so do you guys remember when I did my huge massive really long video about the Enron Scandal and I mentioned how while at the time it was the largest bankruptcy in American history it was overtaken just a year later by a company called Worldcom but we're going to talk about Worldcom now they're oddly a little less famous than the Enon thing but interestingly they have a lot in common not in terms of their corporate background or anything but in terms of what they were trying to do through different techniques Worldcom was basically doing the same thing Enron was trying to artificially inflate their own stock value in order to please investors when in reality they weren't doing nearly as well as they were presenting but before we get to the actual Scandal here and the bankruptcy let's discuss the actual history of this company so you know exactly what they were now they've gone by several names including MCI Incorporated world or MCI WorldCom but initially they were called ldds or longdistance discount Services Incorporated they were founded all the way back in 1983 in a coffee shop of all places in Hattisburg Mississippi a man named Bernard eers as well as three other investors put the company together and based it in Jackson Mississippi eers was named the CEO in 1985 the industry they worked in was tele Communications they were effectively a phone company nowadays the Telecommunications industry has largely evolved past the uh you know wired phone in your home but back then that was the norm this was before cell phones were in common usage and the internet basically didn't exist but as technology developed they of course moved into those areas they were very successful they would acquire over 60 telecommunications firms and 1989 they first became a proper Corporation as a result of a merger with a company called Advantage Companies Incorporated though their first major acquisition was in 1992 when they spent 720 million to acquire Advanced telecommunications corporation or ATC this purchase involved them outbidding their larger competitors like Sprint and AT&T but it was worth it because it made them a much much larger player in the market they would change their name in 1995 to ldds Worldcom and most people usually just called them Worldcom on November 4th 1997 they would go on to announce a $ 37 billion merger with MCI Communications to form MCI WorldCom but this made them absolutely gargantuan so big that MCI had to divest itself of its internet MCI business in order to even get approval for the merger from the United States Department of Justice they even almost merged with Sprint Corporation in 1999 but that was rejected both the US Department of Justice and the European Union felt that that merger was almost guaranteed to create a monopoly which is not allowed and on July 13th 2000 both Boards of directors from the companies terminated the plans later that same year MCI WorldCom formally changed their name to Worldcom but as you can imagine there was a lot going on in the background when all this was happening but the problem didn't really start until 1999 when a handful of the corporate suits started playing fast and loose with accounting now just like with Enron this is going to require a bit of explanation order for you to really understand what's actually happening here but I will give you appropriate context as we go the first red flag that something weird was happening that anyone even really noticed anyway was that in December of 2000 a financial analyst for the company named Kim amay was instructed to allocate labor for capital projects in worldcom's network systems division as an expense rather than book it as a capital project which was weird and not normal by Ma's estimate if he followed through that would affect at least $35 million in capital spending and he felt that he was straight up being asked to commit tax fraud so he pressed his concerns up the chain of command and notified an assistant to Worldcom Chief Operating Officer Ron bont within just a day it was decided not to implement the directive but amay wound up being reprimanded by his immediate superiors and he was laid off in March of 2001 which is pretty sus now I mentioned a few things there but the big one you want to focus on is capital spending what's that mean well Capital spending or capital expenditure or Capital expense is not the same thing as a regular expense take our bag of chips example that I just love so much cuz everyone understands it pretty well let's say you go to the store and buy a bag of chips you have now incurred an expense that's it it's all an expense is but a capital expense is different it's still spending money but in that instance it's when an organization or a corporate entity spends money to buy maintain or improved fixed assets like buildings Vehicles equipment or land in the accounting sense as well as the tax sense these are very very very vastly different things and are handled differently but in terms of why this was a big deal well say you're an investor and you see this massive company spending a lot of money you look at their books and well oh these are capital expenses oh that's good you're spending money to support yourself you're reinvesting the money into your infrastructure that is a good sign for the company that's just things are going well but no no no no no no that was not what was happening here amay had actually been from the MCI half of that merger he wasn't from Worldcom initially though later he would say that he was already pretty upset with mci's spending habits for years as he felt they were just throwing money at willy-nilly he thought at first that the Worldcom merger had actually helped things but then he began to notice that certain vendors were billing Worldcom for just insane absurd amounts of money stuff he just didn't see as reasonable but no one was questioning it but him