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“The significance of the role of lawyers may not be as great at WorldCom as in some other companies. It’s probably one reason why we’re as successful as we’ve been.” That was P. Bruce Borghardt speaking, back in December 1997. Borghardt was then general counsel for corporate development at WorldCom Inc., which was in the midst of a merger with the MCI Communications Corp. Today, Borghardt is gone, nobody’s talking about WorldCom’s successes, and the legal department’s role at the bankrupt telecommunications company has been laid bare in two investigative reports, released last week, detailing striking governance lapses. The two reports — one from Wilmer, Cutler & Pickering, the other from Kirkpatrick & Lockhart — paint a picture of a splintered legal department that failed as a safeguard against apparent misconduct by board members and senior managers, most notably ousted chief executive Bernard Ebbers. General Counsel Michael Salsbury resigned June 10, after the reports were made public. Salsbury had a 24-year relationship with the company, first as an outside lawyer and then, since 1995, as general counsel. He said in a statement issued by MCI — as the company now calls itself — that he didn’t want the Kirkpatrick report’s “characterization of certain incidents unrelated to the accounting fraud to become an obstacle to the company’s emergence” from bankruptcy. Claire Hassett, an MCI spokeswoman, says another in-house lawyer, Paul Eskildsen, has been named acting general counsel. Salsbury is not accused of any misconduct in the Wilmer report, which was prepared on behalf of a special investigative committee of MCI’s board by Washington, D.C., partner William McLucas, the former enforcement chief at the Securities and Exchange Commission. The Kirkpatrick report, however, faults Salsbury for participating in a multibillion-dollar acquisition that appears to have been a fiasco for WorldCom. The report was prepared by D.C. of counsel and former U.S. Attorney General Dick Thornburgh, appointed last August as an examiner by the judge overseeing the bankruptcy case. Salsbury, 54, could not be reached for comment. Hassett, the spokeswoman for MCI, said Salsbury was “out of the country” and declined to provide a phone number. A call to a number listed under his name was not returned. Borghardt, for years the most senior corporate lawyer at WorldCom, was based in St. Louis and reported directly to Ebbers until 2002, according to the investigators. Borghardt receives more critical attention in both reports, particularly in Kirkpatrick’s. “There were certainly factual inaccuracies in the reports, and I disagree with some of their conclusions based on those inaccuracies and other reasons,” says Borghardt, who no longer works for the company. He declines to be more specific or to discuss the timing or circumstances of his departure from the company. MCI spokeswoman Hassett also declines to discuss the subject. The reports from Wilmer and Kirkpatrick cover much of the same ground, focusing on the billions of dollars in accounting “irregularities” and thehundreds of millions of dollars in company loans to Ebbers that led toWorldCom’s collapse into bankruptcy. But, along the way, the reports each raise questions about the lack of internal oversight by WorldCom’s in-house lawyers. Wilmer explicitly blames Ebbers for the “fragmentation” of the legal department, described as “an agglomeration” of lawyers from companies acquired by WorldCom, housed in various locations, including D.C., where a team of roughly 250 lawyers operated under Salsbury. Dubbed the Law and Public Policy Department, Salsbury’s team was the largest within the company. It handled regulatory work and litigation, according to Wilmer. Borghardt, who had worked with Ebbers since the early 1990s, oversaw WorldCom’s corporate legal matters. Both reports point out that Borghardt advised the board and its compensation committee and weighed in on the company’s public reporting. Wilmer recounts that “in light of what he described as Ebbers’ strong feelings about controlling discussions within the company, [Borghardt] did not regularly consult Salsbury or provide him copies of corporate-related documents.” According to both reports, none of the company’s senior in-house lawyers was located in the Jackson, Miss., corporate headquarters, where Ebbers, then-chief financial officer Scott Sullivan, and other senior managers worked. “Ebbers did not include the company’s lawyers in his inner circle and appears to have dealt with them only when he felt it necessary,” Wilmer writes. “There was no coherent reporting structure or hierarchy, and they had limited support from senior management … . In such an environment, it is not surprising that employees distressed by accounting irregularities did not think of the legal departments as logical avenues of recourse.” Wilmer’s probe ran from late June 2002 through March of this year and kept roughly 23 lawyers busy, including McLucas and D.C. partner Charles Davidow. Davidow, who says he spent most of his time during that nine-month period on the effort, managed the investigation day-to-day. The firm’s bill for the work came to about $13 million. At Kirkpatrick, Thornburgh’s team is still digging. As the court-appointed examiner, Thornburgh is expected to ultimately produce a report detailing possible legal claims against those deemed responsible for WorldCom’s losses. That report is expected to be released