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Federal authorities allowed Scott D. Sullivan and David F. Myers to surrender at 7 a.m. Thursday, but that was the only courtesy shown the disgraced former WorldCom Inc. executives. In short time, Sullivan and Myers, hands cuffed behind their backs, were transported from the FBI’s New York headquarters to U.S. District Court just blocks away. There, the two men entered their initial appearance on charges they orchestrated one of the biggest accounting frauds in history on behalf of the troubled telecommunications company. The complaint unsealed Thursday morning charges Sullivan, chief financial officer, and Myers, the company controller, with conspiracy to commit securities fraud, securities fraud and five charges of making false statements. The statements came in five filings with the Securities and Exchange Commission between May 2001 and May 2002. All the crimes were allegedly committed as the pair hid well over $3 billion in expenditures from investors and both in-house and outside auditors, part of an effort to bolster the company’s stock price. Sullivan, 40, was freed by Southern District of New York Magistrate Judge James C. Francis after posting a $10 million personal bond secured by his home in Boca Raton, Fla. Myers, 44, was released after he posted a $2 million bond secured by two properties in Mississippi, the home state of WorldCom. Richard Owens, chief of the Securities and Commodities Frauds unit for Southern District U.S. Attorney James B. Comey, said that an agreement on the terms of release for both men had been worked out in advance with defense lawyers. Irv Nathan of Arnold & Porter, who is representing Sullivan along with Craig A. Stewart, told Magistrate Judge Francis that he appreciated the decision of the government allowing the two men to surrender rather than be arrested. Last week, Adelphia Communications Corp. founder John J. Rigas and his two sons, who were accused in a multibillion-dollar scheme to defraud investors, were arrested and handcuffed in Manhattan. But later, outside of court, Nathan spoke to the climate in which his client was charged: “We deeply regret the rush to judgment and the political overtones involved.” Sullivan and Myers were fired in June following the company’s belated announcement that its public balance sheet bore almost no relation to the actual financial condition of the telecommunications giant. According to the complaint, Sullivan directed Myers to have employees in WorldCom’s general accounting department in April 2001 transfer about $771 million in “line cost” expenses to a series of property, plant and equipment accounts, as well as another $560 million in July 2001. Similar transfers of transmission line costs of $743 million, $941 million and $818 million were made to a variety of accounts in WorldCom’s general ledger in October 2001, February 2002 and April 2002. Line costs are the various fees WorldCom pays to use or lease facilities and connections belonging to third parties and are not part of WorldCom’s own network. The transfers were designed to give the appearance that the company’s operating expenses were lower, its net income was higher, and the value of the company’s capital assets was larger, according to FBI Special Agent Paul J. Higgins, who signed the complaint. Higgins detailed how WorldCom began to stumble after entering into a series of bad bets that a rapid increase in Internet-related business ventures would increase demand for the company’s services. WorldCom signed agreements with a number of third-party carriers to gain access to out-of-network facilities, but company officials soon realized the demand for such services would not materialize. “Beginning at least in or about July 2000, WorldCom’s expenses as a percentage of its total revenue began to increase, resulting in a decline in the rate of growth of WorldCom’s earnings,” Higgins states. “This decline created the substantial risk that, unless WorldCom’s performance improved, its earnings would fail to meet analysts expectations.” It was at this point, the complaint alleges, that Sullivan and others devised the scheme to hide those increasing expenses in capital accounts and thereby allow the company to report higher earnings. These practices, the complaint charges, were concealed from the company’s auditors, members of the “Arthur Anderson engagement team,” Higgins said. WorldCom fired Arthur Anderson in April following the Enron debacle. The scheme was uncovered by the company’s internal auditors, who questioned Sullivan about several journal entries relating to the transfers, and were told that the company was capitalizing “pre-paid capacity” on underutilized or unused lines leased from third-party carriers. Sullivan allegedly told one employee that the company was intending to take a restructuring charge against earnings in the second quarter of this year related to the prepaid capacity — but would no longer capitalize prepaid capacity. A vice president with the company’s internal auditing department also told the FBI that Sullivan asked her to delay her audit until the third quarter of 2002. When Myers was questioned about the journal entries, also in June, he allegedly said that WorldCom’s management had determined that its cost structure for the network was too high, and that “the field” had been asked to lower costs. Myers allegedly said that if the cost structure of the company did not change, WorldCom “might as well shut the doors.” Myers is represented by Richard Janis and Lawrence H. Wechsler of Washington, D.C.-based Janis, Schuelke & Wechsler. WorldCom announced a $3.8 billion shortfall in June and fired Sullivan and Myers. The company declared bankruptcy in the Southern District on July 21. On Thursday, the Justice Department told Southern District of New York Bankruptcy Judge Arthur J. Gonzalez that it was nominating former U.S. Attorney General Richard Thornburgh, who now practices white-collar criminal law at Kirkpatrick & Lockhart in Washington, D.C., as an independent examiner for the WorldCom bankruptcy case. If Gonzalez approves the appointment, Thornburgh will investigate the company’s books for misconduct and preserve records. WorldCom also faces a series of investor lawsuits, including actions filed by major pension funds, and a civil fraud action brought by the Securities and Exchange Commission in the Southern District. U.S. Attorney Comey said Thursday that the investigation was continuing. He declined to comment on whether his office would seek to file criminal charges against the company itself. Sullivan and Myers face as much as 10 years in prison on the most serious count in the complaint. A pretrial hearing is set for Sept. 3.

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