Source: https://www.sec.gov/litigation/complaints/comp17753.htm
Timestamp: 2019-04-21 18:32:02+00:00

Document:
1. From approximately August 1995 through approximately June 25, 2002, defendant David F. Myers ("Myers" or "Defendant") served, at various times, as Senior Vice President and Controller of WorldCom, Inc. ("WorldCom").
2. From at least as early as 1999 through the first quarter of 2002, WorldCom misled investors. WorldCom has admitted that during this period, as a result of undisclosed and improper accounting, it materially overstated the income it reported in its financial statements by approximately $7.2 billion.
3. WorldCom fraudulently manipulated its financial results in a number of respects, including by improperly reducing its operating expenses in at least two ways. First, WorldCom improperly released certain reserves held against operating expenses. Second, WorldCom improperly recharacterized certain operating costs as capital assets. Neither practice was in conformity with generally accepted accounting principles ("GAAP"). Neither practice was disclosed to WorldCom's investors, despite the fact that both practices constituted changes from WorldCom's previous accounting practices. Both practices artificially and materially inflated the income WorldCom reported to the public in its financial statements from 1999 through the first quarter of 2002.
4. Many of the improper accounting entries related to WorldCom's expenses for accessing the networks of other telecommunications companies ("line costs"), which were among WorldCom's major operating expenses. From at least the third quarter of 2000 through the first quarter of 2002, in a scheme directed and approved by its senior management, and participated in by Myers and others, WorldCom concealed the true magnitude of its line costs. By improperly reducing reserves held against line costs, and then-after effectively exhausting its reserves-by recharacterizing certain line costs as capital assets, WorldCom falsely portrayed itself as a profitable business when it was not, and concealed the large losses it suffered. WorldCom's fraudulent accounting practices with respect to line costs were designed to and did falsely and fraudulently inflate its income to correspond with estimates by Wall Street analysts and to support the price of WorldCom's common stock and other securities.
5. More specifically, in the third and fourth quarters of 2000, by improperly decreasing certain reserves to reduce line costs, at the direction and with the knowledge of WorldCom's senior management, Myers and others caused WorldCom to overstate pretax earnings by $828 million and at least $407 million respectively. Then, having drawn down WorldCom's reserves so far that they could not draw them down further without taking what WorldCom's senior management believed was an unacceptable risk of discovery, Myers and others, again at the direction and with the knowledge of WorldCom's senior management, improperly capitalized certain line costs for the next five quarters, from the first quarter 2001 through the first quarter 2002. This accounting gimmick resulted in an overstatement of WorldCom's pretax earnings by approximately $3.8 billion for those five quarters.
6. Defendant Myers knew, or was reckless in not knowing, that these accounting entries were made without supporting documentation, were not in conformity with GAAP, were not disclosed to the investing public, and were designed to allow WorldCom to appear to meet Wall Street analysts' quarterly earnings estimates. In addition, during the same period Myers and others, including members of senior management, made materially false or misleading statements or omissions to WorldCom's independent auditors in connection with audits and the preparation of filings with the Commission.
7. In addition, as a result of the fraudulent conduct of defendant Myers and others, between October 2000 and June 2002 WorldCom filed numerous registration statements and prospectuses, and amendments thereto, containing or incorporating by reference materially incorrect financial statements or information, in connection with the offer or sale of WorldCom's securities.
8. By engaging in this conduct, defendant Myers violated the anti-fraud, books and records, and internal control provisions of the federal securities laws, and aided and abetted WorldCom's violations of the reporting, books and records, and internal control provisions of the federal securities laws. The Commission requests, among other things, that defendant Myers be: (1) enjoined from further violations of the federal securities laws as alleged herein, and (2) ordered to disgorge all ill-gotten gains, including prejudgment interest, and to pay monetary penalties. The Commission also requests that the Court issue an order under Section 21(d)(2) of the Securities Exchange Act of 1934 ("Exchange Act") prohibiting Myers from acting as an officer or a director of any public company as provided in that section.
9. The Commission brings this action pursuant to Sections 20(b) and 20(d) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §§77t(b) and (d)] and Section 21(d) of the Exchange Act [15 U.S.C. §78u(d)].
10. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. §77u(a)] and Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§78u(e) and 78aa]. The defendant, directly or indirectly, used the means or instrumentalities of interstate commerce, or of the mails, or the facilities of a national securities exchange in connection with the transactions, acts, practices, and courses of business alleged in this Complaint.
11. Certain of the acts, practices, and courses of conduct constituting the violations of law alleged in this Complaint occurred within this judicial district, and, therefore, venue is proper pursuant to Section 22 of the Securities Act and Section 27 of the Exchange Act.
