Bernie Ebbers

With the breakup of AT&T, Bernard Ebbers, and several business partners see a golden opportunity to sell cheap long-distance service. Small-town businessman Murray Waldron sketches out the details of what will become LDDS (Long Distance Discount Service) at a coffee shop in Hattiesburg, Miss., and then Ebbers and some church buddies obtain a $650,000 loan from a local bank to buy a computer switch to route long distance calls. Because AT&T is under court order to lease its phone lines cheaply to start-ups, LDDS is able to offer cut rates to small businesses.

The company expands by following a strategy in which it buys up regional rivals, using LDDS stock as currency. Within 10 years, Ebbers has purchased 30 companies and LDDS sales reach nearly $1 billion. LDDS is renamed WorldCom in 1995.

At the time of their first meeting, Grubman is working as a telecom analyst for PaineWebber. He is hired by Salomon Brothers in 1994 and initiates coverage of LDDS at Salomon in May 1995, rating the stock a "buy," and upgrading it to a "strong buy" in December 1996.

During the 1990s, Grubman comes to personify a new type of Wall Street analyst -- one celebrated for his close relationship with management of the companies he covers. He advises Ebbers on WorldCom deals, and attends three WorldCom board meetings. Although Grubman tells a congressional subcommittee in 2002 that he and Ebbers were limited to a good "working relationship," reportedly Grubman boasts to investors and rival analysts of their friendship, mentioning his invitation to Ebbers' very private wedding in March 1999.

In December 1994, LDDS merges with IDB WorldCom and a few months later it announces the purchase of WilTel Network Services of Tulsa, Okla. for $2.5 billion in cash. At the LDDS annual meeting in May 1995, the company changes its name to WorldCom.

The Telecommunications Act is designed to open up the telecom industry to greater competition by allowing the regional "Baby Bells" to enter the long-distance market if they open up their local monopolies to competition. (Previous regulatory restrictions had prevented local and long-distance companies from competing against each other.)

Because of the difficulty in reconciling various technical and economic obstacles, Congress instructs Reed Hundt, then chairman of the Federal Communications Commission (FCC), to spend six months writing new rules to control the deregulation process. The Baby Bells urge Hundt to move slowly, while long-distance companies, including WorldCom, press him to act quickly in order to speed their entry into the Bells' local markets. Bernie Ebbers spends two days in June lobbying Hundt for faster deregulation.

On Aug. 8, 1996 the FCC releases a 682-page "interconnection order" which sets the rules for opening local markets. Initially, the rules are tilted against the Baby Bells' in favor of their competitors.

As old-fashioned telephone networks are being transformed into the backbone for the Internet, there is a large need for building new fiberoptics systems. Wall Street sees a potential gold mine for raising capital to finance the growth, for bringing new telecoms public, and for helping the burgeoning telecom industry finance corporate mergers, and sell corporate bonds.

Grubman, who had spent eight years working at AT&T before moving to Wall Street, concludes that following the Telecom Act and the breakup of AT&T, newer startup entrants into the telecom industry could gain market share through rapid growth and innovation. He advises companies like WorldCom to take on the industry giants by growing through mergers and acquisitions.

Read Grubman's description of his "telecom thesis."

According to a Wall Street Journal article on Feb. 29, 1996, WorldCom provided investors with returns of 57.3 percent a year over the previous 10 years. The article states: "A $100 investment in WorldCom in 1989, for instance, would be worth $1,580 by January; that, according to the company, is about 10 times the best return generated by WorldCom's primary competitors, the Big Three of long distance: AT&T Corp., MCI Communications Corp. and Sprint Corp."

In August, WorldCom purchases MFS Communications and UUNet, the major Internet carrier, in a $12 billion stock swap. The merger creates the first fully integrated local and long-distance phone company since the old Bell system. Grubman helps to arrange the deal, which brings Salomon $7.5 million in fees.

