MCI, Inc. (formerly WorldCom and MCI WorldCom) was a telecommunications company. For a time, it was the second-largest long-distance telephone company in the United States, after AT&T. WorldCom grew largely by acquiring other telecommunications companies, including MCI Communications in 1998, and filed for bankruptcy in July 2002 after an accounting scandal, in which several executives were convicted of a scheme to inflate the company's assets. These include Bernard Ebbers, who was named CEO of the company from 1985 until December 16, 2002, when he retired. WorldCom then emerged from bankruptcy under Michael Capellas, who served as its last chairman and CEO until January 2006, when the company, by then renamed MCI, was acquired by Verizon Communications and was later integrated into Verizon Business.
WorldCom was originally headquartered in Clinton, Mississippi, before moving to Ashburn, Virginia, when it changed its name to MCI.
In 1983, in a coffee shop in Hattiesburg, Mississippi, Bernard Ebbers and three other investors formed Long Distance Discount Services, Inc. based in Jackson, Mississippi, and in 1985, Ebbers was named chief executive officer.
The company acquired more than 60 telecommunications firms, and in 1995, it changed its name to WorldCom.
In 1989, it merged with Advantage Companies Inc. In 1995, it was renamed LDDS WorldCom and moved to Clinton, Mississippi.
The company grew rapidly in the 1990s through mergers and acquisitions.
WorldCom's first major acquisition was in 1992. It outbid larger rivals Sprint Corporation and AT&T to secure the $720 million acquisition of Advanced Telecommunications Corporation. The deal made WorldCom a substantially larger player in the telecoms market.
Other acquisitions followed: Metromedia Communication Corp. and Resurgens Communications Group (1993), IDB Communications Group, Inc (1994), Williams Technology Group, Inc. (1995), and MFS Communications Company (1996)—the last of which brought along MFS' newly acquired UUNET Technologies, Inc.
On November 4, 1997, WorldCom and MCI Communications announced a $37 billion merger to form MCI WorldCom, making it the largest corporate merger in U.S. history. MCI divested its "internetMCI" business to gain approval from the United States Department of Justice. On September 15, 1998, the merger was consummated, forming MCI WorldCom.
In February 1998, WorldCom acquired CompuServe from H&R Block. Retaining the CompuServe Network Services Division, WorldCom traded its online service to America Online for AOL's network division, ANS. In June 2001, WorldCom acquired the corporate parent of Digex, Intermedia Communications, and then sold all of Intermedia's non-Digex assets to Allegiance Telecom.
On October 5, 1999, Sprint Corporation and MCI WorldCom announced plans for a $129 billion merger. Had the deal been completed, it would have been the largest corporate merger in history, creating a merged company that would have surpassed AT&T as the largest communications company in the United States. But the U.S. Department of Justice and the European Union were concerned that the deal would create a monopoly. On July 13, 2000, the boards of directors of both companies terminated the merger. Later that year, MCI WorldCom renamed itself back into "WorldCom".
Between September 2000 and April 2002, the board of directors of WorldCom authorized several loans and loan guarantees to CEO Bernard Ebbers so that he would not have to sell his WorldCom shares to meet margin calls as the share price plummeted during the bursting of the dot-com bubble. By April 2002, the board had lost patience with these loans. Directors also believed that Ebbers did not seem to have a coherent strategy after the Sprint merger collapsed. On April 26, the board voted to ask for Ebbers' resignation. Ebbers formally resigned on April 30, 2002 and was replaced by John W. Sidgmore, former CEO of UUNET. As part of his departure, Ebbers's loans were consolidated into a single $408.2 million promissory note. In 2003, Ebbers defaulted on the note and WorldCom foreclosed on many of his assets.
Beginning modestly during mid-1999 and continuing at an accelerated pace through May 2002, Ebbers, CFO Scott Sullivan, controller David Myers and general accounting director Buford "Buddy" Yates used fraudulent accounting methods to disguise WorldCom's decreasing earnings in order to maintain the company's stock price.
The fraud was accomplished primarily in two ways:
Booking "line costs" (interconnection expenses with other telecommunication companies) as capital expenditures on the balance sheet instead of expenses.
Inflating revenues with bogus accounting entries from "corporate unallocated revenue accounts".
In June 2002, a small team of internal auditors at WorldCom led by division vice president Cynthia Cooper and senior associate Eugene Morse worked together, often at night and secretly, to investigate and reveal what was initially valued as $3.8 billion worth of fraudulent entries in WorldCom's books. The investigation was triggered by suspicious balance sheet entries discovered during a routine capital expenditure audit. Cooper notified the company's audit committee and board of directors in June 2002. The board moved swiftly, forcing Myers to resign and firing Sullivan when he refused to resign. Arthur Andersen withdrew its audit opinion for 2001. Cooper and her team had exposed the largest accounting fraud in American history, displacing the fraud uncovered at Enron less than a year earlier. By the end of 2003, it was estimated that the company's total assets had been fraudulently inflated by about $11 billion, the largest accounting fraud ever uncovered until the exposure of Bernard Madoff's giant Ponzi scheme in 2008.
By this time, the U.S. Attorney for the Southern District of Mississippi, the Federal Bureau of Investigation and the U.S. Securities and Exchange Commission were already looking into the matter as well. The SEC launched a formal inquiry into these matters on June 26, 2002. The SEC was already investigating WorldCom for questionable accounting practices.