The whole WorldCom scandal never really registered with me because it happened straight after the dot-com bubble burst. Myself and my co-founders were just dusting ourselves off and slowly realising that we weren’t going to suddenly become business tycoons. On top of that, the whole Enron scandal had exploded just a bit before, so that was the story that consumed me back then.
When WorldCom went bust, I didn’t really give it a lot of time, but I knew in the back of my mind that there was a great story here: Bernie Ebbers, this 6-foot-4, honest-to-goodness, church-going cowboy who kind of came from nowhere to suddenly build one of the biggest telecom companies in the USA—until it all collapsed, becoming the biggest bankruptcy in US history and far surpassing Enron.
And I’m glad that I finally got around to digging into this story because it really is a cracking one.
From Canada to Mississippi
Bernie Ebbers was born in 1941 in Edmonton, Alberta, Canada. While the family did move around a bit, they moved back to Canada and Ebbers lived there up to the age of 23. That was new to me because my image of Ebbers was always of this southern cowboy figure—but that comes later.
His dad sold hardware, his mother was a housewife, and money was always tight. But they had their belief. They were devout Christians, and Ebbers stayed devoted and active in the church throughout his life.
After graduating from high school, he worked as a milkman and a bouncer. But at 6 foot 4, he was a pretty decent basketball player, and in 1964 he got a basketball scholarship to Mississippi College. Before his senior season, he suffered a career-ending knee injury. Instead of cutting him loose, the college gave him the job of head coach of the junior varsity team.
He graduated in May 1967 with a degree in physical education.
He taught in high school for a few years, got married, and he and his first wife had three daughters. He then got a job as a manager in a garment warehouse, and in 1974 he started his first business.
Ebbers bought a run-down, 40-room motel in Columbia, Mississippi. He and his family lived in a two-bedroom trailer in the parking lot while he ran the place. He ran a very tight ship, watched every penny, questioned every expense, and made it work. By 1982, they had 12 motels and a car dealership.
While Ebbers was quietly building his small business, something much bigger and far more significant was happening in the telecoms sector in the US.
The Break-Up That Changed Telecoms
For some context, AT&T up to this stage had been the big beast. It was founded by Alexander Graham Bell in 1885, and over the following century it bought up or squeezed out most of its competitors until it controlled virtually the entire American telephone system—a monopoly that was accepted and regulated by the US government.
But after years of antitrust battles, AT&T finally agreed in 1982 to break itself up. This opened the long-distance market to competition. Smaller companies could now get into the telecoms business without having to build their own telephone networks.
So, in 1983, a handful of Mississippi businessmen, including Ebbers, met in a coffee shop in Hattiesburg and decided to get into the telecoms business.
It was a pretty simple idea: buy long-distance minutes in bulk from the likes of AT&T and then sell them at a discount to smaller businesses that the big telephone companies largely ignored. According to local legend, it was the waitress in that coffee shop who suggested the catchy name—Long Distance Discount Service, or LDDS.
Ebbers and his co-founders borrowed $650,000 from a local bank to buy the computer switch needed to route the calls. At this point, Ebbers was simply a passive investor, but by 1985 LDDS was struggling and the other investors turned to him and asked him to run it.
Ebbers ran the company in much the same way he had run his motels—a very tight operation, constantly looking for costs that could be cut. By combining this with a focus on small to medium-sized businesses, he started to turn the company around. In 1986, revenue hit $8.6 million.
But Ebbers also realised that in telecoms, like any business where scale drives down costs, the more minutes he could buy, the cheaper the wholesale rate he could negotiate. So he started buying smaller regional telephone companies.
Each acquisition brought some obvious cost savings. You didn’t need two layers of middle management or two sets of offices.
But Ebbers was much better at cutting costs than he was at integrating companies. Because he became so focused on growth through acquisition, behind the scenes many of the acquired companies continued using their old systems and processes. For the moment, the extraordinary growth hid that mess.
The Acquisition Machine
By 1988, revenues hit $95 million, and a year later, in 1989, LDDS merged with a struggling publicly traded company. It was a reverse takeover, and in very simple terms, it allowed LDDS to become a public company without going through a traditional stock market flotation.
