WRONG NUMBERS

An Accountant Says She Just Followed Orders at WorldCom. Now She's Facing Prison Time for Fraud.

By Susan Pulliam
Staff Reporter of The Wall Street Journal

In 1996, Betty Vinson took a job as a midlevel accountant at a small long-distance company in Mississippi. Today, Ms. Vinson is awaiting sentencing on conspiracy and securities-fraud charges. She has begun to prepare her 12-year-old daughter for the possibility that she will go to jail.

She was among the career casualties at WorldCom, which melted down last year in an $11 billion fraud, the biggest in corporate history. Asked by her bosses there to make false accounting entries, Ms. Vinson initially resisted-and then caved. Over the course of a year and a half, she continued to make the illegal accounting entries to inflate WorldCom's profits at the request of her superiors. Each time she worried. Each time she hoped it was the last time. At the end of 18 months she had helped falsify at least $3.7 billion in profits. (Ms. Vinson refused to talk about her work for WorldCom or the case against her.)

Ms. Vinson and two colleagues ended up confessing to federal investigators. As the investigation got rolling, she hoped to be considered a witness for prosecutors. But when the Justice Department shifted the case midstream from Mississippi to more-aggressive prosecutors in New York, she became a target.

A Cautionary Tale

Ms. Vinson's story is a cautionary tale for good corporate employees everywhere who find themselves ordered to do something wrong. In a recent speech to Wall Street executives, James Comey, the federal prosecutor in Ms. Vinson's case, said that "just following orders" is not an excuse for breaking the law. As Ms. Vinson's experience at WorldCom shows, sometimes it's hard to tell right from wrong in the heat of a workplace battle. And when an employee's livelihood is on the line, it's tough to say no to a powerful boss. Ms. Vinson wasn't alone in these predicaments. In a report issued this month, investigators hired by the company's new board found that dozens of employees knew about the fraud at WorldCom but were afraid to speak out.

When she joined WorldCom, it was a small long-distance company on the verge of becoming a star of the Wall Street telecom boom. Ms. Vinson developed a reputation for being hardworking and diligent. She was known as a loyal employee who would "do anything you told her," says a former colleague.

Within two years, Ms. Vinson was promoted to be a senior manager in WorldCom's corporate accounting division, reporting to Buford Yates. In her new job, she helped compile quarterly results, along with 10 employees who reported to her. She analyzed the company's operating expenses and loss reserves, amounts put aside to cover certain kinds of expenses.

Also working for Mr. Yates was Troy Normand, who oversaw accounting for the company's fixed expenses, such as property, plants and equipment.

Ms. Vinson's work world began to change in mid-2000. With the telecommunications industry in a severe slump, WorldCom CEO Bernard Ebbers and Chief Financial Officer Scott Sullivan informed Wall Street in July that the company's financial results for the second half of the year would fall below expectations. That warning turned out to be an understatement.

The company had a looming problem: Its huge line costs-fees paid to lease portions of other companies' telephone networks-were rising as a percentage of the company's revenue. Those numbers were carefully watched by investors as a measure of the company's health. Then in the third quarter of 2000, the company was hit with $685 million in unpaid bills, after some of its small customers went belly-up.

Inside the accounting department, a scramble ensued to try to reduce expenses on the company's financial statements enough to meet Wall Street's expectations for the quarter. But Ms. Vinson, Mr. Normand and Mr. Yates were able to scrape together only $50 million, far from the hundreds of millions it would take to hit the company's profit target.

In October, Mr. Yates met with Ms. Vinson and Mr. Normand, and told them that his bosses, Mr. Sullivan and WorldCom Controller David Myers, had asked them to dip into a reserve account set aside to cover line costs and other items for WorldCom's telecommunications unit, fish out $828 million and use it to pay other expenses, according to people familiar with the meeting. In doing so, they would reduce expenses for the quarter and boost earnings. (An attorney for Mr. Myers didn't return phone calls.)

Ms. Vinson and Mr. Normand were surprised by their bosses' proposal and the huge sum involved. All three accountants were worried that the adjustment wasn't proper, according to the people familiar with the conversation. Ms. Vinson and Mr. Normand told their boss that the transfer wasn't good accounting, according to a person close to Ms. Vinson. Mr. Yates replied that he wasn't happy about it either. But he said that Mr. Myers had assured him that it would never happen again and that he had agreed to go along. Finally, so did Ms. Vinson and Mr. Normand.

Pangs of Guilt

Afterward Ms. Vinson suffered pangs of guilt. On Oct. 26, 2000, the same day the company publicly reported its third-quarter results, she told Mr. Yates that she was planning to resign. Mr. Normand felt similarly, according to the person close to Ms. Vinson and others.

Several days later, Mr. Sullivan tried to talk Ms. Vinson and Mr. Normand out of resigning. Mr. Normand said that he was worried he would be held liable for making the accounting changes. But Mr. Sullivan assured him that nothing they had done was illegal and that he would assume all responsibility, according to two people familiar with the meeting. (Mr. Sullivan's attorney, Roy Black, declined to comment for this article.)

Ms. Vinson reconsidered her decision. She was the family's chief breadwinner, and her family depended on her health insurance. Plus, she was anxious about entering the job market as a middle-age worker. She decided to stay, and so did Mr. Normand.

By the end of the first quarter of 2001, WorldCom's profits were again in danger of missing their targets. But this time, Ms. Vinson and her colleagues could find no large pools of reserves to dip into to solve the profit shortfall. The gap was a whopping $771 million.

As the situation grew dire, a troubling solution was ordered up

by Mr. Sullivan, according to a former WorldCom employee.