Engineered by Travelers CEO Sanford Weill, the $9 billion stock swap combines the bond-trading firm Salomon Brothers and Smith Barney, a primarily retail brokerage, into an investment bank powerhouse.

At the time, MCI -- which had been close to merging with British Telecom -- is more than three times the size of WorldCom. The takeover is the largest in history -- WorldCom pays $37 billion in stock for the deal in which MCI's long-distance assets are joined with WorldCom's local phone and Internet businesses. MCI WorldCom becomes the second largest U.S. long-distance company.

WorldCom is advised on the deal by Salomon and Jack Grubman, who is so involved that he is listed as a financial adviser on the transaction by WorldCom's board, and he also acts as a proxy solicitor among WorldCom stockholders to get them to approve the deal. Grubman attends a November meeting of WorldCom's board in order to provide comments on the industry's potential reaction to the merger. According to The Wall Street Journal, Salomon earns $32.5 million for advising WorldCom on the MCI deal.

In a brazen deal, Sanford I. Weill, chairman of the Travelers Group and John S. Reed, chairman of Citicorp, announce a merger of their giant financial empires in a $70 billion stock swap that dwarfs the WorldCom-MCI merger. The 1998 merger, which was engineered by Weill, brings together such brand names as Citibank, Travelers, Salomon Smith Barney, and Primerica. Because this deal goes beyond the limits of existing laws, Weill, joined by Reed, privately obtains temporary approval of the deal from Alan Greenspan, chairman of the Federal Reserve Board, and then helps mobilize the financial services industry to lobby Congress to repeal restrictive banking laws. Reed and Weill announce they will jointly run the new superbank, but Reed eventually resigns in early 2000 after losing a power struggle to Weill.

Read more about the politics behind the creation of Citigroup.

Former Salomon Smith Barney brokers say that during the late 1990s stock market bubble, Grubman and his team develop a strategy to win telecom banking deals by awarding favored customers, such as Bernie Ebbers, shares in hot telecom initial public offerings (IPOs), a practice known as "spinning." Grubman denies any involvement in IPO allocations. Salomon Smith Barney later tells Congress that Bernie Ebbers made $11 million through 21 Salomon Smith Barney-sponsored IPO allocations.

However, according to a lawsuit filed by former Salomon Smith Barney broker David Chacon -- and disputed by the firm -- Grubman oversaw the awarding of IPOs to favored telecom clients, and Ebbers makes $16 million in one deal alone. Chacon's lawsuit states that Ebbers received 350,000 shares in the IPO of a company called Rhythms NetConnections.

Grubman attends a WorldCom board meeting on Oct. 4, where directors decide to pursue a merger with Sprint. If WorldCom had completed the $115 billion deal, which would have joined the second- and third-largest long-distance carriers, it would have been the largest merger in history. The merger is met with immediate skepticism by European regulators, who oppose it, influencing U.S. federal regulators, including Joel I. Klein at the Justice Department's antitrust division, and Bill Kennard at the FCC.

In June 2000, both U.S. and European regulators announce intentions to block the deal. The U.S. Justice Department argues that the merger would limit competition in the long-distance market, while European Union regulators say it would place too much of the Internet under one company. The plans for the merger are finally called off on July 13, 2000.

In the fall of 1999, Grubman upgrades AT&T from a "neutral" to a "buy" rating after months of pressure to "take a fresh look" from Citigroup CEO Sandy Weill, a member of AT&T's board of directors. Grubman, who thought AT&T was too sluggish and mired down by old methods and technologies, had long been bearish about his former employer. A subsequent investigation by New York State Attorney General Eliot Spitzer uncovers several conflicts of interest surrounding Grubman's upgrade that are not disclosed to investors at the time.

Spitzer's team unearths a November 1999 memo that Grubman had written to Weill in which he asks for Weill's assistance in gaining admission for his children into the 92nd Street Y's exclusive preschool. After the AT&T upgrade and after Grubman's children are admitted to the school, Weill arranges for Citigroup to provide a $1 million donation to the 92nd Street Y.

