WEBVTT 00:00:00.000 --> 00:00:02.140 Welcome back to the Deep Dive. Today we're going 00:00:02.140 --> 00:00:04.980 to tell a story that it really fits right into 00:00:04.980 --> 00:00:07.599 that truth is stranger than fiction category. 00:00:07.900 --> 00:00:10.019 It really does. I mean, it's a story that has 00:00:10.019 --> 00:00:12.820 everything. Yeah. A humble beginning in a coffee 00:00:12.820 --> 00:00:17.079 shop, a just a meteoric rise that defied gravity, 00:00:17.500 --> 00:00:20.579 cowboys in boardrooms. And a secret detective 00:00:20.579 --> 00:00:24.230 operation. Can't forget that. Happening in the 00:00:24.230 --> 00:00:26.390 middle of the night. It is the quintessential 00:00:26.390 --> 00:00:30.050 American business tragedy. It's got hubris, greed, 00:00:30.190 --> 00:00:33.530 and just a staggering amount of money vanishing 00:00:33.530 --> 00:00:35.490 into thin air. We are talking about the rise 00:00:35.490 --> 00:00:38.030 and fall of WorldCom. Right. And for some of 00:00:38.030 --> 00:00:40.369 our listeners, that name might just be a vague 00:00:40.369 --> 00:00:43.329 memory. You know, a logo from the late 90s. A 00:00:43.329 --> 00:00:45.149 telecommunications company, something like that. 00:00:45.189 --> 00:00:47.429 Exactly. But for anyone who is working in finance 00:00:47.429 --> 00:00:50.840 or tech or... Frankly, anyone with a 401k in 00:00:50.840 --> 00:00:53.500 the early 2000s, the name WorldCom is probably, 00:00:53.659 --> 00:00:55.880 well, it's synonymous with disaster. It was the 00:00:55.880 --> 00:00:58.100 Enron of the telecom world. Actually, you know, 00:00:58.119 --> 00:01:01.000 in terms of sheer assets, it was bigger than 00:01:01.000 --> 00:01:03.700 Enron. Bigger than Enron. Yeah. We're talking 00:01:03.700 --> 00:01:07.700 about an $11 billion accounting scandal that 00:01:07.700 --> 00:01:10.780 wiped out billions in shareholder value and cost 00:01:10.780 --> 00:01:13.480 what? tens of thousands of people their jobs 00:01:13.480 --> 00:01:16.319 and what makes the story so fascinating to me 00:01:16.319 --> 00:01:18.480 isn't just the fraud itself though we are definitely 00:01:18.480 --> 00:01:20.260 going to get into the nitty -gritty of how they 00:01:20.260 --> 00:01:22.459 cooked the book oh we have to but it's the sheer 00:01:22.459 --> 00:01:25.819 aggression of how this company was built it wasn't 00:01:25.819 --> 00:01:28.299 a tech innovator in a garage inventing the next 00:01:28.299 --> 00:01:31.819 big thing it was it was a financial machine designed 00:01:31.819 --> 00:01:34.019 to swallow everything in its path that is the 00:01:34.019 --> 00:01:36.260 perfect way to frame it it's a story about the 00:01:36.260 --> 00:01:39.159 pac -man strategy of business growth and what 00:01:39.159 --> 00:01:41.579 happens when pac -man runs out of dots to eat. 00:01:41.879 --> 00:01:45.519 So our mission today is to unpack this beast. 00:01:45.659 --> 00:01:47.560 We're going to look at the origins in Hattiesburg, 00:01:47.659 --> 00:01:50.659 Mississippi, trace this explosion of growth through 00:01:50.659 --> 00:01:53.040 the 90s, dissect the mechanics of the largest 00:01:53.040 --> 00:01:55.859 accounting fraud in history at the time. And 00:01:55.859 --> 00:01:57.819 finally, look at the brave whistleblowers who 00:01:57.819 --> 00:01:59.760 brought the whole thing crashing down. We've 00:01:59.760 --> 00:02:02.459 got a massive stack of sources here, court documents, 00:02:02.739 --> 00:02:06.040 historical analyses, SEC filings. And what we 00:02:06.040 --> 00:02:07.799 really want to do is move past the headlines 00:02:07.799 --> 00:02:10.539 and understand the mechanics. I mean, why did 00:02:10.539 --> 00:02:12.599 they do it? How do they think they would get 00:02:12.599 --> 00:02:14.539 away with it? And why did the watchdogs, the 00:02:14.539 --> 00:02:17.419 auditors, the board, why did they fail so miserably? 00:02:17.539 --> 00:02:19.719 Let's get into it. And to do that, we have to 00:02:19.719 --> 00:02:22.199 travel back in time, not to Wall Street, not 00:02:22.199 --> 00:02:25.599 to Silicon Valley. We are going to Hattiesburg, 00:02:25.699 --> 00:02:29.180 Mississippi. The year is 1983. It's a very different 00:02:29.180 --> 00:02:31.979 world. I mean, no smartphones, no internet as 00:02:31.979 --> 00:02:34.520 we know it. And the telecommunications industry 00:02:34.520 --> 00:02:38.000 was, well, it was boring. Utility. Right. You 00:02:38.000 --> 00:02:40.080 had Matt Bell, AT &T, and that was pretty much 00:02:40.080 --> 00:02:42.759 it. But 1983 is pivotal because the monopoly 00:02:42.759 --> 00:02:45.400 is breaking up. The government is taking a sledgehammer 00:02:45.400 --> 00:02:47.879 to the Bell system. Right. And this is the context 00:02:47.879 --> 00:02:51.080 you need. The breakup of AT &T created a vacuum. 00:02:51.449 --> 00:02:53.430 Suddenly, you didn't have to be AT &T to sell 00:02:53.430 --> 00:02:55.750 long -distance service. There was this new market 00:02:55.750 --> 00:02:58.129 opening up for what they called resellers. So 00:02:58.129 --> 00:03:00.689 you could just lease phone lines from the big 00:03:00.689 --> 00:03:03.009 guys and then resell the time. Essentially, yeah. 00:03:03.129 --> 00:03:05.569 Lease the lines in bulk and then resell the minutes 00:03:05.569 --> 00:03:08.490 to businesses at a discount. It's classic arbitrage. 00:03:08.629 --> 00:03:11.849 Buy wholesale, sell retail. Exactly. And that 00:03:11.849 --> 00:03:15.069 is what brings us to a coffee shop in Hattiesburg. 00:03:15.469 --> 00:03:17.610 There are four guys sitting there. One of them 00:03:17.610 --> 00:03:20.900 is named Bernie Eppers. Now, Ebers isn't a telecom 00:03:20.900 --> 00:03:24.800 engineer. He's not a finance wizard. He's fine. 00:03:24.960 --> 00:03:28.199 What was he? A gym teacher turned motel owner? 00:03:28.300 --> 00:03:30.259 He was a basketball coach. Yeah. A bouncer at 00:03:30.259 --> 00:03:32.780 one point. He owned a chain of motels. He was 00:03:32.780 --> 00:03:35.699 a salesman. He had that larger than life, you 00:03:35.699 --> 00:03:38.639 know, back slapping, let's make a deal kind of 00:03:38.639 --> 00:03:40.719 personality. So not the guy crunching the numbers. 00:03:40.860 --> 00:03:43.099 Definitely not. He was the guy selling the dream. 00:03:43.670 --> 00:03:46.090 So these investors, they form a company called 00:03:46.090 --> 00:03:49.189 Long Distance Discount Services, Inc., or LDDS. 00:03:49.669 --> 00:03:52.430 Very, very literal name. Very literal. And initially 00:03:52.430 --> 00:03:54.430 it was a total disaster. They were losing money 00:03:54.430 --> 00:03:55.990 hand over fist. They were about to go under. 