Friday, March 11, 2005
Add three more deep-pocketed underwriters to the list (see earlier post here) who have settled WorldCom bond investor claims that they failed to conduct adequate due diligence about the company. Deutsche Bank will be paying the largest amount in this group -- $325 million -- while West LB settles for $75 million and Caboto for $37.5. The brings the total settlements to approximately $4 billion (check the Securities Litigation Watch blog here for its scorecard), with one big fish out there waiting for the trial scheduled to begin March 17: J.P. Morgan. As discussed in a Wall Street Journal article (here), Morgan used Bernie Ebbers in a video touting the Morgan-Chase merger in 2001, with Ebbers saying (to the jury, I might note): "J.P. Morgan Chase is really like MCI WorldCom . . ." How's that for a ringing endorsement of a defendant accused of failing to adequately review financials of a favored client. Morgan turned down an offer last year to settle the case for approximately $1.3 billion, and that number will likely climb higher as the pool of potential defendants with those deep pockets shrinks. I sure feel good about being a Morgan shareholder.
On the Ebbers trial front, the jury watch has now surpassed watching paint dry for the level of boredom induced. If the jury does not reach a verdict today, the sixth day of deliberations, the question of deadlock (and the dreaded Allen charge) arises. (ph)
Thursday, March 10, 2005
The Securities Litigation Watch blog has a very handy scorecard (here) of the settlements by investment banks that served as underwriters for WorldCom's various bond issues while it engaged in accounting fraud. The total paid in the settlements so far is $3.564 billion, with Citigroup contributing the largest amount to date ($2.58 billion). The latest to settle are: ABN Amro ($268 million), Mitsubishi ($75 million), BNP Paribas and Mizuho International ($37.5 million each). Among the defendants who have not settled yet are J.P. Morgan and the former directors of WorldCom, whose earlier settlement was not accepted by the judge. (ph)
The jury in the Bernie Ebbers prosecution may be near a verdict, although they also asked the court to order out for Dominos pizza for lunch today because they're tired of the food from the cafeteria -- no great surprise there for those who have spent more than a day in most federal courthouses. The jury asked the judge if they had to agree unanimously on supplemental charges related to sentencing issues that the government had added to the indictment after the Supreme Court's decision in Blakely threw the Sentencing Guidelines into question. After Booker, those supplemental charges on sentencing factors became irrelevant, and apparently there was never a ruling on the defense motion to strike the language from the indictment as surplusage. Judge Jones informed the jury they should ignore the supplemental charges, and denied a defense motion for a mistrial. If Ebbers is convicted, this will be one more issue to raise on appeal, largely due to the court's failure to rule on the motion in a timely manner. The jury appears to have reached the final part of the indictment, so they may be ready to deliver a verdict -- after the pizza, of course. See an AP story here discussing the jury's dealings with the court. (ph)
The pizza bit has definitely been noticed by more than one journalist. See the Wall Street Journal story here. (esp)
Wednesday, March 9, 2005
The jury in the Bernie Ebbers trial continued through a third day a deliberations by, among other things, reviewing a video of Ebbers at a 2000 investment conference, excerpts of his cross-examination, and testimony from two other government witnesses who entered guilty pleas, former accounting executives Betty Vinson and Troy Normand. It will be interesting to see how long it takes for a verdict, and if we're getting close to a potential deadlock. An AP story here discusses the third day of deliberations. (ph)
Monday, March 7, 2005
At the end of last week, more investment banks agreed to settle claims by purchasers of WorldCom bonds underwritten by the firms before the company's collapse in 2002. On Thursday, March 3, Bank of America agreed to pay $460 million to the claimants, and on Friday, March 4, four more investment banks paid up: Lehman Brothers for $62.7 million, and CSFB, Goldman Sachs, and UBS Warburg each for $12.5 million. This is on top of the rather hefty $2.58 billion -- yes, that's a B -- payment by Citigroup. Among the investment banks that have not yet entered into a settlement are J.P. Morgan, Deutsche Bank, and ABN AMRO. And, of course, a rather closely watched criminal prosecution should wrap up in the next few days against former CEO Bernie Ebbers. An AP story here discusses the settlements in the bondholder suit. (ph)
Sunday, March 6, 2005
The jury deliberated on Friday in the case of Bernard Ebbers, former Worldcom chief, and will resume their deliberations on Monday. So far the jury has asked to re-examine some of the evidence. Their request to re-examine some of he testimony of Scott Sullivan, a key witness in the trial is particularly noteworthy. See more here (Atlanta Jrl. Const.) and here (Wall St. Jrl).