12. The defendant, directly and indirectly, has engaged in, and unless restrained and enjoined by this Court will continue to engage in, transactions, acts, practices, and courses of business that violate Section 17(a) of the Securities Act [15 U.S.C. §77q(a)] and Sections 10(b) and 13(b)(5) of the Exchange Act [15 U.S.C. §§78j(b) and 78m(b)(5)] and Rules 10b-5, 13b2-1, and 13b2-2 thereunder [17 C.F.R. §§240.10b-5, 240.13b2-1, and 240.13b2-2]; and has aided and abetted violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Rules 12b-20, 13a-1 and 13a-13 thereunder [17 C.F.R. §§240.12b-20, 240.13a-1 and 240.13a-13].
13. Defendant David F. Myers, 45, served as Senior Vice President and Controller of WorldCom during the relevant period. Myers was licensed in the state of Mississippi as a certified public accountant (CPA) from approximately 1985 until December 31, 2001, when his license lapsed. Myers resides in Madison, Mississippi. In addition to a substantial salary and annual bonuses, Myers received a retention bonus of $765,000 in May 2000 as an incentive for him to stay at WorldCom through May 2002.
14. WorldCom, a Clinton, Mississippi-based company incorporated in Georgia, provides a broad range of communications services to businesses and consumers in more than 65 countries. WorldCom is a public company whose securities are registered with the Commission pursuant to Section 12(b) of the Exchange Act, and it is required to file periodic reports with the Commission pursuant to Section 13 of the Exchange Act. WorldCom's common stock was, at all times relevant hereto, listed and traded on the Nasdaq National Market System. The company's securities were covered by Wall Street analysts who routinely issued quarterly and annual earnings estimates. On July 21, 2002, WorldCom and substantially all of its active U.S. subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
15. Public companies, such as WorldCom, typically report the financial results of their operations in financial statements that include both an income statement and a balance sheet. A company's income statement reports, among other things, revenue recognized, expenses incurred, and income earned during a stated period of time-usually for a fiscal quarter or a fiscal year. Within an income statement, expenses are generally subtracted from revenues to calculate income. A company's balance sheet reports, among other things, the assets and liabilities of a company at a point in time, usually as of the end of the company's fiscal quarter or fiscal year.
16. When companies spend money or incur costs, those expenditures can be accounted for in a variety of ways depending on the nature of the transaction. Some types of expenditures, most commonly those incurred by a company in its normal operations, are treated as current period costs or "operating expenses." Examples of operating expenses include recurring costs such as salaries and wages, insurance, equipment rental, electricity, and maintenance contracts. Generally, almost all routine expenditures that a company makes are operating expenses. Other types of expenditures, most commonly those that result in the acquisition of, or improvement to, the company's assets, are treated as "capital expenditures." Examples of capital expenditures include purchases of real estate, manufacturing equipment, and computer equipment.
17. Operating expenses and capital expenditures generally receive different accounting treatment. Operating expenses are generally reported on a company's income statement and subtracted from revenues in the period in which the expense is incurred or paid, resulting in the company's pretax net income for that period. Capital expenditures, by contrast, are not subtracted from revenues and are not generally reflected on the income statement. Instead, capital expenditures are reported as capital assets on a company's balance sheet.
18. If a company makes entries in its accounts that effectively reclassify or transfer a given expenditure from an "operating expense" to a "capital asset," that action will have the following effects on the company's financial statements: (a) the reclassification or transfer will reduce the company's operating expenses, and the company's pretax net income consequently will increase by the amount reclassified or transferred; (b) the value of the company's capital assets and total assets will increase by the amount reclassified or transferred; and (c) the value of the company's net worth will increase.
19. One of WorldCom's major operating expenses reported on its income statements, which were periodically filed with the Commission, was its so-called "line costs." Line costs represented the various fees WorldCom paid to third-party telecommunications carriers for WorldCom's right to access the third-party's network facilities in order to serve customers who were not directly connected to WorldCom's own network. Under GAAP, these fees must be reported as an expense on a company's income statement.
20. From time to time, WorldCom established reserves on its balance sheet for various future payments for goods or services it had previously received or incurred. Among the reserves WorldCom established were reserves for line costs and income taxes. Line cost reserves and income tax reserves were listed on WorldCom's balance sheet as liabilities.