00:03:56.090 --> 00:03:58.490 Completely. And in 1985, the other investors, 00:03:58.550 --> 00:04:00.530 they turn to Ebers and they say, Bernie, you 00:04:00.530 --> 00:04:02.789 take over. You're the CEO. And this is the moment. 00:04:02.849 --> 00:04:05.550 This is where the rocket ignition starts. Because 00:04:05.550 --> 00:04:08.990 Ebers realizes something fundamental. He realizes 00:04:08.990 --> 00:04:13.449 that in this new fractured telecom market. Organic 00:04:13.449 --> 00:04:16.550 growth, you know, winning one customer at a time 00:04:16.550 --> 00:04:20.129 is for suckers. It's just too slow. Exactly. 00:04:20.189 --> 00:04:22.790 If you want to get big, you don't build, you 00:04:22.790 --> 00:04:25.730 buy. And this brings us to the core strategy 00:04:25.730 --> 00:04:27.610 that defined the company for the next, what, 00:04:27.629 --> 00:04:30.790 15 years. The Pac -Man strategy. I love that 00:04:30.790 --> 00:04:33.250 analogy because it's so visual. You're just moving 00:04:33.250 --> 00:04:35.350 through the maze, eating everything in front 00:04:35.350 --> 00:04:37.050 of you. That is literally what they did. They 00:04:37.050 --> 00:04:39.589 started acquiring other small, long -distance 00:04:39.589 --> 00:04:42.180 resellers. And the model was simple. How did 00:04:42.180 --> 00:04:44.339 it work? They'd buy a company, strip out all 00:04:44.339 --> 00:04:47.319 the duplicate costs, HR, call it Hing, some of 00:04:47.319 --> 00:04:49.699 the network operations, and suddenly the combined 00:04:49.699 --> 00:04:52.519 company looks more profitable than the two separate 00:04:52.519 --> 00:04:55.339 companies did. Ah, so it creates a feedback loop, 00:04:55.420 --> 00:04:57.060 doesn't it? Because if you look more profitable 00:04:57.060 --> 00:04:59.240 and you're growing fast, your stock price goes 00:04:59.240 --> 00:05:01.240 up. And that stock price becomes your currency. 00:05:01.459 --> 00:05:03.879 This is a crucial concept for you to grasp. Uh 00:05:03.879 --> 00:05:06.579 -huh. Worldcommer or... well, LEDs at this point, 00:05:06.620 --> 00:05:08.660 wasn't usually buying these companies with cash 00:05:08.660 --> 00:05:10.139 from a bank account. They were using their own 00:05:10.139 --> 00:05:12.139 stock. They were buying them with their own stock. 00:05:12.540 --> 00:05:15.139 I'll give you 100 shares of my company for your 00:05:15.139 --> 00:05:17.379 entire company. So as long as your stock keeps 00:05:17.379 --> 00:05:20.240 going up, you have expensive currency. You can 00:05:20.240 --> 00:05:22.319 just buy bigger and bigger targets. It's like 00:05:22.319 --> 00:05:24.680 printing your own money, provided Wall Street 00:05:24.680 --> 00:05:27.759 believes the story you're telling. And they believed 00:05:27.759 --> 00:05:30.240 it. And they bought a lot. The sources say over 00:05:30.240 --> 00:05:33.420 60 acquisitions during their arrives. 60? I mean, 00:05:33.459 --> 00:05:35.399 just think about that. That is a chaotic amount 00:05:35.399 --> 00:05:38.180 of merging. It's a logistical nightmare. Imagine 00:05:38.180 --> 00:05:42.360 trying to merge the IT systems, the billing systems, 00:05:42.399 --> 00:05:45.379 the corporate cultures of 60 different companies 00:05:45.379 --> 00:05:48.220 in just over a decade. I can barely get my laptop 00:05:48.220 --> 00:05:50.399 to sync with my phone sometimes. Right. I can't 00:05:50.399 --> 00:05:52.600 imagine merging 60 different corporate databases. 00:05:53.000 --> 00:05:55.600 And here's the thing. They often didn't. And 00:05:55.600 --> 00:05:57.379 that's a bit of foreshadowing for the disaster 00:05:57.379 --> 00:06:00.360 to come. They would just slap the new company 00:06:00.360 --> 00:06:02.620 on top of the old one and keep moving. No time 00:06:02.620 --> 00:06:04.579 to integrate. No time. They had to find the next 00:06:04.579 --> 00:06:07.160 dot to eat. Okay, let's fast forward a bit to 00:06:07.160 --> 00:06:10.100 1992. This is where they graduate from being 00:06:10.100 --> 00:06:13.540 a small regional player to, wait a minute, who 00:06:13.540 --> 00:06:15.720 are these guys? Right, because they make a bid 00:06:15.720 --> 00:06:18.180 for a company called Advanced Telecommunications 00:06:18.180 --> 00:06:20.980 Corporation. And this was a big deal. A $720 00:06:20.980 --> 00:06:23.920 million deal. But the price tag isn't the real 00:06:23.920 --> 00:06:27.259 headline. The headline is who they outbid. AT 00:06:27.259 --> 00:06:30.579 &T and Sprint. The giants. AT &T and Sprint. 00:06:30.680 --> 00:06:33.180 That must have been a shock to the system. AT 00:06:33.180 --> 00:06:35.300 &T is the establishment. They are the empire. 00:06:35.879 --> 00:06:39.019 And here comes this motel owner from Mississippi 00:06:39.019 --> 00:06:41.379 throwing more money on the table than they are. 00:06:41.540 --> 00:06:43.920 It signaled the changing of the guard. It showed 00:06:43.920 --> 00:06:46.279 that Wall Street was rewarding this aggressive 00:06:46.279 --> 00:06:49.639 growth at all costs model over the conservative, 00:06:49.759 --> 00:06:53.180 you know, steady utility model of AT &T. Ebers 00:06:53.180 --> 00:06:55.519 was the darling. He was the darling. He was delivering 00:06:55.519 --> 00:06:57.769 double digit returns quarter after quarter. And 00:06:57.769 --> 00:07:01.110 clearly the ambition was scaling up. So in 1995, 00:07:01.430 --> 00:07:04.949 they changed the name. LDDS is gone. Now they're 00:07:04.949 --> 00:07:08.230 WorldCom. It sounds global. It sounds dominant. 00:07:08.329 --> 00:07:10.569 It's a statement of intent. They moved the headquarters 00:07:10.569 --> 00:07:12.870 to Clinton, Mississippi. But they were thinking 00:07:12.870 --> 00:07:15.569 about the entire planet. And speaking of the 00:07:15.569 --> 00:07:18.129 planet, or at least the digital one, we have 00:07:18.129 --> 00:07:22.470 to talk about the MFS acquisition in 1996. Because 00:07:22.470 --> 00:07:25.689 up until now, they're selling phone calls. Long 00:07:25.689 --> 00:07:28.980 distance. Right. But the world is changing. People 00:07:28.980 --> 00:07:31.199 are starting to buy modems. The internet is happening. 