The other victims of Bernie Ebbers's fraud
By Geoffrey Colvin

(FORTUNE Magazine) – DOES BERNIE EBBERS DESERVE TO SPEND THE REST OF his life in prison? You decide. But first, consider the full extent to which history's greatest financial fraud affected lives--it's far greater than most of us realize. In fact, Bernie is still costing people money.

Unless his long-shot appeal succeeds, WorldCom's former high-living CEO will serve 25 years in a federal prison without the possibility of parole (though he could get about four years off for good behavior). He's 63, so Jay Leno's joke from 2002--about Ebbers spending his retirement years in a gated community of a different kind--looks prophetic. Just for the record, Ebbers insists that underlings committed an $11 billion fraud without his knowing a thing about it. Right, said the jury.

Sympathy has focused on the thousands of WorldCom employees who lost not only jobs and medical insurance but also 401(k) accounts invested heavily in company stock. Next in line for sympathy come the company's shareholders, including many pension funds, which lost billions. But the truth is, the universe of folks who got whacked by the fraud is far larger.

Suppose your firm had been competing against WorldCom between 1999 and 2002. Lots of companies were, primarily AT&T but also Global Crossing, Qwest, Sprint, and a bunch of smaller players. WorldCom was lying about its expenses, but you didn't know it. All you knew was that the company seemed to be incredibly efficient, consistently making money while underpricing you. It was and is a brutally competitive business, so you absolutely had to match WorldCom's efficiencies.

How? By firing people, for starters. AT&T fired tens of thousands in the late 1990s as it tried frantically to match WorldCom's infuriatingly low costs. Of course, those employees didn't need to be fired (at least not then), but it was too late for them once the fraud was revealed.

Other telecom players did the same thing, and some did more. Qwest wound up committing accounting fraud, and Global Crossing was under investigation and ended up declaring bankruptcy, its value going to zero. Those companies had plenty of their own problems, but the relentless pressure to match a major competitor--which couldn't be legitimately matched--undoubtedly made matters worse.

That's some of the damage the fraud caused while WorldCom was flying high. Much more followed once the fraud was revealed and WorldCom filed for bankruptcy. Many suppliers immediately stopped getting paid, which was bad for all and terrible for some--local carriers were no longer being paid to complete WorldCom calls, yet it was illegal for those carriers not to complete them. For equipment vendors and every other kind of supplier to a company with $35 billion of revenues, the result was more fired people and more clobbered shareholders.

But the effects of the fraud still weren't complete, for WorldCom was eventually allowed to emerge from bankruptcy--and what sounds like good news actually caused still more problems. In the alchemy of modern corporate bankruptcy, when a failed company is allowed to reorganize rather than liquidate, it remains largely whole while most of its debts disappear. In WorldCom's case the effect was especially dramatic. Before bankruptcy, it labored under a truly mammoth debt of $41 billion. After bankruptcy, all but $5.5 billion magically vaporized. Yet the company retained most of the assets it had bought with all that borrowed money.

You think competing with a fraudulent WorldCom was tough? Now try competing with a totally legal WorldCom largely freed of its debt burden. Prebankruptcy, the stock declined to nothing and was delisted; post-bankruptcy, it reopened at $23 a share. If you're AT&T, BellSouth, SBC, Sprint, or Verizon, you're loaded up with at least triple WorldCom's debt, and all because you were a Boy Scout during the great telecom bacchanal and managed to stay solvent.

WorldCom, now known as MCI, will soon disappear as an independent firm when Verizon buys it. But it permanently, violently reshaped its industry, and its low-capital cost advantage will live on to the benefit of its new owner and the bedevilment of its competitors.

As for Bernie Ebbers, he'll disappear too, behind prison walls, probably for the rest of his days. But he needn't wonder if he'll be remembered. Millions of shareholders, suppliers, and former employees--of his own firm and many others --will never forget him.