1.

Background info on Ebber:

Ebbers was a wealthy man with a significant personal business empire outside WorldCom. He
had also accumulated millions of shares of WorldCom stock. However, he had borrowed over
US$400 million from banks, using his stock in WorldCom as collateral.
As WorldCom stock price began to drop in 2000, Ebbers received margin calls from the banks
requiring him to either put up more stock as collateral or to pay back a portion of the money he
owed.
Because he had used much of the borrowed money to buy relatively illiquid assets, such as a
ranch, timberlands and a yacht-building company, Ebbers could not use those assets to meet the
margin calls.
2. What happened?
1996 The Internet backbone purchased by WorldCom in 1996, sold a total of $87 million in
WorldCom stock.
Late 1990s the telecom bubble burst, as all bubbles do. The telecom industry began to suffer
serious decline, and stock values began to fall at all telecom companies including WorldCom.
Telecom bubble/ dot com bubble
(In early 1990s, personal computers were becoming increasingly common for both business and
personal use. During 1990s, the U.S. computer industry decided to focus primarily upon
computer software development instead of designing and manufacturing computer hardware,
because computer software was a product with very high profit margins. Because software
companies generated profits by selling licensed software, which costs very little to reproduce.
Computer hardware is becoming a commodity product and that it is virtually indistinguishable
from the product of the competitors, which force company to compete on price. Throughout
1990s, software companies stock were very strong performers.
During the mid-1990s, the internet had evolved as a way for people to communicate via email,
use chat rooms and browse websites. Technology stocks continued to soar and created a very
strong inventive for more technology companies to become publicly traded. Many early tech
company shareholders become millionaires overnight, even they are lack of business plan and
even more had no earnings whatsoever to speak of. Tech companies continued to pay their
employees in stock options, which profited greatly as long as stocks maintained their strong
upward trajectory.
By early 2000s, reality started to sink in. Investors soon realised that the dot-com dream had
devolved into a classic speculative bubble. In within months, stock index crashed from 5000 to
2000.)
Early 2000 The telecommunications industry as a whole and WorldCom is experienced sharp
and continuous declines in share prices. WorldCom stock price began drop.

Stock price drop:

June 30, 1999 US$96.7666

June 30, 2000 US$46
December 29,2000 US$18.656
In 2001 fluctuated between US$24 and US$12 per share.
June 25, 2002 US$0.83
July 1, 2002 US$0.06 when the company announced its improper accounting and
intention to restate its financials.

Literally, anything that would increase the price of WorldCom stock or slow its rate of decline,
such as strong reported earnings, would help relieve the intense financial pressure on Ebbers. At
the same time, if WorldCom were perceived as having earnings too low to carry the massive
volume of debt Ebbers had incurred in conducting scores of acquisitions, Ebbers would most
likely have been financially destroyed. As has been extensively reported, Ebbers turned to his
longtime associates on the WorldCom Board for help in handling his debt.
(Richard C. Breeden, Corporate Monitor, Restoring Trust, Report to The Hon. Jed S. Rakoff, United States District
Court for the Southern District of New York, on corporate governance for the Future of MCI, Inc. (August 2003)
(Restoring Trust), at pages 27-28.)

The false financial picture at WorldCom was motivated by Ebbers personal financial
circumstances is supported by the report of the investigation of the Special Investigative
Committee of the Board of Directors of WorldCom.
Ebbers directed significant energy to building and protecting his own personal financial empire,
with little attention to the risks these distractions and financial obligations placed on the
Company that was making him one of the highest paid executives in the country. It was when his
personal financial empire was under the greatest pressure - when he had the greatest need to keep
WorldComs stock price up in order to avoid margin calls that he could not meet - that the largest
part of the fraud occurred. And it was shortly after he left that it was discovered and disclosed.
(Special Investigative Report of the Board of Directors of WorldCom)

Two members of the Board, Mr. Stiles Kellett (chairman of the Compensation Committee) and
Mr. Max Bobbitt (chairman of the Audit Committee) appear to have made the initial decision to
use Company funds to extend Ebbers massive personal loans to help support his personal debt.
Ultimately the program of loans and guarantees grew to more than $400 million, representing a
substantial portion of WorldComs cash reserves and its net worth, had its balance sheet been
accurately reported.
Amazingly, at least $50 million of these loans was apparently wired to Ebbers before the Board
of Directors as a whole was even notified. Unfortunately when the full Board discovered what
Kellett and Bobbitt had done, it ratified the loans and allowed the program to continue and
grow.

(Richard C. Breeden, Corporate Monitor, Restoring Trust, Report to The Hon. Jed S. Rakoff, United States District
Court for the Southern District of New York, on corporate governance for the Future of MCI, Inc. (August 2003)
(Restoring Trust), at pages 27-28.)

