tJNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF MISSISSIPPI JACKSON DIVISION

N, RE MCI WORLDCOM, INC. ) Case No . 3:000VS33BN SECURITIES LITIGATION

CONSO L IDATED AMENDED CLASS ACTION COMPLAINT

Lead Plaintiffs, by and through their attorneys , allege the following upon the investigation of counsel, except as to those allegations concerning plaintiffs, which are alleged upon personal knowledge, upon, the investigation of their attorneys, including without limitation:

(a) review and analysis of public filings made by WorldCom Corporation', ("WorldCom" or the

"Company"), with the Securities and Exchange Commission (the "SEC"); (b) review and analysis of securities analysts ' reports concerning WorldCom ; (c) review and analysis of press releases and other publications disseminated by defendants; (d) other publicly available information about WorldCom; (c) consultations with experts, including accountants : and (f)

:ontact with factual sources, including former WorldCom employees who were employed in several departments including: accounts receivable, customer service, sales, credit, engineering, switch planning and analysis.'

On May 7, 2000, the Company , previously known as "MCI WorldCom" changed its name to ' WorldCorn."

For the convenience of the Court, an Index to the allegations included herein is attached at Tab 1. MATURE OF THEACTION

1. , This is a class action on behalf of a class (the "Class") of all persons who purchased or otherwise acquired the securities of WorldCorn Corporation between February 10,

2000 and November 1, 2000 (the "Class Period), seeking to pursue remedies under the Securities

Exchange Act of 1934 (" 1934 Act")

2. During the Class Period, defendants, including WoridCom, its Chief Executive

Officer, Bernard Ebbers and its Chief Financial Officer, Scott Sullivan, issued a series of false

statements to the investing public. During the Class Period, WorldCom reported seemingly

unstoppable growth in revenue and profitability despite unprecedented competition in the

telecommunications industry, transforming WorldCom into the second largest long-distance

carrier in the United States, second only to industry giant AT&T. Indeed, WorldCom, headed by

Ebbers and Sullivan, acquired billions of dollars worth of companies in the span of a few years -

- including the then largest merger ever, the 1998 MCI merger. Throughout the Class Period,

defendants represented that the massive MCI merger was an enormous success - contributing

heavily to synergies, revenues and growth.

3. As defendants knew, due to industry -wide pressure , there was simply no way to

continue the significant revenue and earnings growth the market had come to demand from

WorldCom absent further consolidation . To that end, Ebbers in October, 1999 announced

WorldCom' s largest merger ever, a deal to merge with number three in the industry, Sprint

Telecommunications . The Sprint Merger was crucial to WorldCom for several reasons : (1) due

to increased competition , WorldCom' s revenue growth was slowing dramatically due to regular

- 2 - forced contract renegotiations as a result of lower prices for long-distance and telecommunications services; (2) WorldCom' s account receivable situation was out of control, with hundreds of millions of receivables going uncollected but remaining on its books for long periods of time ; and (3) WorldCom did not have a significant presence in the wireless business, and needed Sprint's wireless division to allow the Company to compete with major telecommunications providers such as AT&T who did have wireless operations . The Sprint

Merger would not only provide a conduit of increased revenue by which defendants could mask

WorldCom 's deteriorating financial condition , but also provided a means to hide the enormous amount of uncollectible accounts receivables through integration-related charges.

4. Throughout 1999 and the first two quarters of 2000, the Company reported strong sales and growth. and became an investor favorite, reaching $62 per share in late 1999.

WorldCom was followed by numerous analysts who favorably commented on the Company and its potential, especially in light of the highly anticipated Sprint Merger. Behind the positive numbers, however, there were significant problems growing at WorldCom which threatened the

Company' s ability to compete.

According to numerous former employees , the Company resorted to a myriad of improper revenue recognition and sales practices in order to report favorable financial results in line with analysts ' estimates despite the significant, and worsening financial decline WorldCom was then experiencing . Defendants' fraud involved : ( a) failing to take necessary write-offs in order to avoid a charge to earnings (g158-72); (b) intentionally misrepresenting rates to customers (11174-81); (c) switching customers' long distance service to WoridCom without

- 3 - customer approval ('x'¶82-83); (d) recognizing revenue trom accounts which had been canceled

by customers (¶¶84-87); (e) "double-billing" (1,J91-92); (0 back-dating contracts to recognize

additional revenue at the end of a fiscal quarter (197); (g) failing to properly account for contracts

which had been renegotiated or discounted (¶¶93-96, 98-99); and (h) deliberately understating

expenses . (41188-90 ), Further, despite defendants ' frequent statements regarding WorldCom's

increased network expansion capabilities, the Company was experiencing substantial difficulties

performing " build-outs ", or network expansions , a failure which limited the Company' s growth.