This was really important because Ebbers now had publicly traded shares. He didn’t need cash—he could use the rising share price to fund even bigger acquisitions.
Revenues in 1991 reached $263 million. Just two years later, they were over $1.5 billion, and two years after that, in 1995, revenues reached $3.6 billion.
In just four years, Ebbers had increased revenue almost fourteenfold. The growth came from more than 40 acquisitions, and it made LDDS the fourth-largest telco in the US, behind AT&T, MCI and Sprint.
Also in 1995, LDDS was renamed WorldCom. A year later, Ebbers pulled off his biggest deal yet, buying MFS Communications in an all-share deal worth around $14 billion.
The importance of this deal was the timing because it gave WorldCom ownership of local fibre networks in major cities, just as the internet boom was about to take off.
Over the years, Ebbers had started building a relationship with a telecom analyst called Jack Grubman. Regular listeners might remember that Grubman made an appearance in the Sandy Weill episode. He was involved in a scandal in which he upgraded AT&T’s rating to curry favour with Weill. Anyway, by 1996 Grubman had become the most influential telecom analyst on Wall Street.
And as I mentioned in the Yuri Milner episode, during the dot-com boom analysts were becoming celebrities within the business world. Because all of this internet traffic had to travel through telecom networks, companies that were well positioned for the boom—like WorldCom—suddenly became part of the internet coverage.
So Ebbers now had Jack Grubman, the star telecom analyst on Wall Street, constantly telling investors that WorldCom was the bee’s knees.
In fairness, Grubman wasn’t the only one hyping the company. Most analysts and publications could see its growth and could see how well positioned it was to take advantage of the huge surge in demand. For example, in 1997, Time magazine included Ebbers among its “Cyber Elite” and told readers that WorldCom “is here to stay.”
All of this praise—or hype—mattered because it helped push WorldCom’s share price higher. By 1997, the company’s market cap was more than $30 billion, making it more valuable than MCI, the second-largest telco in the US, despite MCI having revenues of $18.5 billion compared with WorldCom’s $5.6 billion.
So MCI was bringing in more than three times as much revenue, but Wall Street believed WorldCom was worth more.
Because Ebbers used WorldCom’s ever-increasing shares to buy companies, this gave him enormous buying power. He took advantage of this in October 1997 by making an unsolicited $30 billion bid for MCI. This was huge news because, at the time, it was the biggest takeover bid in American corporate history.
The Battle for MCI
For a bit of background on MCI, the company had started life in the 1960s. It built a series of towers between Chicago and St Louis and offered businesses a cheaper alternative to AT&T.
Then, in 1968, a very interesting guy called Bill McGowan invested $50,000, took control of the company and became this relentless, chain-smoking workaholic. It was McGowan who launched a huge antitrust case against AT&T—one of the legal battles that eventually helped bring about AT&T’s break-up.
He grew MCI into the second-largest long-distance provider in America. It also helped build the government-backed network that became one of the foundations of the modern internet. By the 1990s, MCI was carrying not only telephone calls but also a huge and rapidly growing amount of internet traffic.
You might be wondering: if MCI was carrying so much internet traffic, why wasn’t Wall Street as excited about it as it was about WorldCom?
Well, the problem was that more than 90% of MCI’s revenue still came from traditional long-distance telephone calls—and the price of those calls was falling rapidly.
Anyway, in 1994, British Telecom bought a 20% stake in MCI, and two years later it agreed to buy the remaining 80% for around $22 billion.
But in July 1997, MCI revealed that its expansion into local telephone services was losing far more money than expected—around $800 million. BT’s shareholders were furious, and the takeover offer was cut to around $19 billion.
Of course, MCI’s board wasn’t happy, and this created an opening for Ebbers. He went in with a $30 billion all-share bid.
It then turned into a bidding war, forcing WorldCom to increase its bid to $37 billion. By the time the deal eventually closed in September 1998, its value was closer to $40 billion, making it the biggest corporate merger ever up to that point.
