INTRO: Imagine you‘re considering investing into
AT&T.
It’s not a flashy stock like Tesla or Apple, but it’s one of the oldest and most established
companies in America.
They pay a phenomenal dividend yield of 8.34% and the man running the company grew it from
being just a small phone company to being an telecommunications giant.
Most would agree that such an investment would be quite safe.
You may not make millions, but the chances of you losing money are quite low.
Now, what if it was revealed that AT&T had been faking their financials for years in
the magnitude of billions.
What if they were secretly taking out new loans to pay off old debt and the entire front
of AT&T was just a facade.
At first glance, such a massive fraud may seem impossible to pull off yet that’s exactly
what took place about 2 decades ago with a company called WorldCom.
At their peak, WorldCom employed 80,000 employees and boasted a market cap of $180 billion,
$2 billion more than what AT&T is worth today.
Despite their massive size, the entire company would go bankrupt just one month after being
exposed.
So, here’s how Bernard Ebbers ran the largest accounting scandal in US history.
BERNARD EBBERS: Taking a look back, Bernard Ebbers was born
on August 27, 1941 in Edmonton, Alberta.
His birthplace likely didn’t mean much to him though as his family was constantly moving
around Canada and America.
His father was a traveling salesman, so his job required him to consistently target new
markets and customers.
Despite the hectic nature of their lives though, the Ebbers family was devout Christians.
They tried their best to instill Christian values into all of their children, but unfortunately,
it doesn’t look like they were successful with Bernard.
On the brightside, it looks like the family was finally able to settle down in Canada
when Bernard was a teenager, and this is where Bernard would attend high school and college.
It’s not clear how Bernard performed academically, but he was a star performer when it came to
basketball.
After high school, Bernard would initially attend the University of Alberta and Calvin
College before switching over to Mississippi College on a basketball scholarship.
Unfortunately though, Bernard would get injured before his senior year in college, so he would
be tasked with coaching the junior varsity team instead of playing.
Though Bernard was disappointed by this turn of events, he actually really liked coaching.
And he says that coaching played a massive role in his rise to the top.
Anyway, Bernard graduated with a Bachelor’s degree in physical education and a minor in
secondary education in 1967.
After college, Bernard worked a bunch of odd jobs for a few years each.
This included being a high school PE teacher, a basketball coach, a garment warehouse manager,
and even a bouncer.
But by 1974, Bernard decided to do something more long term and that led him to the motel
industry.
Bernard started off by purchasing a small motel in Colonel, Mississippi.
Two years later, he would bring on some investors which allowed him to quickly expand his motel
operation to nine Best Westerns by the end of the 1970s.
On paper, Bernard’s net worth was skyrocketing as he paid off the properties, but in terms
of cash, it was a different story.
The motel chain was profitable, but it didn’t produce very much in terms of cash flow.
So, Bernard started looking for some more lucrative opportunities, and that’s when
AT&T would be divested.
STARTING WORLDCOM: The Department of Justice had been assessing
the AT&T monopoly since 1974, and they had finally come to a decision.
In 1982, they announced that AT&T must split up and relinquish control of the Bell Operating
Companies.
This resulted in AT&T splitting up into 8 different companies with only one of them
carrying on the AT&T name.
Ironically, AT&T would end up buying back half of these companies and the other half
would turn into Verizon, so this wasn’t all that effective in breaking up the monopoly.
But, right after the divestiture, it seemed like the telecommunications industry had finally
opened up for disruption.
Hopeful entrepreneurs flooded the space and one of these hopefuls was Bernard and his
friends.
In 1983, Bernard and three friends borrowed $500,000 against their properties and purchased
a struggling phone company.
They named the company LDDS or Long Distance Discount Service and with that they had entered
the telecommunications industry.
Initially, Bernard tried to play a passive role by simply being an investor, but the
thing to keep in mind is that this was a struggling phone company and that wasn’t an accident.
The original management was terrible, and the new management they hired wasn’t any
better.
So, eventually the investors got together and decided to shake up management once again.
They appointed Bernard as the new CEO despite his lack of experience.
Bernard was actually very transparent that he didn’t have any of the skills of regular
businessmen.
He admitted that he wasn’t an engineer or an accountant, but what he was was a coach.
Bernard approached the job as being a coach for employees and this approach actually worked
extremely well.
Just six months after taking over as CEO, LDDS became profitable and Bernard could finally
focus on growing the company.
Initially, he attempted to grow the company the natural way.
In November of 1983, LDDS got its long distance carrier certification and their first long
distance customer was the University of Southern Mississippi.
But it didn’t take long for Bernard to rely on acquisitions to accelerate growth.
Over the next decade, Bernard completed dozens of acquisitions ranging from just a few million
to a few billion dollars.
Despite the large number of acquisitions, each acquisition was strategic and precise.
Each acquisition expanded operations into new areas, reduced overhead, and built up
the company’s high capacity fiber optic network.
By 1995, LDDS had grown to being the country’s 4th largest long-distance carrier, and Bernard
would rename the company WorldCom that same year.
