Extraordinary Circumstances

The Journey of a Corporate Whistleblower

Cynthia Cooper

• Publisher: Wiley
• Year: 2010
• Print ISBN: 9780470443316, 9780470124291
• eBook ISBN: 9780470893371
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The longer WorldCom Chief Audit Executive Cynthia Cooper stares at the entries in front of her, the more sinister they seem. But the CFO is badgering her to delay her team's audit of the company's books and directing others to block Cooper's efforts. Still, something in the pit of her stomach tells her to keep digging. Cooper takes readers behind the scenes on a riveting, real-time journey as she and her team work at night and behind closed doors to expose the largest fraud in corporate history. Whom can they trust? Could she lose her job? Should she fear for her physical safety?

In Extraordinary Circumstances, she recounts for the first time her journey from her close family upbringing in a small Mississippi town, to working motherhood and corporate success, to the pressures of becoming a whistleblower, to being named one of Time's 2002 Persons of the Year. She also provides a rare insider's glimpse into the spectacular rise and fall of WorldCom, a telecom titan, the darling of Wall Street, and a Cinderella story for Mississippi.

With remarkable candor, Cooper discusses her struggle to overcome these challenges, and how she has found healing through sharing the lessons learned with the next generation. This book reminds us all that ethical decision-making is not forged at the crossroads of major events but starts in childhood, "decision by decision and brick by brick."

At a time when corporate dishonesty is dominating public attention, Extraordinary Circumstances makes it clear that the tone set at the top is critical to fostering an ethical environment in the work-place. Provocative, moving, and intensely personal, Extraordinary Circumstances is a wake-up call to corporate leaders and an intimate glimpse at a scandal that shook the business world.

CHAPTER 1
A Dark Cloud

People don’t wake up and say, “I think I’ll become a criminal today.” Instead, it’s often a slippery slope and we lose our footing one step at a time.

It’s the end of summer 2001. White linen tablecloths blow in the warm breeze of the evening. Candles glow softly throughout the backyard and patio. The weather is unseasonably gentle, a break from the usually sultry Mississippi humidity.

My husband Lance and I are at the home of David Myers, the WorldCom Controller, who oversees the accounting department. We’re attending a shower for Scott Sullivan, the company’s Chief Financial Officer, and his wife Carla. Recently, they adopted a beautiful baby girl, their only child and the reason for our celebration. Carla has been in and out of hospitals, battling diabetes, and has come close to death several times. Many of us know about her struggles with her health. The office has been buzzing with excitement at their good news.

Some 20 people have come together at David’s home—executives reporting to Scott and spouses, as well as Bernie Ebbers, our CEO, and his wife Kristie, who are helping to host the shower. The Myers home is beautifully decorated, reminding me of one of the fine homes in Southern Living. Lance and I admire each room as David takes us on a tour, excitedly telling us about the changes he and his wife made after moving in. “We’re trying to move Jack from his crib to the big bed,” he says, pointing to his son’s crib, still sitting in his room.

Scott and Carla are showing off their baby girl. With plump rosy cheeks, she looks like the perfect Gerber baby. We watch as they take turns feeding her a bottle. Scott, the man known as intensely serious at work, is suddenly very nurturing, almost giddy.

Only a few months before, Lance and I were also blessed with a beautiful baby girl, and I’ve just come back to work from maternity leave. Since our babies are only months apart, it’s been fun to talk to Scott and Carla about how our girls are growing, especially because Scott and I usually talk only about business. For my daughter’s birth, they gave us a small doll wearing a beautiful pink dress with smocking across the collar. It sits on a white shelf above my daughter’s bed. And Carla recently brought her daughter to the office wearing the dress Lance and I had given her.

Everyone ambles about, visiting and sampling the hors d’oeuvres. The tables scattered about the lawn overlook a beautiful lake. After dinner, we stand in a large circle on the back patio. The men smoke cigars and guests take turns telling humorous stories about old times. In typical fashion, Bernie Ebbers chews on an unlit cigar and occasionally throws out one of the one-liners he’s famous for, making everyone laugh.

The atmosphere is full of warmth and good-hearted banter, but an unseen cloud hangs over this seemingly perfect picture. Within two years, with the exception of myself and one other guest, every employee present will be gone from the company. Three will be criminally indicted for financial-statement fraud, and I will be thrust into the center of a storm.

That night reminds me that numbers and accounts are only part of what hung in the balance. What happened touched real people: The man who lost his children’s college fund, the elderly lady whose life savings disappeared, the employee living paycheck to paycheck and struggling to find another job. It also affected the families of those involved in the wrongdoing, who, on an emotional level, would endure the pain and serve prison sentences along with their loved ones. So happy and full of life at the dinner party, the faces of Kristie, Carla, and David’s wife Lynn—the spouses of three of the men indicted—will soon show only pain and sorrow.

The Slippery Slope

Sow a thought, reap an action; sow an action, reap a habit; sow a habit, reap a character; sow a character, reap a destiny.