The logic behind the deal was pretty good. MCI brought millions of customers and a huge long-distance business, and combined with WorldCom, they controlled more than half of all the traffic moving across American internet networks.
WorldCom could now go to a large company and offer everything—local calls, long-distance calls, international calls and internet services—all in one package.
Wall Street loved it. WorldCom’s share price surged, and Jack Grubman told investors: “There’s no telecom stock in the world that will be anywhere near the performer WorldCom will be over the next several years.”
On a side note here—and I think you already know this—Grubman wasn’t really an impartial analyst. His investment bank was earning huge fees from WorldCom’s constant deal-making. At the same time, the bank was giving Ebbers access to shares in red-hot internet companies before they went public—shares he could then sell almost immediately for a huge profit. Between 1996 and 2001, these deals made Ebbers around $11 million.
And not everyone thought the MCI deal was such a great idea. As mentioned, MCI’s core business was traditional phone calls—and the price of those calls was collapsing as competition increased.
Then the network itself was getting old and would need to be upgraded or replaced at enormous cost.
There were also serious questions about whether Ebbers could now run a global business with almost 80,000 employees.
But neither Ebbers nor his cheerleaders on Wall Street seemed particularly worried. I think the reason was that they were all so focused on WorldCom’s ever-increasing share price and were also distracted by the internet boom.
With the market booming and its share price rocketing, like so many people during the internet boom—and hands up, I was caught up in the frenzy myself—we believed that this was something new, that it was totally different to anything that had come before and that it wasn’t a bubble.
Man, how naive.
It was assumed that the good times would continue and that WorldCom’s rising share price would carry it through whatever problems it might encounter.
The Cowboy CEO
The MCI deal turned Ebbers into a national celebrity. This was when I first really became aware of him.
The financial press became fascinated by this former motel owner who lived on a farm, drove a tractor and taught Sunday school every week. And he did—that wasn’t performative. Ebbers even began WorldCom board meetings with a prayer, and members of the Baptist church he attended described him as grounded, accessible and genuinely committed to the local congregation.
As CEOs go, Ebbers was a very likeable character. The following is from a Newsweek profile of Ebbers straight after the deal:
“He doesn’t fit the image of the modern megamogul. With his Southern charm and down-home manner—not to mention his cowboy boots and leather vests—Bernie Ebbers seems more the Mississippi basketball coach he once was than a guy who bedazzled Wall Street with the biggest takeover bid this country has ever seen.”
All of this attention gives us a much clearer picture of how Ebbers actually operated. In the interviews and profiles published after the MCI deal, he made it pretty clear that he didn’t get involved in the nitty-gritty of the business.
Here’s a quote:
“I’m not an engineer by training. I’m not an accountant by training. My job is to bring people in who do have those specific skills and then rely on them. I’m the coach. I’m not the point guard who shoots the ball.”
And in an interview with Time magazine, he went even further:
“The thing that has helped me personally is that I don’t understand a lot of what goes on in this industry.”
The person Ebbers relied on more than anyone was his CFO, Scott Sullivan.
In one of the interviews I read with Ebbers shortly after the MCI deal, whenever the reporter asked him for detailed financial information, he simply turned to Sullivan for the answer. This is important to remember when things start to go wrong a few years later.
But for now, this was the high point of the entire Bernie Ebbers story.
He remarried in 1999, and WorldCom shares reached an all-time high of $64.50, giving the company a market cap of $180 billion. Ebbers was being hailed as the “Sam Walton of Telecom” and had a net worth of $1.4 billion.
Most people believed that with the MCI deal closed, the focus should have been on integration. As one financial journalist wrote, Ebbers had to “learn to run what he has built.”
But Ebbers’ whole raison d’être for the previous 16 years had been growth through acquisition, and it seems like he just couldn’t help himself. He either got addicted to deal-making, or maybe he just didn’t want to knuckle down and get into the nuts and bolts that a boss needs to understand to run a successful company.
And so, in October 1999, WorldCom announced another enormous merger, this time with Sprint. It would create a business with around 30% of the entire domestic market.
But almost immediately, regulators signalled that they were not going to allow it. This was a big problem because, without another major acquisition, WorldCom had no real growth story to sell to Wall Street.