in May of 2002 the article in which he claimed all this was read by a man named Glenn Smith who was an internal audit manager at worldcom's headquarters in Clinton Mississippi when he read it he decided to go to his boss Cynthia Cooper and suggested that maybe it was a good idea if they started that Year's scheduled capital expenditure audit a few months early just to see um if there was something sketchy going on Cooper felt that Smith's concerns were legitimate so they decided to begin the audit late that same month as part of the audit they talked to the corporate finance director sanjie Sethi and they were asking about differing amounts between two different Capital spending expenditures he said they were related to something called prepaid capacity now what does that mean well in the accounting sense it means absolutely nothing no seriously that's not a thing even Cooper didn't know what it was and when she asked sethy said he didn't know what it was no one knew what it was it was just there on the books with a lot of money next to it like what what is it this was despite the fact that Seth's division had been approving Capital spending requests including those listed under prepaid capacity again even though he had no idea what the heck that was he proceeded to refer the Auditors to the corporate controller named David Meyers Cooper asked Smith to get a hold of an auditor with more technical skills a computers guy because what she wanted to do was locate the entries in the system that referred directly to this weird prepaid capacity thing Smith brought in a man named Eugene Morse who' been working at Worldcom since 1997 and had already assisted with some reports on the wireless allowance audit Morse worked directly with Cooper as well as the auditing team to try to figure out um what this was cuz no one knew what that was Cooper didn't go straight to David Meyers first she went to the head of property at Worldcom Mark abide she asked him about prepaid capacity and he said as you may expect that he didn't know what the heck that was seriously what what what is happening here and in his case it was despite the fact that he had personally made mult multiple entries on it in the computerized accounting system Cooper asked abide to provide accounts that he had booked the relevant entries to and he did give her what she wanted he named the accounts of furniture fixtures as well as things like transmission equipment and Communications equipment things you would expect Capital expenditures to be but not under something like prepaid capacity Cooper had Morse looked into the system and try to find any references that related to prepaid capacity and he did find one but fine only represented a single side of the transaction they needed both Morris traced it through the system at Cooper's request and took everything he found to her but they struggled to actually put the entries in a sensible order none of it made much sense and they attempted to decipher them using one of the most basic methods of accounting known as tea accounts a tea account well have you heard of debit and credit I'm sure you have I can almost guarantee most of you have at some point well basically a tea account just for refers to a chart or a list format that is so named because it looks like a t this Ledger format puts the debits in the left column and the credits in the right column it's a pretty simple way of organizing things and likely it would have made sense in this situation in order to break a relatively complex analysis down to the simplest way it could be looked at but the problem they found was that the amounts were bouncing between different accounts in a way that was just insane it was absurd there was no logic to it so the T accounts didn't really help what they did figure out is that regardless of how often they bounced around or why they always resulted in a very large round amount moving from worldcom's income statement onto the balance sheet Cooper then asked moris to try to find another prepaid capacity entry that moved around in a similar way but during the process Cooper started receiving emails directly from David Meyers and he was questioning why she was even looking into Capital expenditures he said that she was wasting her time and tying up his employees who were needed for other projects much more important ones than your silly looking into corporate fraud thing how dare you but Cooper stood her ground and explained to him that the employees he needed could report back to him when they finished on her other projects the next day she did receive another reply Myers again reiterated that the capital expenditures thing was a waste of time and told her to stop Cooper decided to leave him on red she didn't reply to him at all and continued with the investigation Mor in the meantime was doing solid work trying to find more entries but the problem was he was pulling so much data from the system that he often found himself clogging up the accounting servers this um would have likely alerted people like David Meers or the Chief Financial Officer Scott Sullivan who was actually Cooper's boss Lo to what they were up to and Cooper feared that they might actually be told directly ordered to stop so Cooper decided to employ a bit of such Refuge she and her team began working at night to avoid the whole clogging issue entirely if no one else was at work there wouldn't be any issues tying up the system and they could continue the audit in peace on June 10th they finally discovered more entries related to prepaid capacity these were very large amounts that have been transferred from the income statement to the balance sheet from the third quarter of 2001 to the first quarter of 2002 just after they discovered this Sullivan directly called in Cooper for a meeting about the audit projects Cooper would take this opportunity to directly ask Sullivan