THE INDUCTEES: Bernie Ebbers

The “telecom cowboy” of WorldCom

As CEO of WorldCom, Bernard J. Ebbers built the second biggest long-distance company and Internet service provider in the country. In 1997, WorldCom had revenues of nearly $7 billion and shareholders enjoyed an average annual return of 53 percent. But the high-flying success had little to do with Ebbers’ legendary cost-cutting or deal-making. In fact, beneath the bluster was an $11 billion fraud built on phony revenues and inflated stock prices.

Thanks to deregulation and the Internet, the telecommunications industry was in a state of tremendous flux in the late 1990s. A federal act passed in 1996 removed virtually all barriers to media ownership; at the same time, there was uncertainty about how the Internet would effect the ways in which people communicate.  In this crossroads atmosphere, Ebbers made a series of bold mergers to position himself as a trailblazer. Hailed as the man who could transform the industry, today he’s serving the longest prison sentence of any corporate executive in U.S. history.

Starting from the day in 1997 when BusinessWeek ran a cover article on Ebbers, he was known as the “telecom cowboy.” It was a nickname likely inspired by the boots he wore in the boardroom and on his ranch, as well as his cool and unflinching business style. The cowboy was actually raised in Canada; he came to Mississippi as a young man on a basketball scholarship.

After finishing his studies, Ebbers stayed in Mississippi and worked as a milkman and a high school sports coach. In 1983, he and a few other entrepreneurs founded a small company that purchased long-distance telephone service wholesale from the big carriers and resold it. Within two years, AT&T split apart and Ebbers took over the little company that became WorldCom. He put his love of making deals to work and, over the next ten years, made as many as 60 acquisitions. His maneuvers placed WorldCom on the map; and, after purchasing Communications Co. and CompuServe, the company offered long distance, local service and data communications.

With stock trading at a whopping 90 times earning, people started to take notice of WorldCom. It was at this moment that Ebbers made his grand entrance. In 1997, Ebbers announced a $37 billion bid to take over MCI.  Some analysts called it a showy grab for attention, while others questioned the likelihood of the deal being approved. The merger went through and WorldCom barreled on full steam ahead – looking to swallow yet another long distance giant, Sprint. That deal didn’t work out but, by that time, Ebbers had other things on his mind.

With considerably less fanfare than he used in his deal-making, Ebbers borrowed $366 billion from WorldCom to cover stock losses at the end of 2000. Six months later, the story of his eyebrow-raising personal loan broke; within a year, Ebbers resigned. The price of WorldCom stock plummeted by 82 percent in 2002 as the Securities and Exchange Commission launched its investigation.

The SEC uncovered a complex web of deception, from operating expenses reclassified as capital expenditures to inflated stock prices and 401K plans. The rot ran deep: employees testified to a corporate environment that encouraged creating revenues at any cost. It was customary practice to double bill and ignore customers who wished to cancel service – or to book revenues for those who did. To keep track of the many methods of creating revenues, WorldCom had 55 separate billing systems at one point.

During his trial, Ebbers denied any knowledge of the fiction and fraud in WorldCom's accounting. The jury didn't buy it and, in 2006, he was sentenced to 25 years in federal prison – the longest prison term of any CEO in history. Four other WorldCom employees received prison sentences, ranging from five years (for chief financial officer Scott D. Sullivan) to five months. As a result of the company’s tailspin, 20,000 people lost their jobs. Ebbers’ assets were liquidated to create a restitution fund for former employees and the hundreds of thousands of people who had invested in WorldCom.