00:07:31.420 --> 00:07:33.560 This is one of the smartest moves Ebers ever 00:07:33.560 --> 00:07:36.379 made, or maybe just stumbled into. He buys a 00:07:36.379 --> 00:07:40.319 company called MFS Communications. Now, MFS was 00:07:40.319 --> 00:07:42.240 important because they had their own local fiber 00:07:42.240 --> 00:07:44.839 networks in big cities. They could bypass the 00:07:44.839 --> 00:07:48.000 local phone companies. But MFS had just bought 00:07:48.000 --> 00:07:50.600 another company. U -Net. I remember seeing that 00:07:50.600 --> 00:07:54.199 name on old system diagrams. U -Net was arguably 00:07:54.199 --> 00:07:55.980 the most important company you've probably never 00:07:55.980 --> 00:07:59.100 heard of. In the mid -90s, they carried a huge 00:07:59.100 --> 00:08:01.420 percentage of the world's Internet traffic. They 00:08:01.420 --> 00:08:04.000 were the backbone. So by buying MFS, WorldCom 00:08:04.000 --> 00:08:06.040 accidentally bought the Internet. Essentially, 00:08:06.120 --> 00:08:08.420 yes. I mean, it's a bit of an overstatement. 00:08:08.579 --> 00:08:11.040 But they went from being a long -distance phone 00:08:11.040 --> 00:08:13.319 company to being the landlord of the Internet 00:08:13.319 --> 00:08:16.399 just as the dot -com boom was about to explode. 00:08:16.480 --> 00:08:18.139 And the stock market must have gone crazy for 00:08:18.139 --> 00:08:20.899 that. They went wild. WorldCom became a tech 00:08:20.899 --> 00:08:23.459 stock. It wasn't just about phone minutes anymore. 00:08:23.720 --> 00:08:26.439 It was about the future of data. And that gave 00:08:26.439 --> 00:08:28.819 Ebers the most expensive currency he'd ever had. 00:08:28.959 --> 00:08:31.779 His stock was sky high. Which sets the stage 00:08:31.779 --> 00:08:34.039 for the big one. Section two of our outline, 00:08:34.259 --> 00:08:38.179 the mega mergers. It's 1997. WorldCom announces 00:08:38.179 --> 00:08:41.139 they are merging with MCI Communications. This 00:08:41.139 --> 00:08:43.000 is the moment everyone just stopped breathing. 00:08:43.440 --> 00:08:46.419 Thirty seven billion dollars. Billion with a 00:08:46.419 --> 00:08:49.039 B. It was the largest corporate merger in U .S. 00:08:49.059 --> 00:08:51.429 history at the time. Let's pause and just contextualize 00:08:51.429 --> 00:08:54.029 this for a second. MCI was the original David 00:08:54.029 --> 00:08:57.049 to AT &T's Goliath. They were. They were the 00:08:57.049 --> 00:08:59.070 ones who fought the legal battles to break up 00:08:59.070 --> 00:09:00.690 the monopoly in the first place. They were a 00:09:00.690 --> 00:09:03.549 massive established brand. And WorldCom, the 00:09:03.549 --> 00:09:05.909 coffee shop company from Mississippi, is buying 00:09:05.909 --> 00:09:08.029 them. It was unthinkable to a lot of people. 00:09:08.129 --> 00:09:10.110 I mean, MCI had a very specific culture, very 00:09:10.110 --> 00:09:13.710 Washington, D .C., very tech savvy, a bit elitist 00:09:13.710 --> 00:09:16.330 maybe. And here comes the Mississippi Mafia, 00:09:16.330 --> 00:09:18.799 as they were sometimes called. Yeah, Ebbers and 00:09:18.799 --> 00:09:20.860 his crew were seen as cowboys. I mean, they wore 00:09:20.860 --> 00:09:23.340 cowboy boots to board meetings. They were aggressive 00:09:23.340 --> 00:09:25.460 cost cutters. They didn't really care about the 00:09:25.460 --> 00:09:27.320 technology. They cared about the stock price. 00:09:27.500 --> 00:09:29.340 I can just imagine the culture clash. You've 00:09:29.340 --> 00:09:32.299 got the MCI engineers who want to build these 00:09:32.299 --> 00:09:35.080 beautiful, elegant networks. And then you've 00:09:35.080 --> 00:09:37.019 got the WorldCom accountants coming in and asking. 00:09:37.549 --> 00:09:40.029 Why are we spending so much money on coffee filters? 00:09:40.190 --> 00:09:42.409 That's not even an exaggeration, is it? Not at 00:09:42.409 --> 00:09:44.830 all. Ebers was famous for auditing the coffee 00:09:44.830 --> 00:09:46.870 filters in the water coolers. He was obsessed 00:09:46.870 --> 00:09:49.769 with cutting costs to boost the bottom line. 00:09:50.009 --> 00:09:52.990 So when they took over MCI, the culture shock 00:09:52.990 --> 00:09:55.789 was violent. But the deal went through. It went 00:09:55.789 --> 00:09:58.450 through in September 1998 after they appeased 00:09:58.450 --> 00:10:00.330 the Department of Justice by selling off some 00:10:00.330 --> 00:10:03.970 internet assets. They became MCI WorldCom. They 00:10:03.970 --> 00:10:07.440 are now a colossus. But the Pac -Man strategy 00:10:07.440 --> 00:10:10.519 requires constant feeding. You can't just stop. 00:10:10.779 --> 00:10:13.240 You really can. Because the underlying business 00:10:13.240 --> 00:10:15.940 selling long distance phone calls was starting 00:10:15.940 --> 00:10:18.220 to get really competitive. Prices were dropping. 00:10:18.480 --> 00:10:21.779 So the only way to show that big revenue growth 00:10:21.779 --> 00:10:24.279 Wall Street expects is to buy another revenue 00:10:24.279 --> 00:10:26.960 stream. Exactly. Which is why they do this really 00:10:26.960 --> 00:10:31.059 weird deal in 1998 with CompuServe, H &R Block 00:10:31.059 --> 00:10:35.019 and AOL. The CompuServe AOL shuffle. I've always 00:10:35.019 --> 00:10:36.620 found this one confusing. Can you break this 00:10:36.620 --> 00:10:38.559 down for us? Okay, think of it like a real estate 00:10:38.559 --> 00:10:42.360 deal. WorldCom buys an apartment building that's 00:10:42.360 --> 00:10:46.240 CompuServe. Now, CompuServe has two things. It 00:10:46.240 --> 00:10:48.659 has the tenants, which are the people dialing 00:10:48.659 --> 00:10:50.860 in to check their email. Okay. And it has the 00:10:50.860 --> 00:10:52.580 plumbing and the wiring, which is the network 00:10:52.580 --> 00:10:55.019 itself. Right. So WorldCom looks at this and 00:10:55.019 --> 00:10:57.860 says, you know what? We hate tenants. Tents complain. 00:10:58.120 --> 00:11:00.700 They need customer service. We just want to own 00:11:00.700 --> 00:11:01.879 the plumbing. They just want the infrastructure. 00:11:02.200 --> 00:11:04.360 So they call up AOL. Now, AOL loves tenants. 00:11:04.840 --> 00:11:07.139 AOL is all about the consumer. Of course, they're 00:11:07.139 --> 00:11:09.340 sending out a billion of those CDs to get people 00:11:09.340 --> 00:11:12.080 to sign up. Exactly. So WorldCom says, hey, AOL, 00:11:12.279 --> 00:11:14.460 we will give you all these CompuServe customers, 00:11:14.779 --> 00:11:17.860 the tenants. In exchange, you give us your plumbing, 00:11:17.960 --> 00:11:19.940 your network division, which was called AAM. 00:11:20.330 --> 00:11:22.990 So WorldCom basically creates a monopoly on the 00:11:22.990 --> 00:11:26.909 infrastructure and lets AOL deal with the actual 00:11:26.909 --> 00:11:29.549 human beings. Precisely. It was a brilliant strategic 00:11:29.549 --> 00:11:32.289 move to corner the market on data transport. 