—Scottish author Samuel Smiles

It’s October, 2000, a year before the dinner party. The accounting team at WorldCom has just closed the company’s books for the third quarter. David Myers is shocked by the numbers. Line cost expense—what the company pays to lease telecommunications lines and to originate and terminate telephone calls, its single largest expense—is too high by hundreds of millions of dollars, driving earnings well below Wall Street expectations. Someone must have made an error. But where?

David is a Mississippi boy who’s done well for himself. Tall with a slim build, he played basketball in high school and earned a degree in accounting from the University of Mississippi in Oxford. He started his career in public accounting with Ernst & Whinney (now Ernst and Young), one of the country’s most prestigious firms, and then moved into industry with Lamar Life Insurance in Jackson, the state capital. Hard-working and friendly, David quickly moved forward professionally.

Things have been going well for him. He’s happily married with three children, two from a previous marriage. In his early 40s, David has been able to achieve some financial security for his family. By working hard and putting in long hours, he’s moved up the corporate ladder to Senior Vice President, commanding an annual salary close to a quarter of a million dollars. As the Controller, he reports directly to Scott Sullivan, the Chief Financial Officer, and has hundreds of finance employees under his charge.

David joined WorldCom in 1995. In his first years with the company, the stock soared. By 1999, when the stock hit a record high, his stock options were worth over $15 million. David has received some $700,000 in pre-tax profit by exercising his options. He and his wife moved into a lake-front home in an upscale neighborhood, and purchased a home for his wife’s parents, but David has held the remainder of his options.

Now that potential wealth seems at risk of evaporating. The high-flying bull market of the 1990s is on a fast downhill slide. The Internet stock bubble that burst in March, 2000 is about to be followed by a less publicized but much larger and more devastating collapse: Telecom. The entire sector is in disarray, but many in the industry believe the problems are temporary. Still, the figures glaring back at David are far worse than expected. Are the numbers he sees an error or a train wreck in progress?

David isn’t looking forward to presenting such bad news to his boss Scott Sullivan, especially since he has no idea why the numbers are so abysmal. But he knows he can’t put it off. WorldCom soon has to release its quarterly earnings to the public. He walks through the halls joining the building where the accountants work with the one housing the executive suite, where Bernie and Scott have large adjacent corner offices. As he walks through the double glass doors to the suite, he sees the lighted bookcases he’s seen so many times on his way in, filled with company memorabilia Bernie has collected over the years, including items marking each acquisition.

David takes a deep breath and walks into Scott’s office. The glass windows taking up the entire wall behind Scott’s desk provide a beautiful view of the small man-made lake, fountain, and walking trail below. But David is in no mood to admire the view. He might as well get right to it: The numbers are bad. He can’t explain why. His department has checked and re-checked them. The accountants can’t find any errors.

Scott isn’t happy. This is unacceptable news. Surely, someone made a mistake. David is sent back to his office to go through the numbers again, or do whatever it takes to find and fix the errors. He asks several of his accountants to retrace their steps, but even the second time around, they find no mistakes. He returns to Scott with the news, but Scott still refuses to accept the numbers, insisting there’s a mathematical mistake.

Management is now only days away from having to release financial results to the public. Scott and David know that if they report these results, WorldCom will not meet the earnings guidance executives previously issued. The stock price will get hammered, and analysts will downgrade their opinions, which could send the company into a downward spiral. And WorldCom depends on its high stock price to acquire companies.

The pressure is intense and building every hour. What are we going to do, David asks Scott. Scott is at a dangerous crossroads. He rationalizes that the cost of telling the truth is too high. In any case, there must be an error, he thinks, and it’ll surely correct itself the following quarter. Change the numbers, he instructs David. Reduce line-cost expense so that the company can meet earnings guidance. “While [Scott] didn’t believe that this was the right and appropriate thing to do,” David later recalled, he said “this is what we needed to do at the time.”

Scott’s instructions are stressful for David. But David has always felt loyal to his boss, so he, too, rationalizes. This will be temporary. There must be an error. Scott is sure of it. Either way, WorldCom is just going through a tough time. The industry will soon turn around.

To change the financial statements, David will have to pull several of his mid-level accountants into the plan. David and Scott are at high enough levels in the company that they don’t actually make accounting entries in the system. The trusted inner circle will have to grow.

David decides to relay Scott’s message to his right-hand lieutenant, an accounting director named Buford (Buddy) Yates. David trusts Buddy. They’ve been friends for many years, having worked together at Lamar Life. Buddy joined WorldCom in 1997. With a stocky build and gray hair, some say he can be like a bulldog—he isn’t afraid to speak his mind and doesn’t mince words, turning gruff at times. This time is no exception. Buddy can’t believe what he’s hearing. Is Scott really serious? Very much so, David tells him.

David then turns to Betty Vinson and Troy Normand, two mid-level accountants who report to Buddy and play a key role in compiling the financial results. They’ll be able to analyze the details, help decide which specific accounts to adjust, and physically make changes in WorldCom’s accounting system.

