Stolen Without A Gun: Confessions
from inside historys biggest
accounting fraud - the collapse of
MCI Worldcom by Neil Weinberg
If He'd Only Known...
Walter Pavlo, Jr. was a young MBA rising quickly through the finance
ranks at the nation’s second largest telecom company. With a beautiful
wife, two kids and a promising career, he epitomized the American dream.
Pavlo’s life took a dark turn when he became a willing participant in the
company’s efforts to hide from investors and potential acquirers a
mountain of bad debt run up by mobsters and other unsavory customers.
Encouraged by higher-ups, Pavlo became accomplished at accounting
gimmickry. Then the jaded young executive consorted with a colorful scam
artist and others to use some of the same ploys he’d devised for his
employer to enrich himself at its expense. A ruse born of disillusionment
and greed turned into a nightmare for Pavlo after he was caught and

forced to choose--rat on his buddies or spend decades rotting in prison.
His crimes ultimately cost Pavlo his freedom, family, reputation and self-
respect. Only later did he recognize that his original sins were part and
parcel of the corruption that led to an historic collapse for his company, his
industry and of public confidence in corporate America. With humor and
raw honesty, Pavlo and award-winning Forbes senior editor Neil Weinberg
use this compelling personal story to portray in intimate detail the
pressures millions of white-collar workers face every day.
Personal Review: Stolen Without A Gun: Confessions from
inside historys biggest accounting fraud - the collapse of MCI
Worldcom by Neil Weinberg
One of the best book ever written about the telecom bubble of the 1990s
by one insider. It shows the mechanisms that propelled a
telecommunications carrier into a world of financial fantasy and finally pure
fraud. In 1992, when a young engineer, Walter Pavlo was hired by MCI
Communications, the company was highly revered as the David who
brought down the telecommunications Goliath, AT&T. If one wanted to be
where the action was in the new world of communications, MCI was it. The
only problem was the department that had hired Pavlo: Financial Services,
i.e. accounts receivable, credit and collections. This consisted in collecting
bills from long distance carriers and 900 numbers that used MCI network.
As it happens, long distance carriers were burgeoning on the fertile left by
the AT&T break-up. Companies such as WorldCom appeared on the
market and started cutting the prices in order to gain market share, not
profits. Actually, profit was the least of their concerns. The idea was to
inflate the share value as quickly as possible and to cash in a few millions
dollars in stock option to be able to retire young and rich.
900 numbers and long distance cards was a bizarre business. Scores of
tiny companies rented a line in a slum and were offering dial-a-porn or
dating services to people too poor to afford paying their telephone bill.
Prepaid long distance card business was even fishier since cards were
sold in small ethnic grocery stores and the money was collected in cash.
The temptation was great to sell international minutes to India, say 20¢ a
minute, when the price charged by MCI to route the call was billed 80¢ a
minute. The market was humming with fly-by-nights whose only goal was
to collect as much money as they can, until the 90 days past due debts
limit after which MCI would trigger an alarm. In practice, MCI never cut off
a delinquent creditor, it would rather get him to sign a promissory note - a
legally binding promise to pay back the debt over time. Creditors would
thus buy some time and the unpaid debt would grow month after month
until it would really be worth disappearing in nature with bags of cash.
MCI was so lenient on its bad customers because the Sales Department
was eager to show increased revenues. First of all, the account
representatives bonus checks depended on the number of new customers
they could sign in every year. Some reps were rumored to be taking home
seven-figure pay checks. Then the Sales Department per se was under

intense pressure from the board of directors and Wall Street to report
earnings that would grow each quarter. The executives' bonus plan
depended as well on the share price continuing appreciation. When Walter
Pavlo first tried to warn the executives of the problems ahead, they told
him never to come back with such alarming news. "Nobody cared about
reality", commented Pavlo who was forced to invent new tricks every
month to maintain bad accounts under artificial life. Fortunately, MCI
accounting system was so antiquated that each month millions of dollars
were received that nobody could figure out where they should go. These
"vagabond payments" would wait until someone would complain and they
were properly assigned to their legitimate accounts. Waiting for that to
happen, the or "phantom money" as it was as well called, could be used to
clean up bad debt accounts. Indeed the following month, the money had to
be withdrawn, but the old bad debt would go back on the books as a new
balance that was not even due.
Of course, Pavlo was not jailed for these ploys. He was arrested and tried
because he averted money for his own purpose with the help of a
Canadian citizen called Harold Mann. They had invented a deal where a
third party would buy the bad debts to MCI and collect a hefty 36 percent
interest to its creditors. Interestingly enough the National Bank of Canada
was one of the main lenders to the factoring company that would secure
MCI with upfront money. Of course, the interest paid by the factoring
company was diverted to a Cayman Island account and MCI never
received a penny from this scam. Pavlo just had to move around a bit more
"phantom money" to bad debtors. In less than two years he had pocketed
$6 millions. Things could have lasted forever, if MCI had not decided to be
acquired by one of its most important bad debtors, WorldCom. During the
due diligence process, the scam was discovered and the company sued
Pavlo. The small crook was punished and went to jail for two years while
MCI gladly accepted the WorldCom $30 billion offer and its executives
could rip off their stock options and bonus payments for revenues that
never existed.
Interestingly enough, WorldCom CEO Bernie Ebbers explained very
clearly what happened during all these years of creative accounting and
financial fantasy in a percipient letter dated October 1, 1997 that is quoted
at length in Stolen Without A Gun (page 222):
"WorldCom and MCI share similar legacies: pioneering the introduction
of competition in the telecommunications marketplace and histories of
innovation, agility and growth. Indeed, these two companies are the
paradigm of the American entrepreneurial spirit."
Walter Pavlo and his co-author Neil Weinberg thought they wrote a book
about personal failure and work ethics or lack of ethics. Indeed, they wrote
a book that is symbolic of the whole way competition was introduced in the
telecommunications market. A well-kept industry where everyone knew
every one (there were no more than 200 carriers in the whole world and
most of them were doing business locally anyway) was confronted

overnight with thousands of payers among whom many swindlers. The
arrival of the Internet and the frenzy that accompanied it, raised
expectations beyond logic, especially among carriers that did not
understand this offspring of the computer industry. The end-result was a
giant looting spree in of the telecommunications industry that ruined the
lives of many employees and much more small investors. For once though,
justice was made and one of the top executives responsible for this mess
was punished: Bernie Ebbers is currently serving a 25-year prison term.
Bert Roberts has agreed to pay $5.5 million to settle claims by investors
who said he should have known that the company's books were falsified,
but he never went to jail.
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