OVERTAKING AT&T Despite his massive success, Bernard was a
very quiet and religious man that avoided the spotlight.
Bernard was a member of the Easthaven Baptist Church in Brookhaven Mississippi, and he was
a leading member of the church.
He regularly attended church every week and he even taught Sunday school.
On top of all of this, he named his 4 children, two of which were adopted, Treasure, Ave,
Joy, and Faith.
Bernard would also start every corporate meeting with prayers.
Considering all of this, Bernard was literally the last person you would expect to be a fraudster.
He was adopting children, he was teaching sunday school, and looked like he had extremely
strong morals and ethics.
And this was the case up until 2000.
There’s no evidence suggesting that Bernard was committing fraud before 2000, so his entire
rise up from running a struggling phone company to running one of the largest telecommunications
businesses in America was presumably completely legitimate.
So what happened?
Well, the answer seems to boil down to just one thing: greed.
The only step left for Bernard was to overtake AT&T, but this would prove to be his biggest
challenge.
Bernard continued his strategy of acquiring his way to the top.
In 1996, he purchased MFS Communications for $12 billion which made WorldCom a global player.
And though this was a great buy, his next move would leave Wall Street stunned.
In 1997, the second largest telecommunications company MCI Communications was looking for
a merger partner.
But instead of offering to merge with MCI, Bernard offered to buy the entire company
for $29.4 billion.
Over the next year, there was an intense bidding battle for MCI, but Bernard would prevail
buying out MCI for $37 billion in September of 1998.
WorldCom was officially the second largest telecommunications business in America.
They were only one acquisition away from overtaking AT&T, and this acquisition would come in October
1999.
Bernard had made a deal with Sprint’s CEO to acquire the company for $129 billion.
Many news publications actually reported the story as if it was already completed.
And given that both parties were in complete agreement, all the money was ready to go,
and that they just had a couple of formalities left, the deal seemed good as done.
But then, Uncle Sam stepped in.
In June of 2000, the DOJ sued to stop the acquisition and that left the deal dead in
the water.
If the deal had gone through, WorldCom would’ve comfortably overtaken AT&T in terms of market
cap.
Their revenue would still slightly be less than AT&T, but given that WorldCom averaged
50% growth per year throughout the 90s, it wouldn’t take longer than a year for Worldcom
to completely overtake AT&T.
And that’s exactly why the DOJ didn’t like the deal.
While this was a disappointing setback, it was still just a matter of time until WorldCom
naturally outgrew AT&T, so it seemed like Bernard had still come out on top.
But then, the dotcom bubble burst and Bernard would resort to fraud.
RESORTING TO FRAUD The dotcom crash killed the vast majority
of tech companies most of which would never return.
But, I think it’s pretty safe to assume that WorldCom was definitely in the category
of too big to fail.
If Bernard simply reported the losses as is, WorldCom probably would’ve performed like
Intel, Cisco, and Microsoft.
They would’ve crashed 40 to 60% and stalled out for several years, but it’s very unlikely
that they would’ve faded into oblivion.
Bernard’s actions, however, would ensure that the latter was the case.
As the dotcom crash rolled around, WorldCom started losing billions per quarter, but Bernard
faked the financial reports of the company and made it seem like WorldCom was actually
making billions.
Wall Street was pleasantly surprised while AT&T was scrambling.
AT&T laid off tens of thousands of employees in an attempt to cut losses and close the
gap to WorldCom.
Yet they couldn’t even get close.
Looking back, this was a clear major red flag, but it probably wasn’t as clear as it was
unfolding.
Aside from faking profits, Bernard was taking out loans in his own name and the company’s
name in order to pay for all the losses.
Unfortunately for Bernard, he wasn’t very good at this and it didn’t take long for
auditors and the media to catch on.
In March of 2001, the Wall Street Journal drew attention to the massive amount of loans
Bernard was taking out, and the SEC got involved shortly after.
About a year later, Bernard would be ousted from WorldCom.
And just a couple months later, WorldCom would file for the biggest bankruptcy ever.
Tens of thousands of employees lost their jobs, pension plans and 401k plans evaporated,
and investors suffered substantial losses.
Around the same time, Bernard would address his church and say, “I just want you to
know, you aren't going to church with a crook.”
You could say these were his famous last words.
THE BITTER END The SEC would continue their investigation
over the next two years, and though Bernard never admitted to the crimes, he would be
found guilty on all counts and sentenced to 25 years in prison in July of 2005.
Bernard spent the next 14 years in prison, but at the end of 2019, one of his daughters
was able to convince a judge to release Bernard early due to his deteriorating health and
dementia.
His daughter definitely wasn’t lying as Bernard passed away just 2 months later on
February 2, 2020.
In the end, Bernard was actually a stellar business man who was able to reach extraordinary
heights.
But eventually, success and greed got to his head, and he resorted to fraud which rapidly
destroyed his life.
If he had played it safe, it’s likely that WorldCom would’ve been another household
name like AT&T and Verizon.
But instead, the only thing people know about Bernard today is that he orchestrated the
largest accounting fraud in US history.
Were you guys familiar with WorldCom?
Comment that down below.
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