21. Anticipating unabated growth in telecommunications services, WorldCom entered into a number of long-term lease agreements with various third-party telecommunication carriers to gain the right to access these networks in the late 1990s. Many of these leases required WorldCom to make fixed monthly payments to the third-party carrier over the full term of the lease regardless of whether WorldCom actually made use of all or part of the capacity of the leased facilities. Historically, these payments were recorded by WorldCom employees on the company's books and records as expenses, and reported as part of WorldCom's operating expenses on its income statements.
22. Beginning in or around July 2000, WorldCom's expenses as a percentage of its total revenue began to increase, resulting in a decline in WorldCom's income. Defendant Myers and others at WorldCom, including members of WorldCom's senior management, knew that this decline in income created a substantial risk that WorldCom's publicly reported income would fail to meet the expectations of Wall Street analysts and that the market price of WorldCom's securities would therefore decline.
23. Starting at least as early as the third quarter of 2000, WorldCom, in a scheme directed by the company's senior management, and participated in by defendant Myers and others, engaged in a series of improper and fraudulent accounting manipulations designed to inflate artificially WorldCom's publicly reported income by falsely reducing WorldCom's reported line cost expenses. As a result of this scheme, WorldCom materially understated its expenses, and materially overstated its income, thereby defrauding investors.
24. In or around October 2000, at the direction and with the knowledge of WorldCom senior management, defendant Myers and others fraudulently caused the making of certain entries in the company's general ledger for the third quarter of 2000. These entries were intended to increase WorldCom's publicly reported income and conceal the true extent of its expenses. Specifically, fraudulent and false entries were made in WorldCom's general ledger reducing its line cost expense accounts, and reducing-in amounts corresponding to the fraudulent and false line cost expense amounts-various reserve accounts. There was no documentation supporting these entries, and no proper business rationale for them, and they were not in conformity with GAAP. These entries had the effect of reducing third quarter 2000 line costs by approximately $828 million, thereby increasing WorldCom's publicly reported pretax income by that amount for the third quarter of 2000.
25. Defendant Myers and others caused the making of similar entries in the company's general ledger for the fourth quarter of 2000, with similar intentions. Again these entries were made at the direction of and with the knowledge of WorldCom's senior management, and again there was no documentation supporting these entries, and no proper business rationale for them. These entries had the effect of reducing fourth quarter 2000 line costs by at least $407 million, thereby increasing WorldCom's publicly reported pretax income by that amount.
26. In or around April 2001, because WorldCom's senior management determined that the company could not continue to draw down its reserve accounts to offset line costs without taking what they believed to be unacceptable risks of discovery by the company's auditors, WorldCom changed its method of fraudulently inflating its income. At the direction and with the knowledge of WorldCom's senior management, defendant Myers and others caused the making of entries in WorldCom's general ledger for the first quarter of 2001 which fraudulently reclassified line cost expenses to a variety of capital asset accounts without any supporting documentation or proper business rationale and in a manner that did not conform with GAAP. And at the direction and with the knowledge of WorldCom's senior management, defendant Myers and others continued to cause the fraudulent capitalizing of line cost expenses in the four succeeding quarters, through and including the first quarter of 2002.
27. Specifically, in or around April 2001, at the direction and with the knowledge of WorldCom's senior management, defendant Myers and others fraudulently reduced first quarter 2001 line cost expenses by approximately $771 million and correspondingly increased capital asset accounts, thereby fraudulently increasing publicly reported pretax income for the first quarter of 2001 by the same amount. In or around July 2001, at the direction and with the knowledge of WorldCom's senior management, defendant Myers and others fraudulently reduced second quarter 2001 line cost expenses by approximately $560 million and correspondingly increased capital asset accounts, thereby fraudulently increasing publicly reported pretax income for the second quarter of 2001 by the same amount. In or around October 2001, at the direction and with the knowledge of WorldCom's senior management, defendant Myers and others fraudulently reduced third quarter 2001 line cost expenses by approximately $743 million and correspondingly increased capital asset accounts, thereby fraudulently increasing publicly reported pretax income for the third quarter of 2001 by the same amount. In or around February 2002, at the direction and with the knowledge of WorldCom's senior management, defendant Myers and others fraudulently reduced fourth quarter 2001 line cost expenses by approximately $941 million and correspondingly increased capital asset accounts, thereby fraudulently increasing publicly reported pretax income for the fourth quarter of 2001 by the same amount. In addition, in and around April 2002, at the direction and with the knowledge of WorldCom's senior management, defendant Myers and others fraudulently reduced first quarter 2002 line cost expenses by approximately $818 million and correspondingly increased capital asset accounts, thereby fraudulently increasing publicly reported pretax income for the first quarter of 2002 by the same amount.