Like Buddy, Troy and Betty are extremely uncomfortable with Scott’s request. This is beyond tweaking—to meet earnings expectations, they’d have to make adjustments in the hundreds of millions of dollars with no support and only the hope that the problem would correct itself. They’re feeling upset and pressured, but there’s little time to think things through—the company has to release its earnings to the public. All three are their families’ primary breadwinners. Not following orders could mean losing jobs that aren’t easily replaceable in Jackson, Mississippi. Begrudgingly, they decide to go along with the plan—this once.

The three split the work load. Buddy and Troy work on one side of the accounting entries, deciding which liability accounts can be reduced. Betty works on the other side, doing the same for expense accounts.

Because there are estimates in accounting, especially during acquisitions, companies sometimes overstate liabilities and expenses. This has to be corrected once the exact numbers have been determined, though some companies choose to leave them in place, creating what’s known in accounting, disapprovingly, as rainy-day “cookie-jar reserves.” These are the accounts that Betty, Buddy, and Troy are drawing down, but they don’t have a legitimate business rationale. They’re just drawing down reserves by whatever amount is necessary to meet earnings. “I just really pulled some [accounts] out of the air,” Betty will recall.

Once the changes have been made, David takes Scott the adjusted financial statements. Now they’re exactly what the boss wants to see, but David is worried that his accountants may jump ship. Both Betty and Troy have told him that they’re contemplating resigning from the company. Buddy is also growing upset. They love their jobs and have been devoted to WorldCom, working long hours and often taking work home to continue through the night—whatever it took to get the job done. But now, it seems, they’re being forced to walk away.

Scott offers a solution—the company will reduce earnings guidance going forward so that, in the future, no one will have to make bad entries. David is relieved to hear the news. He asks Scott if he would mind personally reassuring the three accountants. Hearing it from someone so senior to them may make a difference.

Scott agrees to meet with the accountants. Buddy doesn’t attend, but Betty and Troy are anxious to hear what Scott has to say. When they arrive at his office, he invites them to sit in the executive seating area in front of his desk. Employees usually sit around the large conference table, but the sofa and chairs make for a homier, more intimate setting.

Scott knows all too well what’s at stake, and he pours it on thick and heavy. He appeals to their loyalty. He flatters. He assures Betty and Troy that the false entries were a one-time thing, since earnings guidance will be lowered. He thanks them for their hard work and apologizes that they had to do this. In any case, he still believes that the numbers in the initial statement were simply wrong and will correct themselves come next quarter.

“This is a situation where you have an aircraft carrier out in the middle of the ocean and its planes are circling up in the air,” Scott tells the two accountants, according to David’s recollection, “and what you want to do, if you would, is stick with the company long enough to get the planes landed to get the situation fixed. . . . Then if you still want to leave the company, then that’s fine, but let’s stick with it and see if we can’t change this.”

Troy tells Scott that he’s “scared” and doesn’t want to find himself “in a position of going to jail for [Scott] or the company.” Scott “said that he respected our concern,” Troy would later recall, but that “we weren’t being asked to do anything that he believed was wrong . . . but that if it later was found to be wrong, that he would be the person going to jail, not me.”

As Troy and Betty discuss the meeting on the way back to their offices, Troy wonders if maybe he’s making too much out of this. After all, Scott’s very smart and highly regarded. He must know what he’s doing. Still, in ...

Table of contents

• Cover
• Table of Contents
• Introduction
• CHAPTER 1 - A Dark Cloud
• CHAPTER 2 - Graduation Day
• CHAPTER 3 - New Beginnings
• CHAPTER 4 - Hotlanta
• CHAPTER 5 - The Turnaround
• CHAPTER 6 - Coming Home
• CHAPTER 7 - Building A New Life
• CHAPTER 8 - King of the Resellers
• CHAPTER 9 - The Hottest Company in Town
• CHAPTER 10 - Nowhere to Go But Up
• CHAPTER 11 - A New Era
• CHAPTER 12 - The Glass Sieve
• CHAPTER 13 - The Tide Comes In
• CHAPTER 14 - The Minnow Swallows the Whale
• CHAPTER 15 - Finding Balance
• CHAPTER 16 - Top of the Mountain
• CHAPTER 17 - A Double-Edged Sword
• CHAPTER 18 - A Titan Stumbles
• CHAPTER 19 - The Rule of Ten
• CHAPTER 20 - What is Prepaid Capacity?
• CHAPTER 21 - Growing Suspicions
• CHAPTER 22 - A Surprise Visit
• CHAPTER 23 - The Confrontation
• CHAPTER 24 - A Desperate Search For Counsel
• CHAPTER 25 - Washington Attorneys Visit the Deep South
• CHAPTER 26 - Navigating the Storm
• CHAPTER 27 - A Visit to Federal Court
• CHAPTER 28 - United States of America Versus Bernard J. Ebbers
• CHAPTER 29 - The Judgment
• Epilogue
• Notes
• Index
• End User License Agreement