6. In addition, the number of uncollectible receivables skyrocketed during the Class

Period, in part because those receivables represented phony sales that never should have been

booked. and in part because defendants allowed over half a billion of worthless accounts

receivable to remain on WorldCom's books in order to delay a charge against earnings required

by Generally Accepted Accounting Principles ("GAAP"). Defendants knew about the increasing

amount of uncollectible accounts by virtue ofa monthly written report which detailed all

accounts deemed uncollectible by virtue ofprolonged litigation, bankruptcy or other

circumstances. Indeed, defendants received detailed monthly packages regarding accounts

receivables and their status, which included lengthy case histories, litigation summanes, a

description of the most recent action taken by the Legal Department , and updates . Ebbers

` himself received these reports because he was the individual at WorldCom responsible for

authorizing writeoffs in excess of $25 million - - accounts for which his express approval was

' Network expansion refers to the laying down of additional cable to increase calling or data capacity, and to provide additional or new service to specific areas.

- 4 - r q u: r°ed.

Defendants implicitly encouraged the widespread improper revenue recognition tactics employed by WorldCom employees , as well as the failures to properly reserve for and account for uncoilectible accounts, for several reasons. First, defendants were desperate to complete the Sprint Merger. As defendants knew, Sprint shareholders were scheduled to vote on the pending merger on April 28, 2000, and it was essential that WorldCorn appear to be a financially strong company in order for the vote to pass. Therefore, defendants reported phenomenal financial results for the first quarter on April 27, 2000 - one day before the Sprint shareholder vote on the merger.

Once Sprint and WorldCom shareholders approved the Merger, defendants kept up their barrage of false statements to avoid attracting negative attention while federal regulators considered the deal, and to ensure the deal was completed on the most favorable terms possible.

Defendants intended to use WorldCom stock as 'currency to merge with Sprint, and the higher the price of WorldCom stock, the cheaper the purchase. It was also crucial to inflate the price of

WorldCom stock in order to complete public offerings of debt in May and June, 2000 -for nearly $6 billion - to be used as to pay existing debt and free up additional borrowing capacity in order to pay for the costs of integrating Sprint.

9. Defendant also had personal reasons to misrepresent WorldCom's financial results. If the Sprint Merger was completed, Ebbers felt the stock would "go through the roof'and he stood to gain hundreds of millions of dollars in profits as a result of his considerable

WorldCom holdings, including soon-to -vest stock options . Ebbers was also strongly motivated

- 5 - to inflate WorldCom's stock price to avoid a forced sale of his stock which he bought through a loan years before. In fact , in order to meet margin calls when the price of WorldCom stock declined, Ebbers regularly received multi-million dollar personal loans from the Company at the expense of WorldCom shareholders. Similarly, Sullivan, keenly aware of the Company's accounting fraud because of his position as the Company's top financial officer, divested himself of nearly $10 million worth of WorldCom stock on August 1, 2000. John Sidgemore, the

Company's Chief Technology Officer and a WorldCom Director, aware of the lack of new products being produced by the Company, sold over S 12 million worth of WorldCom stock in

May, 2000.

10. On July 13 , 2000, defendants were forced to reveal that the Sprint Merger had been rejected by federal regulators. As a result, defendants scrambled to put together another deal which could conceal the problems at WorldCom. On September 5, 2000, defendants announced an intent to merge with Intermedia Communications, Inc. ("Intetmedia") an Internet- services company which included its subsidiary, Digex, a company that manages web sites for business. This acquisition too would be completed using WorldCom stock as currency, so it was essential for the stock price to remain artificially inflated to complete the deal on favorable terms.