28. The manipulation of WorldCom's accounts to fraudulently reduce expenses and increase income, as described above, and the fact that the company had changed its method of accounting for line costs from expensing them to capitalizing them, were not disclosed to investors.
29. As a result of the fraudulent, false and improper accounting manipulations described above, WorldCom's expenses were materially understated and its earnings and assets were materially overstated in its filings with the Commission, specifically on its Forms 10-Q for each quarter from the third quarter of 2000 through and including the first quarter of 2002, and on its Forms 10-K for the fiscal years which ended on December 31, 2000 and December 31, 2001.
31. WorldCom's disclosures in its Forms 10-K and in its Forms 10-Q failed to include material facts necessary to make the statements made in light of the circumstances in which they were made not misleading. Significantly, these filings failed to disclose the fraudulent accounting scheme directed by the company's senior managers and participated in by defendant Myers and others to fraudulently and artificially understate line cost expenses, that the treatment of the line costs had changed from prior periods, and that the company's line cost expenses were actually increasing substantially as a percentage of its revenues.
32. While defendant Myers and others at WorldCom, including members of senior management, were engaged in the fraudulent accounting scheme described above, WorldCom filed numerous registration statements for the issuance of new securities, and related amendments thereto, which statements and amendments incorporated or contained WorldCom's fraudulent financial statements and financial information.
33. Myers was responsible with others at WorldCom for providing the company's auditors with documents and other information the auditors needed to conduct its annual audits and quarterly reviews of WorldCom's financial statements. During all relevant times, Arthur Andersen was engaged as WorldCom's independent auditors.
34. Myers, along with others, including members of WorldCom's senior management, signed three management representation letters to Arthur Andersen (one dated March 7, 2001 and two dated March 7, 2002) in connection with Arthur Andersen's 2000 and 2001 audits of WorldCom's financial statements. Each letter contained similar misrepresentations. First, the letters represented that WorldCom's financial statements were fairly presented in conformity with accounting principles generally accepted in the United States. Second, the letters represented that WorldCom had made available all financial records and related data to Arthur Andersen. Third, the letters stated that there were no material transactions that had not been properly recorded in the accounting records underlying the financial statements. Fourth, the letters represented that there had been no fraud that could have a material effect on the financial statements. Fifth, the letters represented that there were no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements, or as a basis for recording a loss contingency. Finally, the letters represented that the accounting records of WorldCom underlying the financial statements accurately and fairly reflected, in reasonable detail, the company's transactions. When Myers signed the letters, he knew or was reckless in not knowing that the letters contained representations that were false or misleading.
35. Paragraphs 1 through 34 above are incorporated herein by this reference.
36. Defendant Myers, directly or indirectly, by use of the means or instruments of interstate commerce, or of the mails, or of a facility of a national securities exchange, knowingly or recklessly (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (c) engaged in acts, transactions, practices, and courses of business which operated or would operate as a fraud or deceit upon the purchasers of securities and upon other persons, in connection with the purchase or sale of a security.
37. In connection with the above described acts and omissions, defendant Myers acted knowingly or recklessly. Defendant Myers knowingly or recklessly engaged in conduct which caused material misrepresentations and omissions of fact regarding WorldCom's reported earnings for the fiscal years 2000 and 2001 and for the quarters ended September 30, 2000, December 31, 2000, March 31, 2001, June 30, 2001, September, 30, 2001, December 31, 2001 and March 31, 2002. Defendant Myers knew, or was reckless in not knowing, that as a result of the fraudulent conduct described herein, WorldCom's Forms 10-Q for the periods commencing the third quarter of 2000 through the first quarter of 2002, inclusive, and that its Forms 10-K for 2000 and 2001, including the financial statements contained therein, as filed with the Commission, contained material misstatements and omissions.
38. By reason of the foregoing, defendant Myers violated Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5 [15 U.S.C. §78j(b) and 17 C.F.R. §240.10b-5].
39. Paragraphs 1 through 38 above are incorporated herein by this reference.
40. On or about April 26, 2001, WorldCom filed with the Commission a Form 425, a written communication deemed to be a prospectus under Rule 425. The Form 425, containing WorldCom's first quarter 2001 earnings, was filed in connection with a registration related to the offering of two types of tracking stock filed on a Form S-4 registration statement. WorldCom stated in this Form 425 that its first quarter 2001 consolidated net income was $745 million. This figure was materially overstated as a result of manipulations of WorldCom's accounts in a scheme in which defendant Myers participated to fraudulently understate WorldCom's line cost expenses by approximately $771 million for that quarter.