about the prepaid capacity entries because they knew they were there but still didn't know what the heck they were For solivan claimed that that term referred to costs related to Sonet rings as well as lines that were either not being used at all or were seeing low usage from customers a Sonet ring by the way refers to synchronous Optical networking it's a standardized protocol that can transfer multiple digital bit streams synchronously over optical fiber using stuff like lasers very advanced technology especially back then also it had nothing to do with this that was a complete lie just so we're clear solivan went on to say that the costs were being capitalized because they were associated with line leases that were fixed even as Revenue dropped he personally planned on taking a restructuring charge in the second quarter of 2002 after which welcom planned to allocate those costs between restructuring charges and expenses he also asked Cooper to postpone the capital expenditure audit until the third quarter but this only made Cooper more suspicious of the whole thing why don't you want us to look further into this like first of all your explanation doesn't really make much sense any if it did if there's nothing really weird going on then it shouldn't be a problem for us to look into it what you doing bro it's also probably worth mentioning at this point that during the last couple years between September 200000 and April of 2002 worldcom's board of directors had authorized several loans as well as loan guarantees to the company's own CEO Bernard eers this was so that he wouldn't have to actually sell his Worldcom shares to meet margin calls because during those years the do bubble had burst and the industry was going through a pretty major Downs slope that was affecting Worldcom their stock price was falling despite what was going on in the background however by April of 2002 the board was getting fed up with him because eers didn't seem to have a coherent strategy to move the company forward it's also worth mentioning that he would never actually pay back the loans that ultimately amounted to to a single 48.2 million promisory note he default on it in 2003 but back to the main story the same night as the meeting with Sullivan Cooper and Smith got in touch with a man named Max bobbit he was a Worldcom board member but more intrinsically he was the chairman of the audit committee they brought their concerns directly to him and given he's a board member you might be expecting me to say that he knew all along what was going on and he's going to tell to drop it and not look into it further no no bobit stood on business he took auditing the company very seriously he was so concerned that he told Cooper to contact frell Malone Malone worked for a company called KPMG which is one of the big four accounting organization and in terms of how that relates to this they were worldcom's external auditor large companies especially will often employ other organizations to provide auditing service the reason for this is that an external company is less likely to be compromised than an internal audit would be an internal audit as you've noticed by now can be sort of kneecapped in a lot of ways I mean Cooper's been asked to stop investigating at least three times now but KPMG was less likely to be intimidated but they actually hadn't been worldcom's auditor for very long they only inherited the account when they bought Arthur Anderson in the wake of their own indictment for their role in the accounting scandal at Enron oh yeah Arthur Anderson was doing the external accounting for both Enron and Worldcom and yeah yeah they were also overlooking a whole bunch of stuff at Worldcom too by the time this happened the internal audit had wound up discovering 28 entries that related to prepaid capacity they dated back all the way to the 2 quarter of 2001 at that point according to their calculations if not for those entries worldcom's $130 million profit margin in the first quarter of 2002 would instead be a $395 million loss and now you can see why they were doing it this way in the simplest of terms they were entering a lot of regular expenses like normal ones as capital expenditures instead because of this it didn't reflect the same way on the books since as far as they were concerned the money was coming back to them because it was a capital expense not an actual expense but in reality it was a regular expense the money was gone because it went to other things regular expenses which is normal for any company and it would have been very honest to Simply say that but they didn't they were hiding it in order to inflate their stock value which is hilarious cuz by this point their stock value was plummeting because of the whole dotom bubble thing no amount of book cooking could avoid that regardless of this discover y bobit still thought it was a bit premature to discuss the matter directly with the audit committee but he was going to bring the issue directly to Sullivan and he assured Cooper that he would have support for the entries by the following Monday which is a general accounting way of saying justification like why they were there an actual reason for them plot twist they would never get an actual reason for them besides criminal Enterprise Cooper was pretty headstrong though and despite bobbit's support she decided not to wait on that because she just didn't trust solivan at all she went directly to the accountants who had actually made the entries she first went to a man named Kenny Avery who had been Anderson's lead partner on the Worldcom account prior to KPMG she asked him of course about the prepaid capacity thing Avery had no idea what that was how many times have I said that now and he also told her that regardless of what it was he didn't know of anything in the generally accepted accounting principles or Gap that would allow