September, 2000 WorldCom to provide financial assistance to Ebbers with an initial loan of
$50million.
From October 18, 2000 to April 1, 2000 WorldCom Compensation Committee met and
discussed the Companys financial arrangements with Ebbers 26 times, and for 13 of these
meetings, Ebbers financial situation was the only topic specifically identified in the minutes.
April, 2002 the Compensation Committee had approved numerous additional loans and
guaranties for Ebbers, eventually totaling US$165 million of direct loans to Ebbers plus
payments to banks under guarantees of US$235 million. All the loans and guaranties from
WorldCom were consolidated into a single promissory note of US$408 million (including
interest) when Ebbers employment with WorldCom terminated at the end of April 2002.
The Special Investigative Report of the Board of Directors of WorldCom concluded that the
extension of these loans and guarantees was a 19-month sequence of terrible decisions - badly
conceived, antithetical to shareholder interests - and a major failure of corporate governance.
End of April 2002 Ebber resigned, after the announcement of investigation into the accounting
practice by Securities and Exchange Commission in March 2002.
3. How Ebbers extract the money out?
WorldComs improper accounting took two principal forms:
1. The reduction of reported line costs by capitalizing such expenses
2. The exaggeration of reported revenues.
The overall objective was to hold reported line costs to approximately 42% of revenues and to
continue reporting double-digit revenue growth, while actual growth rates were generally
substantially lower.
As part of its international telecommunications business, WorldCom built a global network of
fibre optic cables and telephone wires to transmit data and telephone calls. It also leased capacity
on other companies network facilities to transmit its customers data and calls. The cost of the
leasing was WorldComs single largest expense - categorized as line costs - accounting for
approximately half of the Companys total expenses.
In 1999 and 2000, WorldCom reduced its reported line costs by approximately $3.3 billion. This
was accomplished by improperly releasing accruals, or amounts set aside on WorldComs
financial statements to pay anticipated bills. These accruals were supposed to reflect estimates of
the costs associated with the use of lines and other facilities of outside vendors, for which
WorldCom had not yet paid. Releasing an accrual is proper when it turns out that less is
needed to pay the bills than had been anticipated. It has the effect of providing an offset against
reported line costs in the period when the accrual is released. Thus, it reduces reported expenses
and increases reported pre-tax income.

WorldCom manipulated the process of adjusting accruals three ways:

1. Some cases accruals were released without any apparent analysis of whether the company
actually had an excess accrual in the account. Thus, reported line costs were reduced
(and pre-tax income increased) without any proper basis.
2. Even when WorldCom has excess accruals, the company often did not release them in the
period in which they were identified. Instead certain line cost accruals were kept as
rainy day funds and released to improve reported results when managers felt this was
needed.
3. WorldCom reduced reported line cost by releasing accruals that had been established for
other purposes. This reduction of line cost was inappropriate because such accruals, to
the extent determine to be in excess of requirements, should have been released against
the relevant expense when such excess arose, not recharacterised as a reduction of line
costs.
The released of accruals were directed by CFO, and Director of General Accounting.

Comment on the Board of Directors decision

The decision that was made by the Board of Directors is unethical.
- Firstly, they had approved the loan with limited information and at times, those loans were
approved with discussions that lasted less than half an hour.
- No supporting documents were presented.
- Sometimes discussions did not involve the Board at all. The Compensation Committee in the
company had the power to determine the salaries, bonuses and benefits of the officers
therefore the committee approve the loans to the CEO without confirming with the Board and
only asked for approval from the Boards after the loans had already been paid out.

There are also few other factors as to why Board of Directors agreed to lend him the money:
1) The mix of the Board (with knowledge and experience of business and legal issues) and most
of the members of the Board are closely link to CEO (Ebbers). The directors were therefore
lack of awareness on WorldComs issues. The close ties with Ebbers hurt their duty to be
independent from the company and its management.
2) The Board was inactive and met only about four times a year, not enough for a company
growing at the rate that it was. Lack of participation resulted in the lack of awareness about
WorldComs matters.
3) The Directors were only given a small cash fee as compensation, thus an appreciation of stock
was the only form of compensation available. Therefore, directors also depended on company

growth and stock appreciation for compensation, as did the employees and management. Their
approvals of the acquisitions allowed WorldComs growth to an increase that led to a higher
stock price and a large amout of compensation conflict of interest where their goal became
more focused on the growth of the stock that on what was in best interest for the company.
Meanwhile, the attitude of the Board of Directors that may have also allowed fraud to occur so
easily in the WorldCom.
1. Not only did the chairman of the Compensation Committee and chairman of audit committee
allow the loans to grow more than $400 million. But, also when the Board found out about
these loans, they failed to take any actions and allowed the loans to carry on. Unfortunately,
with WorldCom, when the Board was presented with the challenge of approving Ebbers
loans, among other large acquisition decisions, it failed to take action and limit Ebbers power
on the Board.
2. Indeed, Ebbers as CEO was allowed nearly imperial reign over the affairs of the Company,
without the Board of Directors exercising any apparent restraint on his actions, even though
he did not appear to possess the experience or training to be remotely qualified for his
position.
3. Ebbers controlled the boards agenda, the timing and the scope of board review of
transactions, awards of compensation, and the structure of management. He ran the Company
with iron control, and the board did not establish itself as an independent force within the
Company. The Chairman of the Board did not have a defined role of substance, did not
control the boards agenda, did not run the meetings and did not act as a meaningful restraint
on Ebbers.
4. The Compensation Committee of the Board seemed to spend most of its efforts finding ways
to enrich Ebbers, and it certainly did not act as a serious outside watchdog against excessive
payments or dangerous incentives.
5. Lack of time commitment was not the boards worst failing. Despite having a separate
Chairman of the Board and independent members, the board did not act like it was in control
of the Companys overall direction. Rather than making clear that Ebbers served at the
pleasure of the board, and establishing reasonable standards of oversight and accountability,
the board deferred at every turn to Ebber