Friday, March 4, 2005
Thursday, March 3, 2005
As one might suspect, Attorney Reid Weingarten had words to say about the testimony of Scott Sullivan. In the closing argument for the trial of his client, Bernard Ebbers, he noted that Sullivan was "more rehearsed in his direct testimony than the actor who plays Hamlet on Broadway." The case is coming to a close and may go to the jury as early as today. See more in the Wall Street Journal here and via AP here.
Wednesday, March 2, 2005
The defense rested its case in the Bernie Ebbers trial and the prosecution then proceeded into closing argument. Did he or did he not have knowledge of what was happening? Was this all Scott Sullivan, or was Ebbers a major player in the alleged criminal activity? These appear to be the key issues that will need to be resolved in the jury room.
In closing argument, the prosecution hammered away at the credibility of Ebbers and whether he had been corrupted by power. (See AP) (See Wall Street Jrl). Tomorrow the defense will take its turn before the jury. Heavy penalties are at stake here and it may all come down to who the jury believes - Scott Sullivan or Bernie Ebbers.
Assistant U.S. Attorney David Anders continued the cross-examination of Bernie Ebbers by focusing on the loans Ebbers took -- which WorldCom guaranteed -- on his WorldCom stock, and the pain from the margin calls as the price of shares dropped. The government has argued that Ebbers pressured former CFO Scott Sullivan to engage in accounting fraud to maintain the company's share price at a level sufficient to keep the loans from being called. Anders also focused on Ebbers' involvement in the details of the company, and Ebbers admitted that he was "fairly detail-oriented . . . in the areas that I paid particular attention to." It will be interesting to see if the jury accepts the position that Ebbers paid attention to certain areas of the company (e.g. the water in the water-cooler) but not accounting entries that would affect the stock's price. Articles from the Wall Street Journal (here) and AP (here) discuss the cross-examination. The WSJ also has a poll regarding whether it was a good idea for Ebbers to testify. The problem is that we will not know the effect of the testimony until the jury returns its verdict, and defense lawyers make the decision to call the defendant to testify without the benefit of hindsight or knowing how the person will react to cross-examination. (ph)
Tuesday, March 1, 2005
As promised this past Friday, Bernie Ebbers was called to the witness stand on Monday to present his variant on the "honest-but-ignorant CEO" defense, asserting that he knew little about technology and apparently even less about accounting. Ebbers testified that his grades in college were not very good, and that at WorldCom he was the company's "coach" much like he had been a high school coach before entering the backwaters of the telecom world. Ebbers denied ever being advised by former CFO Scott Sullivan that the accounting entries were incorrect, and noted that Sullivan had an "uncanny knowledge" of accounting. The defense gambit is risky, and to this point Ebbers appears to be comfortable on the witness stand, but the cross-examination may tell another story. Articles from the Wall Street Journal (here) and AP (here) discuss Ebbers' first day of testimony. (ph)
Saturday, February 26, 2005
During a hearing on Friday, defense counsel for Bernie Ebbers stated "in good faith" that Ebbers will be called to testify on Monday. The decision is the most important one the defense will make, and may reflect an assessment that former CFO Scott Sullivan's testimony needs to be countered by more than just the defense witnesses called so far who have indicted only indirectly that Sullivan was the main architect of the fraud at WorldCom. The "honest-but-ignorant" defense is not an easy one to pull off, and the key will be how Ebbers comes across to the jury in his likely assertions that, while he is an otherwise bright person and something of a micromanager (tap water for the water coolers), he did not know about the extensive fraud in the company's accounting. Another factor that may be playing a role in the decision to testify is that the court has so far refused to grant immunity to two witnesses the defense wants to call, including former chief operating officer Ronald Beaumont. A Wall Street Journal story here discusses the defense announcement that Ebbers will testify.
The decision for Ebbers to testify could change over the weekend because the statement was not made before the jury and therefore -- at least in a perfect world in which jurors adhere to the judge's admonition not to read any media accounts of the trial -- no direct harm would come to the defense from jury expectations of hearing him testify. I had predicted in an earlier post that Ebbers would not testify, proving once again that my prognostications are better used as a negative indicator. (ph)
Friday, February 25, 2005
Ebbers- In order to succeed in the prosecution of Bernie Ebbers, the government needs to prove mens rea - that the defendant knew. Two witnesses for the defense, however, state otherwise. (See more here and here).
Scrushy- The government presented some damaging evidence against the defendant with testimony that goes to whether the accused had knowledge of improprieties occurring at HealthSouth. It's tough to get around a statement like, "We can all go to the lake and retire," (See more here). But it is too soon to judge how things are going in this case. Unlike the Ebbers trial, this case is still in the prosecution phase.