00:11:32.750 --> 00:11:35.250 They wanted to be the toll booth operator for 00:11:35.250 --> 00:11:37.509 the information superhighway. So every time you 00:11:37.509 --> 00:11:39.830 send an email or loaded a web page... You wanted 00:11:39.830 --> 00:11:42.009 a fraction of a cent. It sounds like a perfect 00:11:42.009 --> 00:11:46.320 plan, but then... Hubris kicks in, 1999. They 00:11:46.320 --> 00:11:48.299 decide to go for the kill shot. They announce 00:11:48.299 --> 00:11:53.460 a merger with Sprint. For $129 billion. That 00:11:53.460 --> 00:11:55.980 number. I mean, the MCI deal was $37 billion, 00:11:56.039 --> 00:11:58.360 and that was a record. This is nearly four times 00:11:58.360 --> 00:12:01.240 that size. It was pure madness. If this deal 00:12:01.240 --> 00:12:03.379 had gone through, WorldCom and Sprint combined 00:12:03.379 --> 00:12:05.820 would have been larger than AT &T. It would have 00:12:05.820 --> 00:12:08.000 created a duopoly in the United States. You would 00:12:08.000 --> 00:12:09.620 have had two choices for your phone service, 00:12:09.720 --> 00:12:12.279 and that's it. And the regulators finally woke 00:12:12.279 --> 00:12:14.740 up. They woke up. Big time. The U .S. Department 00:12:14.740 --> 00:12:16.659 of Justice and the European Union both stepped 00:12:16.659 --> 00:12:19.039 in. They looked at the map and said, absolutely 00:12:19.039 --> 00:12:21.659 not. You cannot own this much of the infrastructure. 00:12:21.960 --> 00:12:25.940 It's anti -competitive. So in July 2000, the 00:12:25.940 --> 00:12:28.940 deal is blocked. The merger is terminated. And 00:12:28.940 --> 00:12:33.039 this. This is the moment the music stops. Why 00:12:33.039 --> 00:12:36.159 was this specific failure the turning point? 00:12:36.340 --> 00:12:38.379 Why couldn't they just go back to running the 00:12:38.379 --> 00:12:40.700 massive business they already had? Because the 00:12:40.700 --> 00:12:43.139 business they had was sick. Remember, they had 00:12:43.139 --> 00:12:46.139 been masking slowing growth by buying new revenue 00:12:46.139 --> 00:12:49.379 streams. Without Sprint, there was no new revenue 00:12:49.379 --> 00:12:51.620 to paste onto the books. So suddenly they had 00:12:51.620 --> 00:12:54.159 to report their actual organic growth. And the 00:12:54.159 --> 00:12:56.740 actual growth wasn't there. Not only was it not 00:12:56.740 --> 00:13:00.019 there, it was shrinking. The dotcom bubble was 00:13:00.019 --> 00:13:02.259 bursting. All those tech startups that were paying 00:13:02.259 --> 00:13:05.120 WorldCom millions for Internet access, they were 00:13:05.120 --> 00:13:07.919 going bankrupt. The demand for fiber optic capacity 00:13:07.919 --> 00:13:10.860 just plummeted. So you have this massive company 00:13:10.860 --> 00:13:13.120 built on the promise of, what, 15, 20 percent 00:13:13.120 --> 00:13:15.679 growth every year. Suddenly looking at flat or 00:13:15.679 --> 00:13:17.799 even declining revenue. And for a stock like 00:13:17.799 --> 00:13:20.059 WorldCom, that is a death sentence. It is. The 00:13:20.059 --> 00:13:22.279 stock price is based on the expectation of future 00:13:22.279 --> 00:13:25.250 growth. If that expectation vanishes. the stock 00:13:25.250 --> 00:13:27.470 crashes. And if the stock crashes, Bernie Ebers 00:13:27.470 --> 00:13:30.230 has a very, very big personal problem. Which 00:13:30.230 --> 00:13:33.169 brings us to section three, the pressure cooker. 00:13:33.389 --> 00:13:35.990 And we really need to talk about Bernie's personal 00:13:35.990 --> 00:13:38.789 finances because it explains the desperation 00:13:38.789 --> 00:13:42.110 that came next. So Bernie was a wealthy man, 00:13:42.250 --> 00:13:45.750 a billionaire on paper, but he didn't just sit 00:13:45.750 --> 00:13:49.419 on his stock, did he? No. Bernie lived large. 00:13:49.820 --> 00:13:52.299 He bought a massive ranch in British Columbia, 00:13:52.440 --> 00:13:54.879 the largest working ranch in Canada. He bought 00:13:54.879 --> 00:13:57.679 Timberlands in Mississippi. He bought a yacht 00:13:57.679 --> 00:13:59.759 building company. I mean, the list goes on. And 00:13:59.759 --> 00:14:01.600 how did he pay for all this? He borrowed against 00:14:01.600 --> 00:14:03.980 his WorldCom stock. He took out margin loans. 00:14:04.259 --> 00:14:07.659 Exactly. He went to banks, used his millions 00:14:07.659 --> 00:14:10.100 of WorldCom shares as collateral, which is great 00:14:10.100 --> 00:14:12.299 when the stock is going up. But when the stock 00:14:12.299 --> 00:14:15.059 starts to drop. The bank calls. The dreaded margin 00:14:15.059 --> 00:14:17.690 call. The bank says. Bernie, your collateral 00:14:17.690 --> 00:14:20.129 is worth less now. We need you to either pay 00:14:20.129 --> 00:14:22.690 back some of the loan in cash or give us more 00:14:22.690 --> 00:14:24.850 collateral. But Bernie didn't have cash. He had 00:14:24.850 --> 00:14:27.250 ranches and yachts in Timberland. Right. So to 00:14:27.250 --> 00:14:29.809 pay the bank, he would have to sell his WorldCom 00:14:29.809 --> 00:14:34.389 stock. And here is the death spiral. If the CEO 00:14:34.389 --> 00:14:37.429 of WorldCom starts dumping millions of shares 00:14:37.429 --> 00:14:40.230 of his own company, what does the market think? 00:14:40.610 --> 00:14:43.929 Total panic. They think the captain is abandoning 00:14:43.929 --> 00:14:47.750 the ship. everyone else sells, the price crashes 00:14:47.750 --> 00:14:50.090 further. Which triggers more margin calls for 00:14:50.090 --> 00:14:52.950 Bernie. Which forces him to sell more stock. 00:14:53.029 --> 00:14:55.049 It's a feedback loop that ends with the stock 00:14:55.049 --> 00:14:57.289 price at zero. So Bernie goes to the board of 00:14:57.289 --> 00:14:59.769 directors. He says, guys, I'm in trouble. And 00:14:59.769 --> 00:15:01.389 if I'm in trouble, the company's in trouble. 00:15:01.649 --> 00:15:04.230 And the board. The board made a decision that 00:15:04.230 --> 00:15:07.070 is still studied in business ethics classes as 00:15:07.070 --> 00:15:09.570 just a catastrophic failure of governance. Instead 00:15:09.570 --> 00:15:11.590 of letting him fail or forcing him to resign. 00:15:11.830 --> 00:15:14.289 Then authorize loans from the company to Bernie. 