11. The Intermedia deal, however, ran into unexpected hurdles and delays, and was the subject of lawsuits filed in Delaware Chancery Court by Digex shareholders, seeking to block the deal, and alleging the deal was financially unfair to Digex shareholders given WorldCom's worsening financial condition . As a result of the focusing of a spotlight on WorldCom's true financial status, defendants could no longer hide WorldCom 's problems . On October 26, 2000, defendants revealed that the Company was forced to write down $405 million of uncollectible receivables due to bankruptcies of certain wholesale customers. The $405 million was stated in

- 6 - after-tax terms to deflect attention from the even higher whopping pre-tax write otTof 5685 million. The stock dropped from over $ 25 to slightly over $21 on October 26, 2000, on trading volumes of nearly 70 million shares.

12. On November 1, X000, defendants dropped the other shoe, announcing a massive restructuring which would create a separate tracking stock for MCI - - a concession that the integration of MCI and WorldCom had not worked and was not profitable for investors.

Defendants also revealed that the Company had been experiencing dramatic declines in growth and profitability. Fourth quarter 2000 earnings would be between $0.34 and $0.37 share - afar cryfrom the $0.49 analysts and investors effected, and which defendants said was an estimate they were comfortable with 'from top to bottom. " In addition, rather than earning $2.13 per share in 2001, defendants expected only between $1.55 and $1.65. The stock dropped over 20% in one day in response. sinking to a new 52 week low of $18.63 on November 1, 2000.

13. During a November 1, 2000 conference call, Defendant Ebbers revealed that he had "let investors down." He also admitted that, contrary to his repeated Class Period statements detailing the Company's successful acquisition strategy which included purchasing billions of dollars worth of assets from telecommunications and Internet companies, some of the acquired assets "should have been disposed of sooner."

14. WorldCom stock has never recovered, and traded at slightly over 518 per share in

May, 2001. As a result, WorldCom investors who purchased securities during the Class Period, have lost billions. The following chart indicates the impact of defendanits' false statements on the market for WorldCom securities:

- 7 - IMPACT OF DEFEN CANTS' FRAUD ON W RLDCOM STOCK

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APRIL 27. 2000 JULY 27. 2(X)0 AUGUST 1, 2000 OCT 26 - NOV I .:UW

Class Period begins- Defendants report Defendants falsely Defendant Sullivan Defendants reveal improved profitability report a "strong" sec- sells $9 .9 million declining growth and Defendants announce one day before the ond quarter worth of stock. issuance of MCI dramatic revenue Sprint shareholders tracking stock. growth and success vote on the proposed of MCI merger merger STOCK DROPS TO S2 WEEK LOW. JURISDICTION ND VENUE

15. Lead Plaintiffs bring this action pursuant to the 1934 Act as amended (15 U.S.C.

§§ 78j(b) and 78t(a)) 10(b) and Rule lOb-5 promulgated thereunder (17 C.F.R. § 240.1Ob-5).

16. This Court has jurisdiction over the subject matter of this action pursuant to § 27

- of the 1934 Act (15 U.S.C. § 78aa) and 28 U.S.C. § 1331.

17. Venue is proper in this District pursuant to § 27 of the 1934 Act, 15 U.S.C. § 7Saa

and 28 U.S.C. § 1391(b). Defendant WorldCom is headquartered in this District, and many of

the acts and transactions giving rise to the violations of law complained of herein, including the

preparation and dissemination to the investing public of false and misleading information,

- 8 - Occurred in this District.

18. In connection with the acts, conduct and other wrongs complained of herein, the

defendants used the means and instrumentalities of interstate commerce.

THE PARTIES

19. Lead Plaintiffs purchased WorldCom common stock during the Class Period, as

set forth in their certifications accompanying the Affidavit of Kenneth J. Vianale In Support of

Plaintiffs' Motion for Appointment as Lead Plaintiffs filed on January 8, 2001, and have suffered

substantial damages as a result of the wrongful acts of defendants as alleged herein.

20. Defendant WorldCom maintains its principal executive offices located at 500

Clinton Center Drive, Clinton. Mississippi. WorldCorn provides a broad range of

communications , outsourcing, and managed network services to both U.S. and non-U.S.

based corporations . WorldCom is a global communications company utilizing a facilities-based,

on-net strategy throughout the world. The Company' s core business is communications seances,

which includes voice, data, Internet and international services.