Thursday, February 24, 2005
We left off in our post of 2/21 discussing the final portions of the government's case in the trial of Ebbers. The prosecution's case has now ended, and the court has denied the defense motion for a directed verdict. The defense, now presenting its case, started with its first witness being Cynthia Cooper, the former head of internal auditing at WorldCom. See AP story for more.
Monday, February 21, 2005
The importance of Scott Sullivan to the government's case is clear as the prosecutors told the court that they expect to end their case-in-chief on either Tuesday or Wednesday and will not be calling any more witnesses from the company. Sullivan was the principal witness used to establish Bernie Ebbers' involvement in the fraud, and the cross-examination included repeated references to Sullivan's lies and misstatements, including a discussion about whether what he said in a conference call constituted "B.S." It did not, however, include any discussion of marital infidelity -- an issue that was probably used by the defense more as a red herring than anything else. U.S. District Judge Barbara Jones refused the government's request to call a former WorldCom employee who lost almost their entire retirement savings when the company collapsed, calling the testimony repetitive -- an attempt to end the case on an emotional note that had little to do with the charges against Ebbers except in the most general sense. An AP story here discusses the conclusion of the cross-examination of Sullivan.
The interesting question will be whether the defense even puts on any witnesses, and if it does, whether they will only be character witnesses to discuss Ebbers' general niceness and disinterestedness in things related to accounting. I still think it will be a surprise if Ebbers testifies because the case hinges more on Sullivan's credibility, and Ebbers could do more harm than good if he testifies. We'll know by the end of the week. (ph)
Monday, February 14, 2005
Friday, February 11, 2005
Scott Sullivan, former CFO of WorldCom, continued his testimony tying Bernie Ebbers to the accounting fraud at the company. Sullivan recounted how WorldCom entered negotiations with Verizon Communications Inc. in 2001 about a possible merger, but Ebbers ended the talks because due diligence by Verizon likely would have revealed the fraud. Sullivan said that Ebbers used WorldCom's low stock price as the reason for calling off further negotiations. While Sullivan asserts that Ebbers knew about the accounting fraud at the company, the lack of documentation for that claim remains an issue in the government's case. The cross-examination of Sullivan by Reid Weingarten, Ebbers' lead counsel, will likely begin next week, and the effort to fulfill Weingarten's prophecy about the impeachability of Sullivan will be tested. An AP story (here) discusses Sullivan's continuing testimony. (ph)
Tuesday, February 8, 2005
The HealthSouth and WorldCom trials continue along their parallel paths as former WorldCom CFO Scott Sullivan took the witness stand on Monday, Feb. 7, to begin what promises to be a long engagement testifying against Bernie Ebbers. On his first day of testimony, Sullivan -- the government's star witness because he is the principle link between Ebbers and the multi-billion dollar accounting fraud -- stated that Ebbers had a "hands on grasp of financial information." (AP story here) At the HealthSouth trial, former CFO Bill Owens admitted on Friday, Feb. 4, that he had not filed income taxes for the period from 1995 through 2002, and had not repaid loans totaling $1 million from HealthSouth. Sullivan made his own admissions, stating that he used marijuana and cocaine over a two decades and, perhaps more tellingly, lied to the Department of Defense about his drug use as part of a security clearance check. Being an admitted liar is not helpful to the government's case that hinges largely on the testimony of Sullivan.
Once the government's direct examination ends, expect the defense to mount significant attacks on Owens and Sullivan, both of whom entered into plea agreements with the government and will be open to questions regarding their veracity (the always-effective "Which time were you lying?" question). (Birmingham News story here (Owens) and Wall Street Journal story here (Sullivan)). (ph)
Friday, February 4, 2005
The big east coast and deep south white collar cases (Ebbers, Kozlowski, and Scrushy) continued yesterday, all still in the prosecution portion of the case. And it looks like the prosecution has quite a bit more to present in these three cases. For an update on specific testimony presented, check out the "CEO Blotter, Corporate Execs In Court" found on the Atlanta Jrl-Const. website. It sounds like the prosecution had some difficulty in the Ebbers trial (see here and here).
On the west coast, the trial of Richard Hawkins, former CFO of McKesson, continued yesterday with more prosecution evidence. This trial, however, appears to be in the final stages of the prosecutor's case. (see here).
All of this, and I haven't even mentioned cases that may be forthcoming from investigations related to Enron. It sounds like things are building up in that corner of the country as a title of an article in the LA Times this a.m. is "Tapes Reveal Enron's Power Plant Rigging."