Grubman later tells a social friend in an e-mail that he had upgraded AT&T's stock to get his kids into the school and so Weill could secure AT&T CEO Michael Armstrong's support in his power struggle with Citigroup co-CEO John Reed, who resigns after losing a power struggle with Weill in early 2000. Weill denies giving Grubman a direct order to upgrade AT&T, and he is ultimately cleared of this charge by Spitzer's investigation. Weill maintains that the reason driving his request is his firm belief in the value of AT&T, of whose board of directors he was a member at the time. Grubman disavows the e-mail when it becomes public and says he had written it to impress a colleague.

However, a second conflict of interest uncovered by Spitzer's team involves AT&T's spinoff of its wireless division, that the company prepared in the late fall of 1999. The offering becomes the largest IPO in history, and in February 2000, Salomon is named as one of the lead underwriters. The brokerage earns $63 million in fees from the offering. Critics argue that Grubman's upgrade entails a quid pro quo for Salomon to win AT&T's banking business -- a charge that Grubman denies.

Joshua Timberlands, a company controlled by Bernie Ebbers, receives a $499 million loan, which is later folded into $1 billion mortgage from Citigroup's Travelers unit for the purchase of half a million acres of timberland in Mississippi, Alabama and Tennessee. By taking a loan instead of selling stock, Ebbers is able to convert his WorldCom wealth into hard assets.

The timberlands are just one part of Ebbers' developing private business empire, which eventually includes luxury yachts, a boat-building company, and a lumber mill. Ebbers also takes out a separate $43 million loan to finance the purchase of a 500,000-acre ranch -- the largest ranch in Canada. This loan, attorneys say, is financed by Citibank and also backed by Ebbers' WorldCom stock.

Attorneys for pension funds which have sued Citigroup and other banks, seeking to recover heavy losses on WorldCom, argue that Citigroup should have disclosed to investors that Citibank had an interest in keeping the price of WorldCom stock inflated in order to cover the loan. They also protest that investors were not informed that Travelers, owned by Citigroup, actually became a business partner of Ebbers through Joshua Timberlands.

At an annual Salomon Smith Barney conference for major telecom investors, former Treasury Secretary Robert Rubin, recently hired as Sandy Weill's chief lieutenant at Citigroup, gives a sobering speech to counter what he calls "excesses and imbalances that may pose real risk to our economic well-being," -- excessive optimism in the stock market. Rubin cautions that stocks are highly overvalued, cites a perilous "tendency of lenders to forego discipline in credit extensions," and warns of the dangers of discounting the risks in new technologies. Drawing parallels to similar optimism before the 1929 stock market crash, Rubin quotes the philosopher George Santayana that "those who forget history are condemned to relive it."

Telecom analyst Susan Kalla, who heard the speech, tells FRONTLINE that she was so alarmed that she sold all her telecom stocks within a few days. Dan Hesse, former CEO of AT&T Wireless, who heard Rubin tell the head table that he was "out of the market himself," says he regrets not following Rubin's advice. But when Kalla asks Jack Grubman his reaction to Rubin's speech, Grubman brushes off Rubin's statements. Kalla says Grubman told her, "Stocks go up, stocks go down. Doesn't matter."

Eliot Spitzer, New York State's attorney general, begins his investigation of Wall Street stock research analysts, his interest triggered by stockholder complaints and efforts to recover stock losses through arbitration. Spitzer's investigation begins with a focus on Merrill Lynch and its well-known stock analyst Henry Blodget.

According to government indictments, Scott Sullivan, WorldCom's CFO, begins the process of misallocating as capital expenditure what should have been normal expenses, thus turning profits into losses for 2001 and the first quarter of 2002. The accounting tricks -- which ultimately total $9 billion -- are not discovered by internal auditor Cynthia Cooper until June 2002.