Rather than count line costs as part of operating expenses in the quarterly report, they would shift $771 million in line costs to capital-expenditure accounts, according to Securities and Exchange Commission filings. The shift would boost the company's bottom line. That's because operating expenses, such as salaries and benefits, are subtracted from income as they occur, reducing a company's current profit. Capital expenses can be spread out over a longer period of time, reducing the impact on a single quarter's results.

When Mr. Yates told Ms. Vinson about the $771 million transfer, she was shocked, according to the person close to her. Accounting rules make clear that line costs can't be classified as capital expenses. That night Ms. Vinson reviewed her options with her husband. She decided to put together a resume and begin looking for another job. She didn't think about retaining a lawyer or talking to law-enforcement authorities. She hadn't really started to think about the ramifications of her actions.

But the transfer was already in motion, and Ms. Vinson reluctantly went along.

Promotion and a Raise

Ms. Vinson faced the same dilemma in the second, third and fourth quarters of 2001. And each quarter she and her colleagues wound up making giant and fraudulent entries. In the second quarter, they transferred $560 million to the capital accounts. In the third quarter it was $743 million, and in the fourth quarter it was $941 million.

In early 2002, Ms. Vinson received a promotion, from senior manager to director, along with a raise that brought her annual salary to about $80,000.

Meanwhile, she and her two co-workers were increasingly distraught. Mr. Yates decided to look for a lawyer. Through a cousin, he got the name of Joseph Hollomon of Jackson, a former federal prosecutor in Mississippi. Mr. Yates met with Mr. Hollomon, but unsure of what to do, didn't hire him immediately.

Ms. Vinson continued to cling to the notion that each transfer would be the last. That hope was dashed in late April 2002. Ms. Vinson, Mr. Normand and Mr. Yates had just finished putting together the financial reports for the first quarter, which included an $818 million transfer of line costs. Shortly afterward, they made a discovery that spurred them finally to take action.

In reviewing WorldCom's 2002 financial plan, Mr. Normand and Mr. Yates realized that the improper transfers would have to continue at least through 2002 in order for the company to make its profit projections, people familiar with the discussion say. They shared their discovery with Ms. Vinson and they all agreed that they had had enough.

Ms. Vinson vowed to begin looking for a new job. Mr. Yates decided to do the same, and Mr. Normand decided to quit but ask for a severance package, according to internal documents and a person close to Mr. Yates. They made another pact as well: They would refuse to make any more improper accounting entries.

By then, the SEC had started getting suspicious about WorldCom's good financial results, and made a request for information from the company. The company's head of internal auditing, Cynthia Cooper, started asking Mr. Myers and others about certain accounting decisions, and the entries made by Ms. Vinson and Mr. Normand.

On the afternoon of June 17, Ms. Cooper walked into Ms. Vinson's office and asked her to justify the transfers. Ms. Vinson said she couldn't, and told them that the amounts were provided to her by Mr. Yates and Mr. Myers.

Ms. Vinson, Mr. Yates and Mr. Normand were in a panic, people familiar with the situation say. Mr. Yates called the other two into his office and suggested they all meet with Mr. Hollomon, the lawyer he had been referred to, according to a person close to Mr. Yates. On Thursday, June 20, at Mr. Hollomon's downtown office, they agreed on a plan: They would meet with regulators and prosecutors, tell them everything and hope for leniency.

Although there was no written agreement that they wouldn't be prosecuted, several lawyers involved say the Mississippi U.S. attorney's office had told Mr. Hollomon that the accountants would likely be viewed as witnesses, not targets of the investigation.

But Mr. Hollomon warned his clients that "all bets were off" if the case was moved to the Manhattan U.S. attorney's office, which has a long history of aggressively prosecuting high-profile business cases. A few days after their meeting with Mr. Hollomon, Mr. Yates, Mr. Normand and Ms. Vinson told their story to an official from the SEC, an FBI agent and an assistant U.S. attorney.

A Confession

WorldCom's problems were about to explode into public view. The day after the employees met with law-enforcement authorities, the SEC got a call from WorldCom's lawyers with a shocking disclosure: Ms. Cooper and her fellow auditors at WorldCom had found $3.8 billion in fraudulent accounting entries. The following day, the SEC charged the company with accounting fraud.

Soon, Mr. Hollomon's fears were realized. The case was transferred to the Manhattan U.S. attorney's office. and it quickly became clear that the New York prosecutors had a different take on the accountants. Mr. Myers was cooperating with prosecutors, who now suspected that Ms. Vinson and the other accountants from the beginning had been instrumental to making the scheme work, according to the person close to Ms. Vinson.

On Aug. 1, 2002, Ms. Vinson received a call from Mr. Hollomon telling her that the prosecutors in New York would probably indict her. In the end, they viewed the information Ms. Vinson had supplied at the June meeting as more of a confession than a tip-off to wrongdoing, people familiar with the case say. Within hours, she was fired because of the expected indictment.

On Aug. 28, Mr. Sullivan and Mr. Yates were indicted, and Ms. Vinson and Mr. Normand were named as unindicted co-conspirators in the scheme. Mr. Myers pleaded guilty to three felony counts and Mr. Yates soon pleaded guilty to one count of securities fraud and one count of conspiracy to commit securities fraud.

Unable to afford the legal bill that would result from a lengthy trial, Ms. Vinson decided to negotiate a guilty plea as well. She hoped to cut a deal that wouldn't include a prison sentence.

On Oct. 10, 2002, the U.S. attorney's office announced that Ms. Vinson and Mr. Normand had pleaded guilty to two criminal counts of conspiracy and securities fraud, charges that carry a maximum sentence of 15 years in prison.

Her sentencing is scheduled for February.

If you had been in Ms. Vinson's situation, what would you have done differently? Write to us.