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The WorldCom securities fraud case, uncovered in 2002, was the largest accounting scandal in U.S. history at the time and had a profound impact on securities fraud regulation and investors. Along with the Enron scandal, the catastrophic corporate collapse of WorldCom directly exposed the risks of corporate fraud and malfeasance that led to the passage of the Sarbanes-Oxley (SOX) Act of 2002.
The securities fraud attorneys at Silver Law Group initiate and lead class action lawsuits on behalf of investors who were harmed by the same type of fraudulent corporate conduct. We have significant experience pursuing claims against perpetrators and third parties, such as banks, auditors, law firms, and large Wall Street firms for their roles in the fraud. Many of our cases have been covered by the Wall Street Journal and other leading publications.
WorldCom was a major telecommunications company that grew rapidly through the decades before it filed for bankruptcy in 2002. Founded as Long Distance Discount Service in 1983, the company grew rapidly through aggressive mergers and acquisitions under CEO Bernard Ebbers. Through a series of deals in the 1990s, including the acquisition of MCI Communications in 1998, it became the second-largest long-distance carrier in the country, second only to AT&T.
By the late 1990s and early 2000s, WorldCom’s revenue growth was slowing, but executives were determined to meet Wall Street’s expectations for high stock prices. From 1999 to 2002, executives led by Ebbers engaged in accounting fraud to inflate the company’s earnings and hide its true financial condition. The primary fraudulent technique was improperly classifying billions of dollars in operating expenses—such as line lease costs—as capital expenditures.
This manipulation made the company appear far more profitable than it was. Executives also improperly reduced the company’s reserves—funds set aside for future liabilities—to further inflate earnings. WorldCom’s internal audit vice president grew suspicious of irregularities.
Despite opposition from management, she and her team covertly investigated the accounts and uncovered billions in fraudulent balance sheet entries. The internal auditors informed the company’s audit committee of their findings. On June 25, 2002, WorldCom publicly admitted it had overstated its earnings by nearly $3.8 billion. Further investigation would find the total misstatement to be over $11 billion.
Following the exposure of the $11 billion fraud, WorldCom filed for Chapter 11 bankruptcy in July 2002. At the time, it was the largest bankruptcy filing in U.S. history. Several executives were arrested and prosecuted for orchestrating the fraud. Former CEO Bernard Ebbers was found guilty of conspiracy, securities fraud, and false filings, and was sentenced to 25 years in prison.
The collapse of WorldCom led to massive financial losses for investors, wiping out retirement savings and costing them more than $180 billion. After emerging from bankruptcy in 2004 under the name MCI, the company was ultimately acquired by Verizon in 2006.
Multiple lawsuits were filed on behalf of affected investors against WorldCom’s executives, its auditor (Arthur Andersen), and the investment banks that underwrote WorldCom’s securities. In a 2005 settlement, investors in the WorldCom fraud scandal recovered approximately $6.2 billion, which was followed by additional funds several years later.
The SEC created a “Fair Fund,” with the SOX Act of 2002, making it possible to distribute fines from SEC enforcement actions to fraud victims. The $750 million penalty WorldCom paid to the SEC was placed into this fund and distributed to investors starting in 2006. The case remains a prominent example of the problems when Wall Street banks use their analysts as cheerleaders for their investment banking clients.
Our team of experienced and aggressive legal advocates takes on various types of fraud, including misconduct involving investment products, Ponzi schemes, unsuitable investment advice, and misrepresentations. We work on a contingency fee basis, so clients do not pay legal fees unless the firm recovers a settlement or court award. Contact Silver Law Group today to discuss your potential case in a free, one-on-one case consultation.
