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Class Action History: WorldCom Accounting Scandal

When Enron folded due to its 2001 scandal, it was the biggest bankruptcy in American history. Few would have predicted that only a few years later, in 2003, WorldCom would file bankruptcy over a nearly identical scandal. The fantastic implosion of WorldCom would set the stage for one of the biggest class action suits in American history to this day.

WorldCom Accounting Scandal

Under the direction of CEO Bernard Ebbers, WorldCom posted impressive growth throughout the 1990s. Ebbers became fabulously wealthy thanks to his investment in the company’s stock, though by the late 90’s the prices began to flag. This was due to a combination of factors, including the shifting telecom industry and the federal government striking down a bid by WorldCom to merge with Sprint.

While the company had been aggressively growing for roughly a decade, the sudden collapse of their stock prices set Ebbers on a mission to cover the losses by any means. As a result, under his direction, and the direction of CFO Scott Sullivan, controller David Myers and director of accounting Buford Yates, WorldCom committed increasingly flagrant accounting fraud.

Accounting Fraud

Due to the executives’ stake in the company’s stock prices, the board of directors offered substantial corporate loans to Ebbers. This was due in large part to the catastrophic effect Ebbers selling out of the company would have on their stock prices.

However, when paired with Ebbers’ strategy of recording line costs as capital expenditures instead of expenses and fudging company earnings with faked income from “corporate unallocated revenue accounts,” this made the company look rather fishy from the inside looking up. The fraud was discovered by a group of WorldCom accountants, who brought the issue to the attention of the authorities.

Court Cases

In 2005, a federal judge approved a $6.1 billion litigation against WorldCom for the fraud. Plaintiffs in the case were primarily holders of WorldCom stock, which collapses when the scandal was made public. As a result of the scandal, both Bernie Ebbers and Scott Sullivan served jail time.

Ironically, the Enron scandal a few years prior had led to the creation of the Sarbanes-Oxley act, which was aimed at preventing cases like WorldCom’s from occurring again. Had the act been in place before Ebbers began his fraudulent accounting, it’s unlikely it would have gone on for as long as it did.