in September. So far, Thornburgh’s investigation, managed on a day-to-day basis by Kirkpatrick D.C. partner and former SEC enforcer Michael Missal, has occupied about 25 of the firm’s lawyers. Billings exceed $8 million to date, according to Missal. While both reports question the efficacy of the in-house legal oversight under Salsbury, only the Kirkpatrick report directly takes the former Jenner & Block litigator to task for his handling of a major WorldCom acquisition. In that deal, which unfolded during 2000 and 2001, WorldCom paid about $6 billion to acquire InterMedia, a local phone company that controlled an Internet business. According to Kirkpatrick, the transaction proved financially disastrous for WorldCom, which he asserts “wasted company assets amounting to at least several billion dollars.” In Kirkpatrick’s view, WorldCom’s board was rushed through a discussion by management of the merits of the transaction, which the board approved without meaningful consideration. The Kirkpatrick report relates that Salsbury participated in the approval meeting as acting secretary of the company. Even as WorldCom’s prospects of profiting from the deal swiftly dimmed, thanks in part to a slumping telecommunications market, Salsbury and others pressed forward without keeping the board informed, Kirkpatrick writes. Salsbury ultimately executed an amended InterMedia merger agreement in February 2001. “Mr. Salsbury advised the Examiner that [Salsbury] believed that Board approval had previously been obtained and that he was informed by Mr. Sullivan or Mr. Ebbers that he could sign the amendment on WorldCom’s behalf,” Kirkpatrick reports. “The Examiner’s investigation has revealed that no prior Board approval had been obtained.” Borghardt gets tougher treatment. Both investigators’ reports suggest that he was aware as early as September 2000 that Ebbers and the WorldCom board were pushing the corporate-governance envelope. That month, facing margin calls related to his personal investments, Ebbers turned to the compensation committee of WorldCom’s board. And the committee delivered, agreeing to loan Ebbers $50 million. It would be the first of several loans and other guarantees to Ebbers that eventually totaled $408 million. According to both law firms, WorldCom’s compensation committee decided to grant Ebbers the $50 million at a meeting on Sept. 6, 2000. Borghardt apparently attended some of that meeting, according to Wilmer, but was “excluded” while “the subject of the loan was introduced.” The Wilmer report indicates that Borghardt said he first learned of the loan three weeks later, when he was contacted directly by Ebbers. By that time, Ebbers had “reached the $50 million maximum loan amount that had been authorized and was considering selling [WorldCom] stock to meet additional margin calls,” according to Wilmer. Borghardt began drafting documents to support the already exhausted loan. Indeed, the report observes, Borghardt was still getting input on the terms of the loan in early November from a board member and WorldCom’s then-CFO, Sullivan. At the same time, Wilmer observes, citing Borghardt’s notes, two board members warned Borghardt that discussion of the loan with anyone other than Sullivan or members of the compensation committee is “basis for termination.” Ebbers also consulted Borghardt in late September 2000 regarding the propriety of a stock sale. Kirkpatrick writes that, according to Borghardt, Ebbers wanted to know whether there would be an “insider trading issue” if Ebbers were “forced” to sell WorldCom shares “and WorldCom issued an earnings warning within a week or so.” Borghardt sought advice from outside counsel, Wilmer’s report relates, who “cautioned” that even a sale “forced” on Ebbers by lenders making margin calls “would be problematic if Ebbers had material non-public information.” But when Borghardt called Ebbers back, Wilmer indicates, “Ebbers told him the sale had been cleared by [then-CFO] Sullivan.” Ebbers executed the sale agreement two days after his initial query to Borghardt, reaping $70.5 million in cash through an arrangement that required him to deliver 3 million WorldCom shares to Bank of America several months later. According to the Kirkpatrick account, Borghardt signed a letter from WorldCom to the bank consenting to the sale agreement after softening language in the letter relating to the deal’s compliance with WorldCom’s insider-trading policies. On Oct. 26, 2000 — a month later — the company announced an earnings shortfall. A more severe earnings warning followed a few days later. Both law firm reports suggest that Ebbers very likely knew the numbers wouldn’t match market expectations. “There apparently were several ‘red flags’ which suggested that Mr. Ebbers may have possessed material, non-public information,” Kirkpatrick writes. “Nevertheless, Mr. Borghardt failed to explore these matters” and instead “apparently deferred” to Sullivan. (Ebbers’ lawyer, Steptoe & Johnson D.C. partner Reid Weingarten, declines comment.) “The Examiner believes that it was problematic for Mr. Borghardt to have relied on the judgement of a non-lawyer in clearing this transaction,” Kirkpatrick adds. Both investigations emphasize that Ebbers fostered a corporate culture in which gatekeepers, including auditors and lawyers, were marginalized. It was a business model the markets rewarded. Now it’s the target of corporate investigators and bitter investors.

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