00:15:14.649 --> 00:15:16.950 They lent him shareholder money to pay his personal 00:15:16.950 --> 00:15:20.429 debts. Over $400 million. That is obscene. Half 00:15:20.429 --> 00:15:23.009 a billion dollars of shareholder money just to 00:15:23.009 --> 00:15:25.970 stop the CEO from selling his own stock. Their 00:15:25.970 --> 00:15:29.330 logic, if you can even call it that, was that 00:15:29.330 --> 00:15:31.190 they were protecting the stock price for everyone. 00:15:31.389 --> 00:15:33.409 They thought saving Bernie was saving the company. 00:15:33.549 --> 00:15:35.750 But in reality, they were just lighting money 00:15:35.750 --> 00:15:38.600 on fire. But even half a billion dollars couldn't 00:15:38.600 --> 00:15:41.419 stop the bleeding. The stock kept dropping. The 00:15:41.419 --> 00:15:43.980 whole telecom industry was in a free fall. And 00:15:43.980 --> 00:15:47.860 by April 2002, the board finally had enough. 00:15:48.019 --> 00:15:50.080 The optics were terrible. The stock was in the 00:15:50.080 --> 00:15:52.600 toilet. They forced Bernie Ebers to resign. But 00:15:52.600 --> 00:15:57.000 the damage was done. And those loans, they weren't 00:15:57.000 --> 00:15:59.600 the only secret buried in the company's files. 00:15:59.799 --> 00:16:02.259 Not by a long shot. Which brings us to the main 00:16:02.259 --> 00:16:06.740 event, the fraud. The how. We know the why. They 00:16:06.740 --> 00:16:08.639 had to keep the stock price up to prevent the 00:16:08.639 --> 00:16:10.700 margin calls and just to keep the whole Pac -Man 00:16:10.700 --> 00:16:13.480 game going. But the how is where it gets technical 00:16:13.480 --> 00:16:15.679 and, frankly, just brazen. I mean, they weren't 00:16:15.679 --> 00:16:17.600 just nudging numbers. They were rewriting reality. 00:16:17.940 --> 00:16:20.019 Okay, so we need to explain two concepts here 00:16:20.019 --> 00:16:22.539 for the listener. The first is EBITDA. EBITDA. 00:16:23.100 --> 00:16:25.480 Earnings Before Interest, Taxes, Depreciation, 00:16:25.559 --> 00:16:28.340 and Amortization. It's a mouthful. It is. But 00:16:28.340 --> 00:16:30.039 essentially, it's a measure of a company's operating 00:16:30.039 --> 00:16:33.240 health. It asks a simple question. is the core 00:16:33.240 --> 00:16:35.940 business making money before we worry about the 00:16:35.940 --> 00:16:38.600 accountants and the tax man. And Wall Street 00:16:38.600 --> 00:16:41.600 loved EBITDA in the 90s. It was the golden metric. 00:16:41.860 --> 00:16:44.179 So WorldCom needed their EBITDA to look good. 00:16:44.399 --> 00:16:46.960 It had to look good. Now, WorldCom had a massive 00:16:46.960 --> 00:16:49.559 expense called line costs. And what are line 00:16:49.559 --> 00:16:53.960 costs? So WorldCom owned a lot of networks, but 00:16:53.960 --> 00:16:57.399 not all of them. To complete a call from, say, 00:16:57.559 --> 00:17:00.799 New York to London, they might have to pay... 00:17:01.290 --> 00:17:03.970 Verizon or British Telecom to use their wires 00:17:03.970 --> 00:17:06.150 for the last few miles. So these are fees they 00:17:06.150 --> 00:17:08.789 paid to other phone companies. Exactly. And for 00:17:08.789 --> 00:17:10.769 a telecom company, that's just the cost of doing 00:17:10.769 --> 00:17:13.069 business. It's like a bakery buying flour. It's 00:17:13.069 --> 00:17:15.210 an operating expense. It is. So if you sell a 00:17:15.210 --> 00:17:17.670 call for a dollar and you pay 40 cents in line 00:17:17.670 --> 00:17:20.789 costs, your profit... and therefore your EBITDA 00:17:20.789 --> 00:17:24.410 is $0 .60, that $0 .40 disappears from your earnings 00:17:24.410 --> 00:17:26.630 immediately. Makes sense. But Scott Sullivan, 00:17:26.789 --> 00:17:29.230 the CFO and his team, they realized that these 00:17:29.230 --> 00:17:31.809 line costs were eating up all their profit. Their 00:17:31.809 --> 00:17:33.750 EBITDA was plummeting because revenue was down, 00:17:33.910 --> 00:17:36.390 but they still had to pay these fixed costs to 00:17:36.390 --> 00:17:39.069 other carriers. So what did they do? They decided 00:17:39.069 --> 00:17:41.849 to take those line costs, billions of dollars 00:17:41.849 --> 00:17:44.769 of them, and move them from the expense column 00:17:44.769 --> 00:17:48.009 to the capital expenditure column on the books. 00:17:48.390 --> 00:17:52.390 CapEx. Which is usually for buying assets. You 00:17:52.390 --> 00:17:54.910 know, if I buy a building for a million dollars, 00:17:55.130 --> 00:17:57.869 I don't record a million dollar loss today. I 00:17:57.869 --> 00:18:00.170 record an asset on my balance sheet and then 00:18:00.170 --> 00:18:04.289 I depreciate it over, say, 30 years. So you only 00:18:04.289 --> 00:18:07.710 record a tiny slice of that cost this year. Exactly. 00:18:08.009 --> 00:18:11.509 So WorldCom took these daily bills, the flour 00:18:11.509 --> 00:18:14.069 for the bakery, and pretended they were buying 00:18:14.069 --> 00:18:17.380 new ovens. Wow. Instead of subtracting $4 billion 00:18:17.380 --> 00:18:20.200 from their earnings in a year, they subtracted 00:18:20.200 --> 00:18:22.740 just a tiny fraction of that. So the money still 00:18:22.740 --> 00:18:24.819 left the bank account. They still paid the bills 00:18:24.819 --> 00:18:27.779 to Verizon and AT &T. Oh, yeah. The cash was 00:18:27.779 --> 00:18:30.380 gone. But on the report they showed to Wall Street, 00:18:30.579 --> 00:18:33.099 the profit looked massive because the costs had 00:18:33.099 --> 00:18:35.700 magically turned into assets. Precisely. They 00:18:35.700 --> 00:18:38.579 were capitalizing operating expenses. It inflated 00:18:38.579 --> 00:18:40.859 their EBITDA by billions of dollars and made 00:18:40.859 --> 00:18:43.079 a company that was losing money look like a cash 00:18:43.079 --> 00:18:45.240 machine. It's like me paying my electric bill 00:18:45.240 --> 00:18:47.380 but writing it down in my checkbook as a home 00:18:47.380 --> 00:18:49.700 improvement investment so I feel richer. That 00:18:49.700 --> 00:18:51.839 is a perfect analogy. That is exactly what it 00:18:51.839 --> 00:18:53.500 is. And they did it quarter after quarter after 00:18:53.500 --> 00:18:55.220 quarter. And that wasn't the only trick, was 00:18:55.220 --> 00:18:57.759 it? There was also this phantom revenue. This 00:18:57.759 --> 00:19:01.099 one is even dumber, to be honest. It's an accounting 00:19:01.099 --> 00:19:04.079 entry they called corporate unallocated revenue. 