Ethics Newsline®

NEW YORK
The man prosecutors called the architect of the largest accounting fraud in U.S. history was sentenced last week to five years in prison, capping a case that put thousands of people out of work and cost investors billions of dollars.

Scott Sullivan, the former chief financial officer at WorldCom, could have faced 25 years in prison after admitting his role in the $11 billion scandal that bankrupted the telecommunications giant in 2002. He received a far less severe sentence after pleading guilty last year and helping to build a case against the company’s former chief executive, Bernard Ebbers.

Still, U.S. District Judge Barbara Jones told Sullivan that his conduct as the “day-to-day manager” of the scheme justified prison time.

Sullivan was considered the star witness against Ebbers, a Canada-born former milkman who built telecom giant WorldCom from scratch. Prosecutors conceded they would have had a hard time making a case against Ebbers without Sullivan’s cooperation.

Ebbers was found guilty last spring of masterminding the accounting fraud that forced the firm into bankruptcy three years ago, wiping out the jobs of nearly 17,000 workers and costing investors billions of dollars set aside in retirement accounts and college savings funds.

In July, the same judge sentenced Ebbers to 25 years in prison, saying the severity of his crime warranted the stiff punishment. He must report to prison, pending appeal, by October 12.

During Ebbers’s trial, Sullivan told jurors that he faced pressure from his boss to “hit the numbers,” which he interpreted as an order to take whatever means necessary to meet the expectations of Wall Street analysts, the New York Times noted. Fearful of losing his $700,000-per-year job, he directed subordinates to inflate revenues and hide expenses at the Mississippi-based company.

“In the face of intense pressure inside the company, I turned away from the truth,” Sullivan told the judge before he was sentenced. “I knew it was wrong. My intentions were not to hurt people.”

Sullivan has agreed to surrender the $200,000 in his retirement account and sell his lavish $11 million Florida mansion and give the money to WorldCom investors. Sullivan’s lawyer told the Associated Press that his client has been left with virtually no assets.

Sullivan, who has a chronically ill wife and a 4-year-old daughter, must report to prison by November 11.

Also last week, the judge sentenced two of Sullivan’s subordinates — Buford Yates Jr., a WorldCom accounting director, and David Myers, the former comptroller — each to one year and one day in prison. Sullivan, Yates and Myers were among the five former WorldCom executives who pleaded guilty to fraud charges and helped the government build a case against Ebbers.

A former federal prosecutor told the AP that the case reflects the tougher stance that judges are taking against white-collar criminals, even those who cooperate.

“By historical standards, these sentences are off the charts,” George Newhouse, now a partner in a Los Angeles law firm, told the AP.

The New York Times, however, noted that Sullivan’s sentence is far more lenient than one that Enron’s former finance chief, Andrew Fastow, received in a plea bargain last year. Fastow agreed to a 10-year sentence even though the case against his former bosses, Kenneth Lay and Jeffrey Skilling, has yet to go to trial.

In a related story, a former banker pleaded guilty on August 11 to participating in the sales of questionable tax shelters.

Domenick DeGiorgio, former co-head of a financial group at HVB Group, one of Germany’s largest banks, pleaded guilty to charges of conspiracy, fraud and tax evasion.

The Times described the action as the first criminal charges filed by the government in its investigation of tax shelters sold by KPMG, one of the country’s largest accounting firms. The firm allegedly joined banks, law firms, and other financial institutions to create and market tax shelters that cost the government as much as $1.4 billion in tax revenue.

A federal grand jury in New York has been investigating the scheme for the past 18 months, according to the Times.