The Securities and Exchange Commission (SEC) filed a civil enforcement action this week against Scott D. Sullivan, the former Chief Financial Officer of WorldCom, Inc.
The Commission charged Sullivan with engaging in a fraudulent scheme to conceal WorldCom’s poor financial performance. The Commission alleged that Sullivan, with the consent and knowledge of WorldCom’s former Chief Executive Officer, caused numerous improper adjustments and entries in WorldCom’s books and records, often in the hundreds of millions of dollars, to make the company’s quarterly and yearly financial results appear to meet Wall Street’s expectations. In addition, the Commission alleged that Sullivan made numerous false and misleading public statements about WorldCom’s financial condition and performance, and signed a number of SEC filings that contained false and misleading material information.
Lawrence A. West, an Associate Director in the SEC’s Division of Enforcement, said, “The process upon which we are now embarked will ensure that those most responsible for WorldCom’s fraud will be held strictly accountable and will permit the full story of this egregious fraud to be told. The Commission’s filing today of a partially settled civil action that will enjoin Mr. Sullivan and bar him from ever again acting as an officer or director of a public company or ever working in public accounting is only a start.”
The complaint charges that as part of the scheme, Sullivan instructed subordinates to book certain fraudulent adjustments and entries in WorldCom’s general ledger. The adjustments and entries were designed to falsely increase WorldCom’s reported revenue and falsely decrease WorldCom’s reported expenses. The false adjustments and entries, among other things, improperly reduced expenses by drawing down certain reserves and improperly capitalizing certain operating expenses commonly referred to in the telecommunications industry as “line costs.” The complaint also alleges that Sullivan misrepresented or failed to disclose material changes in WorldCom’s revenue recognition practices. During the same period, Sullivan and others made materially false or misleading statements or omissions to WorldCom’s independent auditors in connection with audits and the preparation of filings with the Commission.
The Commission’s action against Sullivan is its fifth civil enforcement action related to the WorldCom fraud. The first was filed against WorldCom, Inc. on June 27, 2002, the day after WorldCom announced that it intended to restate its financial results for five quarters—all quarters in 2001 and the first quarter of 2002 (Litigation Release No. 17588).
The Commission’s investigation into matters related to WorldCom’s financial fraud is continuing.