for capitalizing line costs like there was nothing in there not a single word that would justify this regardless of what prebate capacity even meant he also told Cooper that Anderson had never actually tested worldcom's Capital expenditures for it Cooper then went directly to Betty Vincent who was the accounting director who had made the entries vinon would admit to them that she had made the entries without actually knowing what they were for for or even seeing support for them she just did it and she had done so only under the explicit instructions of both Myers and the general accounting director Buford Yates Cooper then went to Yates and he also admitted that he didn't know what prepaid capacity was just just it's not a thing I I keep saying that it's it's not a thing they made it up but Yates proceeded to throw Myers right under the bus he claimed the accountants reporting to him booked entries at Myers's discretion so key had nothing to do with this never ever even though he was the General accounting director you have one job man then they went to Meyers and he to his credit admitted that there was no support for the entries you get no way to justify them at all he had actually outright stated that they had been booked based on what they had thought the margins should be which no no what wait a okay so let's let's play this game what you thought it should be okay that's Neo so if I walk into a store and I say you know I think this bag of chips should be free do I get to take it then without paying no no that's not how that works bro you can't do your books based on what you just think these are numbers and they have a hard answer you may not like the final answer but they have an answer he went on to say the entries should never have been made but but it was difficult to stop once they started doing it since for a while the only reason the company was still afloat as far as the investors were concerned was because they were cooking the books he wasn't comfortable with it but he never thought it would get so far that he'd have to explain them to Regulators pharoh Malone then came in and met directly with Sullivan and actually concluded that their rationale for the entries did make sense from a business perspective but not from an accounting perspective this is bad news for Worldcom because it meant that KPMG was going to keep looking into things and solivan Myers Yates and abide all went to overdrive trying to clean up their mess before anyone could figure out exactly what they had been doing basically they went through all the books to try to find a mistake many mistakes effectively expenses that should have actually been capitalized the plan here was simply to offset the fraud using legitimate mistakes finding money where they didn't realize they had it before the problem of course is that in order for this to work there would have to be enough mistakes to compensate for the overwhelming amount of fraud they were pulling and there there was nothing that could possibly help them the only other alternative was an earnings restatement which given the amounts we're talking about here would have been crippling to them bobbit would eventually be forced to call an audit committee meeting for June 20th by that date Cooper and her team had managed to discover over3 billion dollar in questionable transfers from line cost expense accounts to assets from 2001 to 2002 frell was at that meeting and he stated that there was nothing in gap that would allow for these entries at all solivan tried to save face and claimed that Worldcom had invested in expanding the Telecom network from 1999 onward but the anticipated expansion in customer usage never actually happened he argued that the entries were justified in the basis of the matching principle that principle would allow for costs to be booked as expenses so they align with any future benefit accured from an asset the problem here is that no that's not what you were doing at all don't shut up he then contended that since Capital assets were worth less than what the books said they should be he said his proposal for restructuring charge or an impairment charge as he called it for the second quarter of 2002 and also said that Myers should be able to provide support for the entries the committee gave him until the following Monday to get that support Cooper and the other Auditors were still hard at work of course and discovered even more prepaid capacity entries the internal audit unit in total would finded 49 prepaid capacity entries that detailed $3.8 billion do in transfers spread out across all 2001 and the first quarter of 2002 many of them had been keyed in on the explicit directions from Sullivan and Meyers under the line SS entry some of these entries were made by directors and managers but others were actually made by lower level accountants who likely had no idea what they were doing and were just following orders from their bosses and this wasn't the only fraud that the company was committing another accounting director named Troy Norman revealed that there was something else going on he explained that management was actually drawing down found the company's cost reserves in portions of 2000 and 2001 the result was that they were artificially reducing the appearance of expenses even when they they they weren't they were just they were just lying again the audit committee would directly ask KPMG to conduct their own review and they would discover that Sullivan had moved system costs across number of different property accounts by putting these regular expenses into property accounts it allowed them to be booked as Capital expenditures and yes this is wildly illegal you can't do that because they're not Capital expenditures you're just spreading them out across accounts related to Capital expenditures the expenses were also spread out in such a way that they weren't