1. Background info on Ebber:

Ebbers was a wealthy man with a significant personal business empire outside WorldCom. He had also accumulated millions of shares of WorldCom stock. However, he had borrowed over US$400 million from banks, using his stock in WorldCom as collateral.

As WorldCom stock price began to drop in 2000, Ebbers received margin calls from the banks requiring him to either put up more stock as collateral or to pay back a portion of the money he owed.

Because he had used much of the borrowed money to buy relatively illiquid assets, such as a ranch, timberlands and a yacht-building company, Ebbers could not use those assets to meet the margin calls.

2. What happened?

1996 – The Internet backbone purchased by WorldCom in 1996, sold a total of $87 million in WorldCom stock.

Late 1990s – the telecom bubble burst, as all bubbles do. The telecom industry began to suffer serious decline, and stock values began to fall at all telecom companies including WorldCom.

Telecom bubble/ dot com bubble(In early 1990s, personal computers were becoming increasingly common for both business and personal use. During 1990s, the U.S. computer industry decided to focus primarily upon computer software development instead of designing and manufacturing computer hardware, because computer software was a product with very high profit margins. Because software companies generated profits by selling licensed software, which costs very little to reproduce. Computer hardware is becoming a commodity product and that it is virtually indistinguishable from the product of the competitors, which force company to compete on price. Throughout 1990s, software companies’ stock were very strong performers.

During the mid-1990s, the internet had evolved as a way for people to communicate via email, use chat rooms and browse websites. Technology stocks continued to soar and created a very strong inventive for more technology companies to become publicly traded. Many early tech company shareholders become millionaires overnight, even they are lack of business plan and even more had no earnings whatsoever to speak of. Tech companies continued to pay their employees in stock options, which profited greatly as long as stocks maintained their strong upward trajectory.

By early 2000s, reality started to sink in. Investors soon realised that the dot-com dream had devolved into a classic speculative bubble. In within months, stock index crashed from 5000 to 2000.)

Early 2000 – The telecommunications industry as a whole and WorldCom is experienced sharp and continuous declines in share prices. WorldCom stock price began drop.

Stock price drop:

June 30, 1999 – US$96.7666 June 30, 2000 – US$46 December 29,2000 – US$18.656 In 2001 – fluctuated between US$24 and US$12 per share. June 25, 2002 – US$0.83 July 1, 2002 – US$0.06 – when the company announced its improper accounting and

intention to restate its financials.

“Literally, anything that would increase the price of WorldCom stock or slow its rate of decline, such as strong reported earnings, would help relieve the intense financial pressure on Ebbers. At the same time, if WorldCom were perceived as having earnings too low to carry the massive volume of debt Ebbers had incurred in conducting scores of acquisitions, Ebbers would most likely have been financially destroyed. As has been extensively reported, Ebbers turned to his longtime associates on the WorldCom Board for help in handling his debt.”

(Richard C. Breeden, Corporate Monitor, Restoring Trust, Report to The Hon. Jed S. Rakoff, United States District Court for the Southern District of New York, on corporate governance for the Future of MCI, Inc. (August 2003)

(“Restoring Trust”), at pages 27-28.)

The false financial picture at WorldCom was motivated by Ebbers personal financial circumstances is supported by the report of the investigation of the Special Investigative Committee of the Board of Directors of WorldCom.

“Ebbers directed significant energy to building and protecting his own personal financial empire, with little attention to the risks these distractions and financial obligations placed on the Company that was making him one of the highest paid executives in the country. It was when his personal financial empire was under the greatest pressure - when he had the greatest need to keep WorldCom’s stock price up in order to avoid margin calls that he could not meet - that the largest part of the fraud occurred. And it was shortly after he left that it was discovered and disclosed.”

(Special Investigative Report of the Board of Directors of WorldCom)

“Two members of the Board, Mr. Stiles Kellett (chairman of the Compensation Committee) and Mr. Max Bobbitt (chairman of the Audit Committee) appear to have made the initial decision to use Company funds to extend Ebbers’ massive personal loans to help support his personal debt. Ultimately the program of loans and guarantees grew to more than $400 million, representing a substantial portion of WorldCom’s cash reserves and its net worth, had its balance sheet been accurately reported.

Amazingly, at least $50 million of these loans was apparently wired to Ebbers before the Board of Directors as a whole was even notified. Unfortunately when the full Board discovered what Kellett and Bobbitt had done, it ratified the loans and allowed the program to continue and grow.”

(Richard C. Breeden, Corporate Monitor, Restoring Trust, Report to The Hon. Jed S. Rakoff, United States District Court for the Southern District of New York, on corporate governance for the Future of MCI, Inc. (August 2003)

(“Restoring Trust”), at pages 27-28.)September, 2000 – WorldCom to provide financial assistance to Ebbers with an initial loan of $50million.

From October 18, 2000 to April 1, 2000 – WorldCom Compensation Committee met and discussed the Company’s financial arrangements with Ebbers 26 times, and for 13 of these meetings, Ebbers financial situation was the only topic specifically identified in the minutes.

April, 2002 – the Compensation Committee had approved numerous additional loans and guaranties for Ebbers, eventually totaling US$165 million of direct loans to Ebbers plus payments to banks under guarantees of US$235 million. All the loans and guaranties from WorldCom were consolidated into a single promissory note of US$408 million (including interest) when Ebbers’ employment with WorldCom terminated at the end of April 2002.