21. The Individual Defendants, at all times relevant to this action, served in the

capacities listed below and received substantial compensation:

Name Position

Bernard J. Ebbers Director, President and Chief Executive Officer

Scott D. Sullivan Director and Chief Financial Officer

22. By reason of their management positions , and membership on WorldCom's Board

of Directors, and their ability to make public statements on behalf of WorldCom, the Individual

4 - 9 - Defendants were and are controlling persons, and had the power and influence to cause (and did cause) WorldCom to engage in the unlawful conduct complained of herein.

23. Throughout the Class Period, defendants exercised significant control over the

Company's accounting and operational policies. Indeed, Ebbers refused to hire a Chief

Operating Officer, as he prefers to "oversee the business himself without much high-level help", according to a January 22, 2001 Fortune article entitled "Can Bernie Bounce Back?". Ebbers was a "hands-on" manager, who did not trust others easily, and was closely involved in the day- to-day operations at WorldCom. Id. Ebbers' closest associate , and right- hand man, was Scott

Sullivan, " who shares his zeal for dealmaking and standout income statements ." Id. Both defendants were integrally involved in the Company' s decision making.

24. The Individual Defendants, because of their positions with WorldCom, controlled the contents of quarterly and annual reports, press releases and presentations to securities analysts. Each Individual Defendant was provided with copies of the reports and press releases alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. Because of their positions and access to material non-public information such as monthly reports detailing uncollectible accounts, each of these defendants knew that the adverse facts specified herein had not been disclosed to and were being concealed from the public and that the positive representations which were being made were then false and misleading . As a result, each of the Individual

Defendants is responsible for the accuracy of WorldCom's corporate releases detailed herein as

"group-published" information and is therefore responsible and liable for the representations

- 10 - containea therein.

25. Each of the defendants is liable as a primary violator in making false and misleading statements, and for participating in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of WorldCom stock during the Class Period.

CLASS ACTION ALLEGATIONS

26. Lead Plaintiffs bring this action as a class action pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of a class (the "Class") consisting of all persons who purchased the common stock of WorldCom between February 10, 2000 and November 1,

2000, inclusive ( the "Class Period"). Excluded from the Class are the defendants herein, members of each Individual Defendant's immediate family, any entity in which any defendant has a controlling interest , and the legal affiliates, representatives , heirs, controlling persons, successors, and predecessors in interest or assigns of any such excluded party.

27. Because WorldCom has millions of shares of common stock outstanding, and because the Company's common stock was actively traded, members of the Class are so numerous that joinder of all members is impracticable . As of March 30, 2000, WorldCom had over 132 million shares outstanding. While the exact number of Class members can only be determined by appropriate discovery, plaintiff believes that Class members number at least in the thousands and that they are geographically dispersed.

28, Plaintiffs' claims are typical of the claims of the members of the Class, because plaintiff and all of the Class members sustained damages arising out of defendants' wrongful conduct complained of herein.

- 11 - 9. Plaintiffs will fairly and adequately protect the interests of the Class members and have retained counsel who are experienced and competent in class and securities ittigation.

Plaintiff have no interests that are contrary to or in conflict with the members of the Class plaintiff seeks to represent.

30. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy, since joinder of all members is impracticable . Furthermore, as the damages suffered by individual members of the Class may be relatively small, the expense and burden of individual litigation make it impossible for the members of the Class individually to redress the wrongs done to them. There will be no difficulty in the management of this action as a class action.

31. Questions of law and fact common to the members of the Class predominate over any questions that may affect only individual members, in that defendants have acted on grounds generally applicable to the entire Class. Among the questions of law and fact common to the

Class are:

(a) whether the federal securities laws were violated by defendants' acts as alleged herein;

(b) whether the Company's publicly disseminated releases and statements during the Class Period omitted and/or misrepresented material facts and whether defendants breached any duty to convey material facts or to correct material facts previously disseminated:

(c) whether defendants participated in and pursued the fraudulent scheme or course of business complained of,

- 12 - S

(d) whether the defendants acted willfully, with knowledge or recklessly, in orrurting and/or misrepresenting matenai facts;

(e) whether the market prices of WorldCom common stock during the Class

period were artificially inflated due to the material nondisclosures and/or misrepresentations complained of herein; and

(1) whether the members of the Class have sustained damages and, if so, what

is the appropriate measure of damages.