43. On or about August 14, 2001, WorldCom filed its Form 10-Q with the Commission for the second quarter of 2001, wherein it reported in its Consolidated Statement of Operations that its consolidated net income for the quarter that ended June 30, 2001 was $97 million. This figure was materially overstated as a result of manipulations of WorldCom's accounts in a scheme in which defendant Myers participated to fraudulently understate WorldCom's line cost expenses by approximately $560 million for that quarter. On or about August 22, 2001, WorldCom filed with the Commission a Form S-8, relating to Intermedia Communications and Digex 401(K) Plans, which incorporated and thereby repeated the materially false overstatement of its second quarter consolidated net income.
the first quarter of 2002. On or about June 19, 2002, WorldCom filed with the Commission a Form S-8 related to WorldCom's 401(k) Salary Savings Plan, and a Form S-8 POS, a Post-Effective Amendment to a previously filed Form S-4, which incorporated and thereby repeated the materially false income figures contained in WorldCom's Form 10-K for 2001, and in its Form 10-Q for the first quarter of 2002.
45. As a consequence of the foregoing, defendant Myers, in the offer or sale of securities, by the use of means or instruments of transportation or communication in interstate commerce, or by the use of the mails, directly or indirectly: (a) employed devices, schemes or artifices to defraud; or (b) obtained money or property by means of untrue statements of material facts or omissions to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon purchasers of securities.
46. In connection with the above described acts and omissions, defendant Myers acted knowingly, recklessly, or negligently. He knew, or was reckless in not knowing, or should have known, that the above-mentioned filings with the Commission contained material misstatements and omissions. By reason of the foregoing, defendant Myers violated Section 17(a) of the Securities Act [15 U.S.C. §77q(a)].
47. Paragraphs 1 through 46 above are incorporated herein by this reference.
48. Section 13(b)(5) [15 U.S.C. §78m(b)(5)] of the Exchange Act and Exchange Act Rule 13b2-1 [17 C.F.R. §240.13b2-1], prohibit, among other things, circumvention of internal accounting controls, and falsification of corporate books, records and accounts.
49. Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. §78m(b)(2)(A)] requires public companies to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect the company's transactions and dispositions of its assets. Section 13(b)(2)(B) [15 U.S.C. §78m(b)(2)(B)] of the Exchange Act requires public companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that the company's transactions were recorded as necessary to permit preparation of financial statements conforming with GAAP. Myers deliberately circumvented existing internal accounting controls in order to falsify WorldCom's books and records.
50. By reason of the foregoing conduct, including, among other things, Myers' knowing falsification of WorldCom's books, records, and accounts and circumvention of its internal accounting controls, as described above, Myers violated Section 13(b)(5) and Rule 13b2-1. As described above, WorldCom violated the books and records and internal accounting controls provisions of the federal securities laws and Myers knowingly and substantially assisted in the commission of those violations. In so doing, Myers aided and abetted WorldCom's violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.
51. Paragraphs 1 through 50 above are incorporated herein by this reference.
52. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require issuers of registered securities to file with the Commission factually accurate annual and quarterly reports. Exchange Act Rule 12b-20 provides that in addition to the information expressly required to be included in a statement or report, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading.
53. Myers knowingly and substantially participated in WorldCom's inclusion of financial statements that were not presented in conformity with GAAP in the following reports filed with the Commission: (1) Forms 10-K for the years ended 2000 and 2001; and (2) Forms 10-Q for the quarters ended September 30, 2000, March 31, 2001, June 30, 2001, September, 30, 2001, and March 31, 2002.
54. By reason of the foregoing, Myers aided and abetted violations of Section 13(a) of the Exchange Act [15 U.S.C. §78m(a)] and Exchange Act Rules 12b-20, 13a-1 and 13a-13 [17 C.F.R. §§240.b-20, 240.13a-1 and 240.13a-13].
55. Paragraphs 1 through 54 above are incorporated herein by this reference.
56. Exchange Act Rule 13b2-2 [17 C.F.R. §240.13b2-2], in general, prohibits officers and directors of a public company from making materially false statements or omissions of material fact to an accountant in connection with an audit of the company's financial statements, or in connection with the preparation of any document to be filed with the Commission.
57. In connection with WorldCom's annual audits in 2000 and 2001, Myers - an officer of WorldCom -- signed three letters to Arthur Andersen, each of which contained the false and misleading statements about the books and records and accounting practices of WorldCom described in detail in paragraph 34 of this Complaint.
58. By reason of the foregoing, Myers violated Exchange Act Rule 13b2-2.
I. Granting such other and additional relief as this Court may deem just and proper.

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