00:19:05.099 --> 00:19:07.039 Unallocated. That sounds suspicious right off 00:19:07.039 --> 00:19:09.460 the bat. It basically meant that if a regional 00:19:09.460 --> 00:19:12.319 office was short on its revenue target, corporate 00:19:12.319 --> 00:19:15.619 headquarters would just find some revenue and 00:19:15.619 --> 00:19:17.339 plug it into their numbers. They would just invent 00:19:17.339 --> 00:19:19.079 it. They would just make a journal entry. They'd 00:19:19.079 --> 00:19:23.680 just type it in. Revenue plus $100 million. With 00:19:23.680 --> 00:19:27.480 no customer, no invoice, no cash actually coming 00:19:27.480 --> 00:19:30.400 in. Nothing. Just a number in a spreadsheet to 00:19:30.400 --> 00:19:32.859 bridge the gap between reality and what Wall 00:19:32.859 --> 00:19:35.200 Street expected to see. The scale of this is 00:19:35.200 --> 00:19:37.000 just mind -boggling. We aren't talking about 00:19:37.000 --> 00:19:39.000 fudging a few thousand dollars here and there. 00:19:39.400 --> 00:19:41.759 In the end, the fraud totaled approximately $11 00:19:41.759 --> 00:19:47.619 billion. $11 billion of fake assets and fake 00:19:47.619 --> 00:19:49.599 revenue. It was a house of cards held together 00:19:49.599 --> 00:19:52.220 by Scott Sullivan's ability to bully the accountants 00:19:52.220 --> 00:19:54.579 into making these entries. And this brings us 00:19:54.579 --> 00:19:57.579 to the heroes of the story. Because usually in 00:19:57.579 --> 00:20:00.279 these massive frauds, the people inside are either 00:20:00.279 --> 00:20:03.259 complicit or they're too terrified to speak up. 00:20:03.579 --> 00:20:06.339 But there was a team in internal audit who decided 00:20:06.339 --> 00:20:08.339 they weren't going to play along. Venter Cynthia 00:20:08.339 --> 00:20:11.019 Cooper. The night detective. So who was Cynthia 00:20:11.019 --> 00:20:13.099 Cooper? She was the vice president of internal 00:20:13.099 --> 00:20:15.779 audit. Now, typically, internal audit is there 00:20:15.779 --> 00:20:18.720 to check if people are following procedure. You 00:20:18.720 --> 00:20:20.900 know, are the travel expenses signed off correctly? 00:20:21.119 --> 00:20:23.640 Is the inventory counted right? They aren't usually 00:20:23.640 --> 00:20:27.000 hunting for the CFO's secret crimes. Not at all. 00:20:27.180 --> 00:20:29.420 But she started noticing things. It started with 00:20:29.420 --> 00:20:32.500 a tip. Actually, a mid -level employee mentioned 00:20:32.500 --> 00:20:34.859 something about prepaid capacity being moved 00:20:34.859 --> 00:20:36.960 around in the books. It just didn't make sense. 00:20:37.240 --> 00:20:39.079 And when she asked the finance guys about it. 00:20:39.200 --> 00:20:43.420 They got weird. Hostile. Evasive. Scott Sullivan, 00:20:43.539 --> 00:20:45.819 the CFO, essentially told her to stay out of 00:20:45.819 --> 00:20:47.559 it. He said, this is complicated. Don't worry 00:20:47.559 --> 00:20:50.500 about it. Focus on your operational audits. Which, 00:20:50.539 --> 00:20:53.720 to a good auditor, is basically a giant flashing 00:20:53.720 --> 00:20:57.420 neon sign that says, look here. There is a dead 00:20:57.420 --> 00:21:00.940 body in this closet. Exactly. If he had just 00:21:00.940 --> 00:21:03.359 explained it calmly, she might have actually 00:21:03.359 --> 00:21:06.819 missed it. But his aggression triggered her instincts. 00:21:07.240 --> 00:21:10.519 So she decides to dig, but she has to do it carefully. 00:21:10.640 --> 00:21:12.500 She can't just run a report in the middle of 00:21:12.500 --> 00:21:14.619 the day where everyone can see. And this is the 00:21:14.619 --> 00:21:17.200 cinematic part of the story. Her team, specifically, 00:21:17.359 --> 00:21:20.319 a guy named Eugene Morse, who was a tech wizard, 00:21:20.539 --> 00:21:23.019 they started working at night. Paint the picture 00:21:23.019 --> 00:21:25.789 for us. Okay, so it's Clinton, Mississippi. The 00:21:25.789 --> 00:21:28.910 WorldCom headquarters is this huge empty building. 00:21:29.369 --> 00:21:32.349 It's midnight. They are in a small conference 00:21:32.349 --> 00:21:36.009 room or maybe just a cubicle farm. And Morse 00:21:36.009 --> 00:21:39.569 is querying the main accounting database. But 00:21:39.569 --> 00:21:42.289 the system is old. Very old. The files are massive. 00:21:42.309 --> 00:21:43.950 They're literally crashing the servers trying 00:21:43.950 --> 00:21:45.630 to pull this data. And they're trying to find 00:21:45.630 --> 00:21:47.690 these specific journal entries that are buried 00:21:47.690 --> 00:21:50.009 in millions and millions of transactions. And 00:21:50.009 --> 00:21:52.589 they are terrified. If the IT department sees 00:21:52.589 --> 00:21:55.150 the unusual network traffic. They might report 00:21:55.150 --> 00:21:57.650 it to Sullivan. If they get caught, they're fired 00:21:57.650 --> 00:21:59.569 instantly. And they're downloading data onto 00:21:59.569 --> 00:22:02.329 CD -ROMs. Remember those? Yeah, they're burning 00:22:02.329 --> 00:22:04.750 CDs to keep a backup copy off -site just in case 00:22:04.750 --> 00:22:06.950 the data accidentally disappears from the servers 00:22:06.950 --> 00:22:09.609 overnight. It's so high stakes. They're investigating 00:22:09.609 --> 00:22:11.869 their own bosses, the most powerful people in 00:22:11.869 --> 00:22:14.470 the company. And then they find it. They find 00:22:14.470 --> 00:22:17.779 a journal entry for $500 million. It's moved 00:22:17.779 --> 00:22:22.259 from line costs to PPE, property, plant and equipment. 00:22:22.599 --> 00:22:24.960 Smoking gun. But there's no invoice attached, 00:22:25.319 --> 00:22:29.160 no documentation, no support, just a manual entry 00:22:29.160 --> 00:22:31.180 made by the comptroller's office. And then they 00:22:31.180 --> 00:22:33.539 find another one and another one. And by June 00:22:33.539 --> 00:22:37.640 of 2002, they found billions. Cynthia Cooper 00:22:37.640 --> 00:22:40.299 realizes she is sitting on the biggest accounting 00:22:40.299 --> 00:22:43.910 fraud in American history. And she knows that 00:22:43.910 --> 00:22:46.089 revealing this will destroy the company. It will 00:22:46.089 --> 00:22:48.269 kill the stock. It will cost her friends their 00:22:48.269 --> 00:22:50.869 jobs. But she doesn't blink. She goes to the 00:22:50.869 --> 00:22:52.970 audit committee of the board of directors. She 00:22:52.970 --> 00:22:56.430 bypasses Sullivan. She bypasses Ebersole cronies. 00:22:56.509 --> 00:22:58.569 She presents the evidence. And the reaction. 00:22:58.809 --> 00:23:02.710 Shock. Denial at first. And then just this grim 00:23:02.710 --> 00:23:06.529 sense of inevitability. They called Scott Sullivan 00:23:06.529 --> 00:23:08.910 in. He tried to explain it away with this complex 00:23:08.910 --> 00:23:11.490 story about matching principles and future revenue. 