The Special Investigative Report of the Board of Directors of WorldCom concluded that the extension of these loans and guarantees “was a 19-month sequence of terrible decisions - badly conceived, antithetical to shareholder interests - and a major failure of corporate governance.”

End of April 2002 – Ebber resigned, after the announcement of investigation into the accounting practice by Securities and Exchange Commission in March 2002.

3. How Ebbers extract the money out?

WorldCom’s improper accounting took two principal forms: 1. The reduction of reported line costs by capitalizing such expenses 2. The exaggeration of reported revenues.

The overall objective was to hold reported line costs to approximately 42% of revenues and to continue reporting double-digit revenue growth, while actual growth rates were generally substantially lower.

As part of its international telecommunications business, WorldCom built a global network of fibre optic cables and telephone wires to transmit data and telephone calls. It also leased capacity on other companies’ network facilities to transmit its customers’ data and calls. The cost of the leasing was WorldCom’s single largest expense - categorized as “line costs” - accounting for approximately half of the Company’s total expenses.

“In 1999 and 2000, WorldCom reduced its reported line costs by approximately $3.3 billion. This was accomplished by improperly releasing “accruals”, or amounts set aside on WorldCom’s financial statements to pay anticipated bills. These accruals were supposed to reflect estimates of the costs associated with the use of lines and other facilities of outside vendors, for which WorldCom had not yet paid. “Releasing” an accrual is proper when it turns out that less is needed to pay the bills than had been anticipated. It has the effect of providing an offset against reported line costs in the period when the accrual is released. Thus, it reduces reported expenses and increases reported pre-tax income.

WorldCom manipulated the process of adjusting accruals three ways:1. Some cases accruals were released without any apparent analysis of whether the company

actually had an excess accrual in the account. Thus, reported line costs were reduced (and pre-tax income increased) without any proper basis.

2. Even when WorldCom has excess accruals, the company often did not release them in the period in which they were identified. Instead certain line cost accruals were kept as rainy day funds and released to improve reported results when managers felt this was needed.

3. WorldCom reduced reported line cost by releasing accruals that had been established for other purposes. This reduction of line cost was inappropriate because such accruals, to the extent determine to be in excess of requirements, should have been released against the relevant expense when such excess arose, not recharacterised as a reduction of line costs.

The released of accruals were directed by CFO, and Director of General Accounting.”

Comment on the Board of Directors’ decisionThe decision that was made by the Board of Directors is unethical.

- Firstly, they had approved the loan with limited information and at times, those loans were approved with discussions that lasted less than half an hour.

- No supporting documents were presented.- Sometimes discussions did not involve the Board at all. The Compensation Committee in the

company had the power to determine the “salaries, bonuses and benefits” of the officers therefore the committee approve the loans to the CEO without confirming with the Board and only asked for approval from the Boards after the loans had already been paid out.

There are also few other factors as to why Board of Directors agreed to lend him the money:

1) The mix of the Board (with knowledge and experience of business and legal issues) and most of the members of the Board are closely link to CEO (Ebbers). The directors were therefore lack of awareness on WorldCom’s issues. The close ties with Ebbers hurt their duty to be independent from the company and its management.

2) The Board was inactive and met only about four times a year, not enough for a company growing at the rate that it was. Lack of participation resulted in the lack of awareness about WorldCom’s matters.

3) The Directors were only given a small cash fee as compensation, thus an appreciation of stock was the only form of compensation available. Therefore, directors also depended on company

growth and stock appreciation for compensation, as did the employees and management. Their approvals of the acquisitions allowed WorldCom’s growth to an increase that led to a higher stock price and a large amout of compensation – conflict of interest where their goal became more focused on the growth of the stock that on what was in best interest for the company.

Meanwhile, the attitude of the Board of Directors that may have also allowed fraud to occur so easily in the WorldCom.

1. Not only did the chairman of the Compensation Committee and chairman of audit committee allow the loans to grow more than $400 million. But, also when the Board found out about these loans, they failed to take any actions and allowed the loans to carry on. Unfortunately, with WorldCom, when the Board was presented with the challenge of approving Ebbers loans, among other large acquisition decisions, it failed to take action and limit Ebbers power on the Board.

2. Indeed, Ebbers as CEO was allowed nearly imperial reign over the affairs of the Company, without the Board of Directors exercising any apparent restraint on his actions, even though he did not appear to possess the experience or training to be remotely qualified for his position.

3. Ebbers controlled the board’s agenda, the timing and the scope of board review of transactions, awards of compensation, and the structure of management. He ran the Company with iron control, and the board did not establish itself as an independent force within the Company. The Chairman of the Board did not have a defined role of substance, did not control the board’s agenda, did not run the meetings and did not act as a meaningful restraint on Ebbers.

4. The Compensation Committee of the Board seemed to spend most of its efforts finding ways to enrich Ebbers, and it certainly did not act as a serious outside watchdog against excessive payments or dangerous incentives.

5. Lack of time commitment was not the board’s worst failing. Despite having a separate Chairman of the Board and independent members, the board did not act like it was in control of the Company’s overall direction. Rather than making clear that Ebbers served at the pleasure of the board, and establishing reasonable standards of oversight and accountability, the board deferred at every turn to Ebber