The Tide Goes Out
As we move into March 2000, you guessed it, the dot-com bubble bursts—and with it, the growth of the telecom sector. I’m reminded of one of Warren Buffett’s great sayings:
“Only when the tide goes out do you discover who’s been swimming naked.”
Well, the tide was going out, and WorldCom was heavily exposed.
Underneath all of the deal-making, and because Ebbers had been so focused on buying companies instead of actually running the business, WorldCom was a mess.
One great example: it had more than 40 separate billing systems inherited from all the different companies it had bought.
It was deep in debt, and revenue growth was slowing.
Even more crucially, WorldCom’s falling share price was creating a huge personal financial crisis for Ebbers. By this stage, he had borrowed more than $400 million from banks and pledged his WorldCom shares as security.
He had used the borrowed money to buy more than 500,000 acres of Canadian timberland, a ranch, a trucking company, a yacht-building business and even a minor-league hockey team. As the economy slumped, these were not assets that could quickly be turned back into cash.
As WorldCom’s share price fell, the banks started demanding more security. Ebbers couldn’t simply sell millions of his shares to repay them because that would push the price down even further, so he was obviously under huge pressure to keep the share price high.
What happened next depends on whose side of the story you want to believe.
It was October 26, 2000, and the company was about to miss its earnings target. Scott Sullivan, the CFO, ordered money that had been set aside elsewhere in the accounts to be moved around, making the quarter look much better than it really was.
There was pushback from within the accounting team. But Sullivan, who claimed to be under pressure from Ebbers, told his team: “We have to hit our numbers.” He also assured them that it was only temporary and wouldn’t happen again.
But, of course, it did happen again.
Throughout 2001 and 2002, the company was haemorrhaging cash. In 2001 alone, Sullivan hid $3.8 billion in operating costs and manufactured a fake net profit of roughly $1.4 billion.
Ebbers continued reassuring Wall Street that WorldCom’s revenues were growing strongly. Behind the scenes, the supposedly independent analyst Jack Grubman was actually helping him prepare his answers for calls with investors.
During one of those calls, Ebbers said:
“We have solid investment-grade debt ratings, and we are free-cash-flow positive. Let me be clear, we stand by our accounting.”
But even some of Grubman’s own colleagues were writing in emails that there was “absolutely no reason to own this stock... It’s a dog.”
Grubman was later charged with issuing biased, misleading research reports to fraudulently pump telecom stocks. While he settled the civil charges out of court without admitting or denying any wrongdoing, he was forced to pay $15 million in fines and received a lifetime ban from working in the securities industry.
It’s worth remembering that the Enron scandal blew up in 2001, so investors and regulators were suddenly looking very closely at heavily indebted companies with complicated accounts.
As a result, WorldCom shares fell below $4, and in April 2002 the board forced Bernie Ebbers out of the company.
Ebbers went on a local TV station after being removed and said:
“I feel like crying. But I am 1,000% convinced in my heart that this is a temporary thing.”
The Biggest Bankruptcy in American History
The crisis now accelerated.
WorldCom’s debt was downgraded to junk, it was removed from the S&P 500 and an internal audit team started digging into the accounts. They discovered the fraud.
Sullivan was sacked, the share price dropped to just 8 cents, and on July 21, 2002, WorldCom filed for bankruptcy. With $107 billion in assets, it was the largest bankruptcy in American history at that time.
Thousands lost their jobs, pensions and savings, and the fraud eventually grew to more than $11 billion.
In March 2004, Ebbers was indicted on nine felony charges. Scott Sullivan pleaded guilty and agreed to testify against him.
The entire case really came down to two completely different versions of what happened.
Sullivan told the jury that he had spoken privately with Ebbers about the improper accounting entries and that Ebbers knew exactly what they were doing. According to Sullivan, the instruction from Ebbers was very simple—and it was the same message Sullivan passed on to his accounting team:
“We have to hit our numbers.”
Now, Sullivan was not exactly the perfect witness. He had already admitted his own role in the fraud and was testifying against Ebbers with a view to getting a reduced sentence. He also admitted that while working at WorldCom, he had used cocaine and marijuana.