immediately obvious you had to really dig to figure out what he was doing KPMG even went to Anderson's former engagement team for Worldcom and the Anderson accountants claimed that they didn't know that this was going on and that they would never have approved of the them had they known the result was that solivan was asked to present a written explanation for his actions by that Monday solivan did present a white paper explaining his reasoning but it um it didn't really explain or justify anything uh no one was convinced at all it was pretty obvious what he was actually doing and they concluded the amounts were transferred with the sole purpose of meeting Wall Street targets not actually telling the truth about the company's situation therefore the only moral and acceptable thing for them to do was to restate the corporate earnings for all of 2001 and the first quarter of 2002 when they knew this kind of stuff was going on they also demanded Sullivan and Meyers resignations on June 25th Myers would agree to resign but Sullivan actually pushed back and refused to leave the company so they fired him I don't know what he expected the Worldcom Executives also then went directly to the the Securities and Exchange Commission or SEC they revealed to them that they would have to restate earnings for the previous five quarters they then admitted publicly that they had overstated their income by that $3.8 billion amount they came clean about it likely because to be fair a lot of the suits simply didn't realize what was going on this is really bad timing for them because even before the Scandal their credit rating had actually been reduced to junk status and their stock had lost over 94% of its value due to the whole dot bubble bursting thing there was actually a separate SEC investigation into its accounting that had already started earlier that year and they had $30 billion in debt to address they announced they would lay off 17,000 employees and then they filed for chapter 11 bankruptcy protection on Sunday July 21st 2002 the company's CEO eers had been forced to formally resign on April 30th 2002 and it was revealed that he also knew it was going on as well he had been directly involved and the federal government had already begun an informal inquiry earlier in the month of June the SEC would file civil charges against Worldcom on June 26th speculating that they had engaged in a concerted effort to manipulate earnings in order to meet Wall Street targets and support their own stock price they claimed that the scheme had been directed and approved by Senior Management and indeed eers in 2005 was found guilty of fraud conspiracy and filing false documents with Regulators he was subsequently sentenced to 25 years in prison though he wouldn't quite serve his entire sentence he was already pretty old and he was released in December 2019 due to declining Health he would only live another two months dying February 2nd 2020 the following investigations also revealed the fraud greatly exceeded 3.8 billion it actually was about $ 11 billion in fraud David Meyers would be sentenced to one year and one day in prison for his role in the whole thing as part of a plea deal Sullivan also got a plea bargain and was sentenced to 5 years in prison in exchange for testifying against abers Buford Yates received a single gear in prison Betty vinsent got five months in prison and Troy Norman got three years probation but unlike Enron despite the whole fraud thing being technically more and the whole bankruptcy being more Worldcom actually didn't fall likely due to the more simplistic way they went about carrying out their fraud whereas enron's was ridiculous and complicated and just insane the company was able to emerge from bankruptcy in 2004 with about 5.7 billion in debt and 6 billion in cash half of that cash was supposed to be used to pay off various claims and settlements as a result of the whole fraud thing despite being out of bankruptcy they were still in in in bad shape previous Bond holders wound up being paid 35.7 cents on the dollar in bonds and stock in the new company previous stockholder stock was actually cancelled but they still had yet to pay off many of the creditors a lot of them had waited 2 years for their money and they wanted it no getting real tired of you ducking me man yeah oh my God getting really tired Where's My Money Where's My Money City group for example would agree to settle with Worldcom investors for 2.65 billion on May 10th 2004 and in March of 2007 16 of Worldcom 17 former Underwriters did reach settlements with investors but the company did carry on for a bit but in January of 2006 the company was actually acquired by Verizon communications and later all of it was integrated directly into Verizon business and that's about it just another one of those stories about corporate Tom Foolery and Suits will just never learn don't anger the money man they know man they will find you don't do it and with that a special thank you that's to all my underwater train finders some do 267 orange glass Benjamin Owens and Zack A1 Arthur Roy Jack Carson's Ro videos Lord off 444 iser 1405 Charles kakowski Matt Weaver Tom Red Lion NS Productions 8104 Wheeljack 8401 rescues Greyhounds the backer Caleb cross white Andrew B and Josh Johnson Caleb brain Waters perz drenon master of none Travis delinsky Jared brussell JBL explorers Tommy ini Ben Mulla paner kitson 131 just 232 Mark holding G whiz Mr terel Hayden de grow metal for Life guy no Kirk forom Ohio trucker one Mitchell Cole Mr sleepy Dr RAC 78 railroad preserver 2000 Willard Concklin Wendy City rails DM travel typhoon Harry Drew debris George Kenny Kevin Wood Liam Wright Morris helmet Productions nj1 1969 Hendrick Motorsports fan 5 Hannah bird Western color history a museum Ryan we Hofer dur rosi and of course my dad till next time this is darkness and the all of fun farewell