Desperate for cash and with its stock price tumbling, WorldCom floats two bond offerings in May 2001 and May 2002 that total $17 billion. Despite a glut in telecom capacity, plummeting phone prices and Robert Rubin's personal call for greater discipline in credit extension, Citigroup's Salomon Smith Barney leads two banking syndicates that market the WorldCom bonds to public investors. Attorneys for pension funds that invested in the WorldCom bonds contend that in sponsoring the bond offerings, Citigroup is limiting its own exposure through loans or open lines of credit offered to WorldCom -- a fact not disclosed to shareholders. With its prices falling sharply, analyst Jack Grubman tells investors that WorldCom stock has become an incredible bargain. Citigroup now faces multiple shareholder lawsuits as a result of the WorldCom bond offering and Grubman's advice to shareholders.

After finding conflicts between the public stock recommendations and private e-mail comments by Merrill Lynch analyst Henry Blodget, Spitzer decides to broaden his investigation of stock market analysts to a dozen investment banks. The overall investigation grows to involve the Securities and Exchange Commission (SEC), the New York Stock Exchange (NYSE), the National Association of Securities Dealers (NASD), the North American Securities Administrators Association (NASAA), and market regulators in 10 states. The various regulators divide up the investigation and Spitzer's team chooses to look into Morgan Stanley Dean Witter and Salomon Smith Barney -- and in particular, SSB analyst Jack Grubman.

On April 22 -- after the stock had fallen 94 percent from its June 1999 peak -- Grubman downgrades his rating on WorldCom from a "buy" to a "neutral." He never puts a "sell" rating on the stock before it is de-listed.

With the SEC investigating WorldCom's accounting practices, and having lost support from WorldCom's board of directors, Ebbers resigns as CEO. A major factor in his resignation is the $366 million in personal loans he had been granted by the company to cover private investments -- loans backed by WorldCom stock. According to The Wall Street Journal, when WorldCom granted Ebbers the loans, its stock had been trading around $24, but by the time of his resignation it is valued at less than $3 per share.

On June 25, WorldCom admits that it had inflated its earnings by $3.8 billion -- the largest accounting fraud in history. WorldCom CFO Scott Sullivan is fired and arrested two months later on charges of securities fraud, conspiracy and filing false statements with the Securities and Exchange Commission (SEC). In August and again in November, WorldCom revises its financial statements, raising the total amount discovered from improper accounting procedures to $9 billion. WorldCom files for bankruptcy in July.

When questioned by Congress in July, Grubman maintains that he saw no red flags in WorldCom's accounting procedures. However, he does not disclose to Congress that a few weeks earlier he had written e-mails coaching Bernie Ebbers on what to tell Wall Street analysts about WorldCom's finances. One such e-mail notes: "integrity of accounting -- big issue. Investors worry that some bombshell will come out." When Ebbers briefs stock analysts a few days later, he follows Grubman's script.

Under fire from investors who lost an estimated $2 trillion in telecom stocks, and sharply criticized by scores of Salomon Smith Barney stockbrokers who had advised customers based on his research, Grubman leaves Salomon Smith Barney by "mutual agreement." He receives a severance package worth $30 million, and Salomon agrees to cover his legal bills. The severance includes a $200,000 per year retainer to keep Grubman available to Citigroup and Salomon to help with their defense against lawsuits and government charges.

Eager to get the scandals and Spitzer's investigation behind them, Citigroup and nine other Wall Street banks strike a deal with the regulators in which the banks agree to pay $1.4 billion and Spitzer agrees not to pursue criminal prosecutions. The banks also say they will stop the practice of "spinning" -- IPO allocations to corporate executives in hopes of winning future business -- and promise to insulate research analysts from investment banking.

Spitzer's investigation clears Sandy Weill of any criminal wrongdoing. Grubman is also promised that he will not face criminal charges from Spitzer. But he agrees to a lifetime ban from the securities industry and payment of a $15 million fine.

A final settlement is announced on April 28. Among the new provisions is the revelation that Sandy Weill is personally prohibited from talking to Citigroup analysts about their research outside of the presence of company lawyers.