired greater
wireless communications capacity
through acquisitions of SkyTel
Communications, Inc. (“SkyTel”),
CAI Wireless Systems, Inc. and
Wireless One.
 October 1999, WorldCom
announced to merge with
Sprint, one of its chief
competitors.
 July 2000, the companies formally
terminated
 the merger plan after receiving
opposition from
 the U.S. Department of Justice.

In September 2000, WorldCom
acquired
 Intermedia Communications, Inc.
for a reported
 $5.8 billion in stock
 By the end of 2000, WorldCom
had grown into a
telecommunications giant,
with significant operations in
all major aspects of the
industry.
 As of December 31, 2000, the
Company
 reported total annual revenues of
over $39
 billion and notes payable and long-
term debt

$ B illio n
Down Turn
 The Dow Jones reflected how
 share prices for the
 industry as a whole rose sharply
 WorldCom’s share price rose from
the low $20s
 in January 1995 to over $90 per
share by mid-
 1999.
 WorldCom common stock fell from
a high
 on June 30, 1999 of $96.766 per
 As of December 29, 2000, the
stock’s high was
 $18.656. For the next year it
generally
 fluctuated between $24 and $12
per share.
 It fell precipitously in 2002 and
was delisted
 from the Nasdaq stock market as
of July 30, 2002.
 WorldCom proposed and its
shareholders
 approved a plan of “recapitalization”

in 2001 to
 create two separately traded tracking

stocks:
 WorldCom Group and MCI Group.
 On May 21, 2002,elimination of
the tracking
 stock structure, due to increasing

debt.
 As of December 31, 2001, the
Company
 reported total annual revenues of

over $35.2
 billion and total debt of $30.2
billion.
 Confidential request from the
SEC for
 voluntary production of

documents and
 23 information.
 April 2002: Significant Reduction
of Workforce
 by 3,700 positions.
Huge Protests
 Resignation of Mr. Ebbers by late
April 2002
 May 2002: Change of Auditors,
Arthur Andersen Replaced.
KPMG Engaged
 Draw Down on Line of Credit a
$2.65 billion in
 May 2002
 June 2002 : Standard & Poor’s
Lowered of
 Credit Rating
Im p ro p e r re p o r
In May 2002, the Company’s
Internal Audit
 Department began an
investigation concerning
 the capitalization of line costs.
 June 12, 2002, Max Bobbitt, the
Chairman of the Audit
Committee informed of its
discoveries regarding a total of
$2.5 billion in line costs that had
been capitalized.
June 25 Public

Announcement of
Revising of Earnings
• On June 26, 2002, the SEC commenced
a civil injunctive action against
WorldCom in the
• United States District Court for the
Southern District of New York alleging
violations of the
• antifraud and other provisions of the
federal securities laws. The SEC
complaint sought an
• injunction, monetary penalties, and
prohibitions on destroying documents
and making
• On June 28, 2002, based upon a joint
agreement between the SEC and
WorldCom, the
• District Court ordered, among other
things, that WorldCom and its
affiliates preserve all items
• relating to the Company’s financial
reporting obligations, public
disclosures required by the federal
• securities laws and accounting matters.
• On July 2, 2002, the Court appointed,
upon the request of the SEC and
with the
• Company’s consent, former SEC
Chairman Richard C. Breeden to
serve as the Corporate Monitor.
On Jul y 21, 2002,
Wor ldCom filed voluntar y
petitions for r eor ganization
under Chapter 11 of the
United States Bankr uptcy
Code.
On August 8, 2002 $3.3
billion in improperly
reported EBITDA.
WorldCom disclosed to
write-offs of assets of

$ B illio n
Panic in market
F in a l H e a rin g
 Complete Restructuring of the
company.
New Members of Senior
Management by Mr.
Sidgmore
Coming up of New
Directors
Nicholas deB Katzen

Dennis R. Beresford
C.B. Rogers, Jr.
Enhancements to the
Company’s Accounting,
Audit and Internal
Control Functions
Other Measures
• Permanent Controller and
Establishment of Sub Controllers.
• Creating a Restatements Group.
• New CFO Positions.
• An Increase of Internal Audit Staffing.
• Annualized Budget Plans.
Significa
nt
Question
s?
What happened with
Bernie Ebbers?
Closing Argument
Reaction of family….
 In 2005 Bernie Ebbers was
convicted of fraud as
 a result of MCI WorldCom’s
financial
 misreporting.
 Currently serving a 25 year term in
the Oakdale Federal Correctional
Complex in Louisiana.  He is
serving his sentence as inmate
#56022-054. The earliest date he
can be released is in 2028, when
he will be 85 years of age.

WorldCom’s
Relationships With SSB,
Jack Grubman and
Citibank?
 SSB and its predecessors,
Salomon Brothers and Smith
Barney allocated millions of
dollars of valuable IPOs to a
number of WorldCom directors,
including Mr. Ebbers.
 Mr. Grubman repeatedly gave
WorldCom's stock
 its highest ratings urging investors
to purchase
 WorldCom shares.
 SSB and Mr. Grubman's
Extremely Favorable Analyst
Reports by which WorldCom
pursued a fast-paced and
aggressive campaign of
 acquisitions and stock

purchases.
SSB REPORTS ON
WORLDCOM FROM
2/00 UNTIL 8/01
 The company emerged in 2004
with about $5.7
 billion in debt and $6 billion in
cash.
 The corporation was purchased by
Verizon
 Communications with the deal
closing on July 7,
 2006, and is now identified as that
company's
  Verizon Business .

A b id in g th e la w is m o re b e n e ficia l
th a n b re a k in g it.
Thank You

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