00:23:11.839 --> 00:23:14.519 But the board knew you can't capitalize an electric 00:23:14.519 --> 00:23:17.240 bill. It's accounting 101. Right. So Sullivan 00:23:17.240 --> 00:23:21.759 is fired. And on June 25th, 2002, World Comp 00:23:21.759 --> 00:23:24.819 issues a press release. It basically says, oops, 00:23:25.039 --> 00:23:28.339 we found a slight error in our accounting to 00:23:28.339 --> 00:23:32.380 the tune of $3 .8 billion. The market just imploded. 00:23:32.380 --> 00:23:34.440 Trading in the stock was halted. And we have 00:23:34.440 --> 00:23:36.400 to mention the other shoe dropping here, Arthur 00:23:36.400 --> 00:23:39.059 Anderson. The external auditors, the people who 00:23:39.059 --> 00:23:41.799 are paid millions of dollars to verify that WorldCom's 00:23:41.799 --> 00:23:43.960 numbers were real and accurate. And they signed 00:23:43.960 --> 00:23:46.079 off on all of this. They did. Now, they claim 00:23:46.079 --> 00:23:48.619 they were led by Sullivan and his team, which 00:23:48.619 --> 00:23:51.339 is true to an extent. But they were also negligent. 00:23:51.339 --> 00:23:53.559 They missed some massive red. And the timing 00:23:53.559 --> 00:23:56.279 was just fatal for them. This news broke just 00:23:56.279 --> 00:23:58.579 days after Anderson was convicted for obstruction 00:23:58.579 --> 00:24:00.940 of justice in the Enron case. So Anderson was 00:24:00.940 --> 00:24:02.799 already on life support and WorldCom basically 00:24:02.799 --> 00:24:05.599 pulled the plug. Effectively, yes. Arthur Anderson 00:24:05.599 --> 00:24:08.660 collapsed. The big five accounting firms became 00:24:08.660 --> 00:24:13.079 the big four. So section six, the fall. It's 00:24:13.079 --> 00:24:16.400 July 2002. The cash is gone. The company's credit 00:24:16.400 --> 00:24:19.160 is frozen. There's no way out. On July 21st, 00:24:19.160 --> 00:24:22.759 WorldCom files for Chapter 11 bankruptcy. And 00:24:22.759 --> 00:24:25.119 the scale of this bankruptcy? It was the largest 00:24:25.119 --> 00:24:29.000 in U .S. history at the time, $107 billion in 00:24:29.000 --> 00:24:32.259 assets. It dwarfed Enron. It was just a leviathan 00:24:32.259 --> 00:24:34.579 going under. And the human cost is what really 00:24:34.579 --> 00:24:36.740 gets me. You know, we talk about Bernie Ebers 00:24:36.740 --> 00:24:38.880 and his yacht, but what about the people working 00:24:38.880 --> 00:24:42.359 in Hattiesburg or the engineers in Tulsa? 17 00:24:42.359 --> 00:24:45.019 ,000 people lost their jobs. Just let that number 00:24:45.019 --> 00:24:48.460 sink in. 17 ,000 families. And many of them had 00:24:48.460 --> 00:24:51.559 their 401k retirement savings heavily, heavily 00:24:51.559 --> 00:24:53.829 invested. in WorldCom stock. Because the company 00:24:53.829 --> 00:24:56.349 encouraged it. Buy the stock. It's going to the 00:24:56.349 --> 00:24:58.849 moon. And then it went to pennies. People lost 00:24:58.849 --> 00:25:00.809 their entire life savings. They lost their health 00:25:00.809 --> 00:25:03.410 care. It was devastating. Meanwhile, the bondholders, 00:25:03.569 --> 00:25:06.009 the big banks, they got scraps. About 35 cents 00:25:06.009 --> 00:25:08.250 on the dollar eventually. But the shareholders, 00:25:08.470 --> 00:25:10.990 the regular people who bought the stock, wiped 00:25:10.990 --> 00:25:14.049 out. Total loss. Let's talk about justice. Did 00:25:14.049 --> 00:25:17.009 anyone go to jail for this? They did. The prosecutors 00:25:17.009 --> 00:25:18.769 from the Southern District in New York didn't 00:25:18.769 --> 00:25:21.660 mess around. Scott Sullivan pleaded guilty pretty 00:25:21.660 --> 00:25:24.220 quickly and cut a deal. He agreed to testify 00:25:24.220 --> 00:25:26.940 against Bernie Evers. And Bernie's defense was 00:25:26.940 --> 00:25:30.279 classic Bernie. It was the aw shucks, I'm just 00:25:30.279 --> 00:25:33.920 a P .E. coach defense. He claimed he didn't understand 00:25:33.920 --> 00:25:35.759 the accounting. He said, I leave the numbers 00:25:35.759 --> 00:25:38.460 to Scott. I'm just a visionary. And did the jury 00:25:38.460 --> 00:25:41.630 buy it? Not for a second. It's pretty hard to 00:25:41.630 --> 00:25:43.829 believe that a CEO who checks the price of coffee 00:25:43.829 --> 00:25:47.150 filters doesn't ask any questions when $4 billion 00:25:47.150 --> 00:25:49.509 in expenses suddenly disappear from the income 00:25:49.509 --> 00:25:52.069 statement. So the jury convicted him? On all 00:25:52.069 --> 00:25:56.190 counts. Fraud, conspiracy, filing false documents 00:25:56.190 --> 00:25:59.250 with the SEC. And the sentence? 25 years. That 00:25:59.250 --> 00:26:01.809 is a life sentence for a man of his age. It was 00:26:01.809 --> 00:26:04.009 meant to be a deterrent. It was the era of the 00:26:04.009 --> 00:26:07.009 perp walk. The judge effectively said, You broke 00:26:07.009 --> 00:26:09.750 the system. You pay the price. Ebers went to 00:26:09.750 --> 00:26:14.869 prison in 2006. And he served about 13 years. 00:26:15.049 --> 00:26:18.690 13 years, yeah. He got sick, was granted a compassionate 00:26:18.690 --> 00:26:21.890 release in late 2019, and died a few months later. 00:26:22.089 --> 00:26:24.670 A pretty tragic end to a tragic arc. And the 00:26:24.670 --> 00:26:27.390 other executives, Sullivan, David Myers, Buddy 00:26:27.390 --> 00:26:30.430 Yates, they all did time, too. Even the mid -level 00:26:30.430 --> 00:26:33.089 managers who physically made the fraudulent entries, 00:26:33.269 --> 00:26:36.470 like Betty Vinson and Troy Norman, they got probation 00:26:36.470 --> 00:26:38.769 or short sentences. That's the part that always 00:26:38.769 --> 00:26:41.130 haunts me. Betty Vinson, she was just a mid -level 00:26:41.130 --> 00:26:43.009 accountant. She knew it was wrong. She actually 00:26:43.009 --> 00:26:45.109 tried to resign. And Sullivan talked her into 00:26:45.109 --> 00:26:47.569 staying. He said, just do it this one time to 00:26:47.569 --> 00:26:49.089 get us through the quarter. We'll fix it next 00:26:49.089 --> 00:26:51.329 quarter. But you never fix it. You never fix 00:26:51.329 --> 00:26:53.710 it. It's the slippery slope. You do it once, 00:26:53.809 --> 00:26:55.670 you're trapped. Then you have to do it again 00:26:55.670 --> 00:26:58.170 just to cover up the first lie. It's a lesson 00:26:58.170 --> 00:27:00.509 in why you have to say no the very first time. 00:27:00.849 --> 00:27:04.450 So the people are gone, but the company, I mean, 00:27:04.470 --> 00:27:06.390 the wires were still in