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Names may change, but telco battles still rage on
By Rob Reuteman, Business Editor
Rocky Mountain News
Sunday, September 24, 2006

It seems so very long ago, that March day in 2001 in Aspen's Hotel Jerome.  Gov. Bill Owens was conducting a winter retreat for his Science and Technology Commission, which sported a roster of anyone who was anyone in Colorado's tech sector.  Looking back, we know the Internet bubble already had burst, but at the time we were still in denial.  Marc Holtzmann was flying high as Owens' secretary of technology, orchestrating the annual meeting of the minds that sought to plot Colorado's next smart moves.  The CEOs of many now-defunct tech companies shuffled through the lunch buffet line, taking a break between panels and speakers and breakout groups.

Quite a few of them are still around, reincarnated in new strains of telecommunication.  Many are long gone.  A few, such as Mac Slingerlend at Ciber and Jon Nordmark at eBags, made it through intact.

I was sitting with Doug Hanson, CEO of Qwest before Joe Nacchio and then CEO of Internet Commerce and Communications, an e-commerce company headquartered in the Denver Tech Center.

A big man with a ruddy complexion, gray beard and a shock of gray hair leaned down to me and asked if the seat on my right was taken.  I gestured for him to take it, and he grasped my right hand in a near-death grip as he sat down with a plate of food.

"Bernie Ebbers," he said.

I was reminded again of that eventful lunch when I read the other day that Ebbers reports to federal prison Monday.  He'll begin serving a 25-year sentence for his part in the $11 billion accounting fraud that drove his long-distance phone company, WorldCom, into bankruptcy in 2002 -- the largest in American history.

It turned out Hanson and Ebbers were old friends, and I sat between them for the next half-hour as they traded anecdotes about the good old days in Washington, D.C., hand-delivering late-night pizzas to the congressional subcommittees writing the legislation to be known as the Telecommunications Act of 1996.

Both men were prominent members of the Competitive Telecommunications Association -- Comptel -- whose 150 member phone companies squared off against the Baby Bells to resell local and long-distance service on existing networks.  Ebbers had been chairman of the group from 1993 to 1995, and Hanson -- a board member through most of the '90s -- was chairman in 1999-2001.

Ebbers joked often and laughed easily, a welcome addition to any meal.  Eventually, he rose from the table to take the podium as keynote speaker, still railing against the regional Bells -- in particular Qwest, whose execs were scattered throughout the room.  Five years after federal legislation ostensibly deregulated the telecommunications industry, he said, the Bells continued to drag their feet and prevent profitable reuse of their phone lines.

"We may be headed into a train wreck that will re-monopolize the industry, with the Bells in control," Ebbers said that day.  That's exactly what happened, of course, though not necessarily for the reasons Ebbers decried.

"Bernie was important in doing it," Hanson recalled this week of the mid-'90s fight, "to ensure smaller providers would get access to the Bell networks for a fair price."

"Those networks had been paid for by the public in the utility rates they were charged," said Hanson, who was in Denver this week on business from his semi-retirement home in the California desert.

While Ebbers was chairman, "We reached consensus in the Bells-vs.-Comptel fight, in a way that we could survive and the regional Bells weren't hurt too much.  We were burning the candles until late at night.  There'd be committees writing sections of legislation.  They'd send it to us, ask what we thought;  we'd send it back with suggestions.  It was a constant battle, and Bernie was right there fighting.  But as soon as the '96 act passed, the Bells started filing suits to prevent them doing what they'd agreed to do.  Now you have AT&T and Verizon re-creating what the Bells once had."

Hanson also recalled Ebbers, in private conversation later that day in Aspen, "telling me the regulators were after him.  I didn't want to pry.  I knew it was tough out there."

In fact, less than a month later, Ebbers famously reassured concerned analysts, "We do not see any storms on the horizon."

He was to resign under fire a year later, a few months before WorldCom -- then the country's No. 2 long-distance provider -- filed for bankruptcy.

Ebbers was indicted in March 2004 on federal charges of securities fraud.  The indictment read in part that Ebbers made "untrue statements of material fact" and omissions that defrauded buyers and sellers of WorldCom's stock.

Investors lost tens of billions of dollars as WorldCom's market cap shrank from the high-flying days of phantom growth, and Ebbers was running the show while that happened.  During his trial last year, statements like "I didn't have anything to apologize for" and "I don't know technology and engineering.  I don't know accounting" failed to sway jurors.  They found that the company used fraudulent accounting methods to hide declining profits, creating the false impression of growth that supported an inflated stock price.

A New York Times report said Ebbers' conviction "may be an indication that juries are not easily convinced by claims from executives . . . that they were unaware of securities and accounting crimes committed on their watch."

Since that time, the convictions of Enron execs Jeff Skilling and Ken Lay underscore that notion.

Ebbers, 65, was sentenced to 25 years in prison last year, lost an appeal and was ordered to report to jail Monday.

"I couldn't believe it," Hanson said.  "It's a death sentence."

"There's no question he's guilty," Hanson said.  "But is he a bad person?  No.  There are people a lot more malicious, calculated and deliberate in what they were doing who were never touched.  I'm not saying he's innocent.  He's the type of person who had to know what was going on, if not to a total extent.  He got caught up in the moment."

Hanson, who left Qwest in 1996 before it went public, has imagined what happened to his old friend:  "He was buying revenue for his own by acquiring other companies. He ended up buying some 60 phone companies.  As you buy these phone companies, everyone overstates their revenues.  You send your due diligence team in, but it was impossible to get down to real numbers.  Everyone was running so fast, pushing so hard -- there was no way to avoid a 15 percent to 50 percent wiggle room in those revenues.  In the end, Bernie bought all these companies with overstated revenues.  Sometime after the MCI acquisition in 1998, somebody woke up and said 'Oh sh--!  We've been reporting all this revenue, and we don't have it.'  If you restate revenue, the stock will collapse altogether, so Bernie leveraged his company and himself personally until it all came down."

WorldCom's stock price was so high at one point, it was able to acquire the much-larger MCI mostly through a stock swap.  But when WorldCom emerged from bankruptcy in 2004, it wisely took back the unsullied MCI name before being devoured by Verizon after a duel with Qwest.

The names change, the industry consolidates, and the regulators run to keep up.

"Bernie got caught up in the bubble and it burst for him," Hanson said.  "It's sad.  A lot of people suffered as a result of his decisions.  They took everything from him financially.  But is 25 years the right sentence?  Killers serve less.  It seems like five, seven, 10 years might be more appropriate.  The justice system seems a little skewed."

Business editor Rob Reuteman can be reached at 303-954-5177 or reutemanr@RockyMountainNews.com

About Rob Reuteman
Rob Reuteman has been business editor of the Rocky Mountain News since 1997.  He is serving a second term on the board of governors for the Society of American Business Editors and Writers.  He has been an editor at the News since 1983, working previously as city editor, national editor and state/regional editor.


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