Although Sullivan gave Ebbers copies of key documents, prosecutors couldn’t produce a single email, voicemail or piece of correspondence showing that Ebbers knew about the fraud.
Ebbers took the stand and completely contradicted Sullivan. He said that he trusted Sullivan entirely and that Sullivan had never once told him that any accounting entry was improper, unsupported or illegal.
As Ebbers put it:
“He has never told me he made an entry that wasn’t right. If he had, we wouldn’t be here today.”
Ebbers fell back on the same defence that he had used throughout his career. He was the dealmaker and the salesman, not the technical or financial expert.
But the prosecution had recordings of Ebbers speaking to the media and to Wall Street investors. In those recordings, he talked confidently and in very specific detail about WorldCom’s revenue, its expenses, its debt and its future financial performance.
Now, of course, he could have done that without actually understanding any of the figures.
But prosecutors also pointed to Ebbers’ reputation as a man who kept an incredibly close eye on costs. He noticed relatively minor overspending, yet claimed not to notice internal reports showing that revenue growth was going down and that line costs were moving by as much as $900 million in a single month.
The government’s argument was that even if Ebbers didn’t understand exactly how the fraudulent entries were being made, he knew—or must have strongly suspected—that there was a huge difference between WorldCom’s real performance and the numbers being given to investors.
Rather than ask questions, he deliberately chose not to find out. In legal terms, that’s called conscious avoidance—or, more commonly, wilful blindness.
Then the prosecution pointed to the timing.
The fraud began in the autumn of 2000, at almost exactly the same time that banks started demanding repayment of more than $400 million in personal loans Ebbers had secured against his WorldCom shares. The government argued that this gave him an enormous personal motive to keep WorldCom’s reported profits—and its share price—as high as possible.
Before the verdict, Ebbers returned to his church in Mississippi to teach Sunday school. At the end of the service, he walked to the front of the hall and told the congregation:
“I just want you to know you aren’t going to church with a crook.”
But the jury disagreed.
Ebbers was found guilty on all nine counts.
The Final Verdict
Look, when you’re pitting one person’s word against another, it’s always tricky. I don’t trust Sullivan—I can’t put my finger on it—and based on an excellent article from The Washington Post, neither did most of the jury.
But overall, I do side with the jury because I just can’t see how Ebbers didn’t know about the fraud.
That June, he agreed to surrender almost everything he had left—around $40 million—to a trust for the victims of WorldCom’s collapse.
Then, in July 2005, he was sentenced to 25 years in prison. That was a real harsh sentence. Sullivan got five years.
A year and a half later, Ebbers’ wife filed for divorce. Inside prison, his health deteriorated. He developed heart disease, became legally blind and eventually suffered from dementia.
In December 2019, after serving 13 years, a judge granted him compassionate release. He returned home to Mississippi and died just over a month later, on February 2, 2020.
He was 78 years old.
A Company With Only One Plan
The Ebbers and WorldCom story is one we see repeated again and again.
A company grows massively during the boom years, and everyone—the company, the press, Wall Street, me—we all become convinced that it can do no wrong. It’s a kind of groupthink.
The company keeps growing with the market and eventually becomes so big that we believe that even if a crash happens, it will be big enough to weather it.
But two things worked against WorldCom.
First, to use the famous Mike Tyson line:
“Everybody has a plan until they get punched in the mouth.”
Well, the dot-com bubble bursting was WorldCom’s punch in the mouth. The company had one plan—keep growing—and when that stopped working, there was nothing to fall back on.
And this ties into the second problem, which is that Ebbers simply wasn’t a good CEO.
He was brilliant at building WorldCom and buying other companies, but the business itself was built on the shakiest of foundations. A good CEO has to plan for the bad times. Ebbers didn’t.
And whether he actively encouraged the fraud or simply let it happen, he had to take responsibility for what came after.
It’s a story we’ve seen many times before, and I’m sure we’ll be seeing it again pretty soon. Whatever your thoughts on Ebbers and WorldCom, it makes for a brilliant story.