the ground. The fiber 00:27:06.390 --> 00:27:08.730 optic cables were still there. You can't just 00:27:08.730 --> 00:27:11.109 liquidate the Internet. That's right. The network 00:27:11.109 --> 00:27:14.109 was critical national infrastructure. So the 00:27:14.109 --> 00:27:15.690 company went through a massive restructuring 00:27:15.690 --> 00:27:17.890 and bankruptcy. They shed all the debt. They 00:27:17.890 --> 00:27:21.130 fired the trucks and they emerged in 2003. And 00:27:21.130 --> 00:27:23.670 they needed a new name. Or rather, an old one. 00:27:23.869 --> 00:27:26.410 They went back to MCI. Which makes sense. Worldcom 00:27:26.410 --> 00:27:29.670 is a dirty word. MCI still had some brand equity 00:27:29.670 --> 00:27:31.970 left. They moved the headquarters from Mississippi 00:27:31.970 --> 00:27:35.069 to Virginia. They brought in a new CEO, Michael 00:27:35.069 --> 00:27:37.730 Capellas. And there was this famous email from 00:27:37.730 --> 00:27:39.930 a new executive that circulated. What did it 00:27:39.930 --> 00:27:42.609 say? It said, my company was not founded in a 00:27:42.609 --> 00:27:47.630 motel coffee shop. Ouch! Shots fired at Hattiesburg. 00:27:47.829 --> 00:27:50.329 It was a total, complete rejection of the Ebbers 00:27:50.329 --> 00:27:52.910 legacy. They wanted to be seen as the grown -ups 00:27:52.910 --> 00:27:54.990 in the room. They brought in Richard Breeden, 00:27:55.109 --> 00:27:57.769 a former SEC chair, to write a report called 00:27:57.769 --> 00:28:00.650 Restoring Trust. They implemented the strictest 00:28:00.650 --> 00:28:02.450 corporate governance rules on the planet. They 00:28:02.450 --> 00:28:04.670 tried to become the Boy Scouts of telecom. They 00:28:04.670 --> 00:28:06.589 had to be. They were on probation with the entire 00:28:06.589 --> 00:28:09.269 world. Although there was that weird hiccup in 00:28:09.269 --> 00:28:12.430 2003 regarding the Iraq War. Yeah, that was strange. 00:28:12.730 --> 00:28:15.880 The Department of Defense. gave the new MCI a 00:28:15.880 --> 00:28:20.079 $35 million no -bid contract to build a cell 00:28:20.079 --> 00:28:22.380 phone network in Baghdad. Which is weird because 00:28:22.380 --> 00:28:25.119 MCI wasn't really a wireless company. Right, 00:28:25.180 --> 00:28:27.160 and they had just emerged from the biggest fraud 00:28:27.160 --> 00:28:30.460 in history. It raised a lot of eyebrows. Critics 00:28:30.460 --> 00:28:32.700 were saying, really, there's no one else you 00:28:32.700 --> 00:28:34.880 could possibly hire for this. But, you know, 00:28:34.900 --> 00:28:37.279 the government needed connectivity fast, and 00:28:37.279 --> 00:28:40.170 MCI had the connections. Pun intended. But in 00:28:40.170 --> 00:28:42.650 the end, MCI couldn't survive on its own. The 00:28:42.650 --> 00:28:44.970 industry was still consolidating. The Pac -Man 00:28:44.970 --> 00:28:47.390 game was over for them, but they became a dot 00:28:47.390 --> 00:28:51.289 for someone else to eat. In 2006, Verizon stepped 00:28:51.289 --> 00:28:53.869 in. The other giant. Verizon bought MCI. They 00:28:53.869 --> 00:28:56.210 integrated it into their Verizon business division. 00:28:56.390 --> 00:28:58.769 And that was pretty much it. The name MCI faded 00:28:58.769 --> 00:29:01.750 away. The name WorldCom was erased. The assets, 00:29:01.990 --> 00:29:04.349 the fiber, the UNET backbone, they all became 00:29:04.349 --> 00:29:06.269 part of the Verizon network that we use today. 00:29:06.619 --> 00:29:09.099 So if you are a Verizon Enterprise customer today, 00:29:09.160 --> 00:29:11.740 you might be sending data over cables that Bernie 00:29:11.740 --> 00:29:14.380 Ebbers bought back in 1996. Almost certainly. 00:29:14.500 --> 00:29:17.140 The physical legacy remains, even if the corporate 00:29:17.140 --> 00:29:19.680 entity is long dead. So let's wrap this up. We've 00:29:19.680 --> 00:29:22.180 gone from the coffee shop to the $11 billion 00:29:22.180 --> 00:29:25.440 lie to the prison cell. When you step back and 00:29:25.440 --> 00:29:27.819 look at the whole WorldCom story, what is the 00:29:27.819 --> 00:29:30.440 big takeaway for you? For me, it's about the 00:29:30.440 --> 00:29:33.279 danger of complex systems that nobody truly understands. 00:29:33.900 --> 00:29:37.220 WorldCom became too big to manage. They had 60 00:29:37.220 --> 00:29:39.500 disparate accounting systems, no integration, 00:29:39.819 --> 00:29:42.420 and a corporate culture that actively discouraged 00:29:42.420 --> 00:29:46.039 questions. That chaos provided the cover for 00:29:46.039 --> 00:29:48.720 the fraud. It created the shadows where the crime 00:29:48.720 --> 00:29:50.980 could happen. Exactly. If they had been a well 00:29:50.980 --> 00:29:53.579 -integrated, transparent machine, Scott Sullivan 00:29:53.579 --> 00:29:55.680 couldn't have hidden $11 billion. It would have 00:29:55.680 --> 00:29:58.099 been impossible. And it's also about the pressure 00:29:58.099 --> 00:30:00.180 of what some people call quarterly capitalism. 00:30:00.460 --> 00:30:03.430 Absolutely. The need to hit the number. Every 00:30:03.430 --> 00:30:06.829 90 days. The market punishes honesty if the truth 00:30:06.829 --> 00:30:09.650 is we didn't grow this quarter. WorldCom chose 00:30:09.650 --> 00:30:12.170 to lie rather than face the market's wrath. And 00:30:12.170 --> 00:30:14.289 finally, it's a testament to the night detective. 00:30:14.670 --> 00:30:17.329 Cynthia Cooper. It really is. She proves that 00:30:17.329 --> 00:30:19.730 all these systems of control, all the rules and 00:30:19.730 --> 00:30:23.150 regulations, they rely on individuals of integrity. 00:30:23.329 --> 00:30:25.490 Again, all the rules in the world, but eventually 00:30:25.490 --> 00:30:28.809 it comes down to one person sitting in a dark 00:30:28.809 --> 00:30:31.299 room deciding to do the right thing. When it 00:30:31.299 --> 00:30:33.900 would be so much easier to just go home and forget 00:30:33.900 --> 00:30:36.319 about it. That's a powerful thought. It puts 00:30:36.319 --> 00:30:39.740 the responsibility on all of us, really. If you 00:30:39.740 --> 00:30:43.059 saw the numbers didn't add up, would you be the 00:30:43.059 --> 00:30:46.099 one to burn the CD? That's the question. Something 00:30:46.099 --> 00:30:48.039 for our listeners to think about next time they're 00:30:48.039 --> 00:30:50.559 reviewing an expense report. Thank you for joining 00:30:50.559 --> 00:30:53.180 us on this deep dive into the wild world of WorldCom. 00:30:53.440 --> 00:30:55.019 Thanks for having me. We'll see you next time.