SUBSTANTIVE ALLEGATIONS

Historical Background : The Company Faces Increased Pressure Due to Unprecedented Industry Competition

32. WorldCom is a global communications company organized in 1983, providing a

broad range of communications services, from Internet to outsourcing and managed network

services . The Company' s core business is communications services, which includes voice, data,

Internet and international communications services . The Company operates in eight reportable

segments: Commercial voice and data, Internet, International operations, Embratel Participacoes

S A. (""Embratel"), Wholesale , Consumer, Operations and technology and "Other". (See,

Quarterly Report on Farm I O-Q, dated August 14, 2000).

33. According to a former Dallas-based Senior Manager in the Credit, Risk and

Receivables Center, the WorldCom sales organization&l structure is organized into: a) wholesale

accounts; b) telecommunications accounts; c) global accounts (including accounts in excess of

Eve million dollars); d) national accounts (ranging between fifty thousand dollars and five

million dollars monthly); and e) major accounts (up to S100,000 monthly). During the last three

- L3 - years. more than 90% of the Company's operating revenues were derived from communications services.

34. For most of the twentieth century, the provision of long-distance services and

many other telecommunications services in the U.S. was monopolized by AT&T. In the 70's,

this monopoly was challenged by new entrants, changes in federal regulations designed to

promote competition and by the U. S. Government's successful antitrust case challenging AT&T's

monopoly, leading to its breakup . After the breakup of the AT&T monopoly in 1984, many

companies entered the long-distance telephone business and, as rates declined, long-distance

soared. However, by the late 1990's, the long distance telephone industry was consolidating and

four carriers - - AT&T, MCI, WorldCom and Sprint - - had come to completely dominate,

controlling 80% of long-distance business. This consolidation reached its zenith in September,

1998, when WorldCom, which had been on a multi -year acquisition spree, acquired MCI, further

concentrating the 80% market share in the now three largest remaining carriers , AT&T, MCI

WorldCom, and Sprint.

35. At the same time, as the long- distance telephone industry was consolidating in the

late 90s, industry insiders, including WorldCom's top officers and directors , realized that the

fundamentals of the long-distance telephone business were deteriorating badly, due to intense

competition leading to accelerating price declines, slowing growth in the voice revenues sector

due to increased cellular and wireless phone use and increasing amounts of uncollectible

accounts receivable - - negative trends that were accelerating rapidly in the late 90s.

- 14 - 36. Indeed, indusuy- wide competition reached its peak heights during the Class

Period, beginning in early fiscal year 2000. In a November 2, 2000 article in USA Today. defendant Ebbers described the unprecedented levels of competition in the long distance business as follows:

''This is how crazy it get sometimes... We bid on an account - - I'm going to tell you because I feel strongly about this - - on Kmart, and we went through (a process) where different long-distance companies bid for a single contract) . The process is supposed to have a system of integrity to it. You bid. They tell you that if you win the bid, you're going to get the business. We won the bid, fair and square ... And they said they received a personal phone call from Mr. (C. Michael) Armstrong (CEO of AT&T) who said, `If you do not leave us, I'll give you S5 million less than whatever WorldCom bid.' I said I'll go back and quote 52 million less than (AT&T did). When we did that we were below profitability. They lowered their bid again, just blindly. I had wanted our people to go back and lower it again so that I could set an example here... "

37. The decline in the profitability of the long-distance industry, which WoridCom's

insiders knew was underway by the start of the Class Period, was recently chronicled by USA

Today:

Blame fierce competition, excess capacity , falling prices, and an explosion of technologies - e-mail, wireless phones and Internet telephony - that siphon minutes from traditional long-distance. Consumer long-distance has become such a commodity that businesses from Costco to American Express are reselling it at pennies a minute.

"I think we' re seeing the beginning of the end of the long-distance industry," says Yankee Group analyst Brian Adarnik.

38. In order to compete in the highly competitive communications industry, it was

crucial for a company such as WorldCom to pursue additional acquisitions , and Ebbers proved to

be an exceptionally aggressive executive. WorldCom achieved its position as one of the top

three telecommunications companies by acquiring more than 60 competitors and other

- 15 - companies through transactions totaling more than $50 billion. For cxampie:

(a) In January, 1995, WorldCom acquired the network services operations of

Williams Telecommunications Group and its 11,000 mile fiber optic nationwide network for

S2.5 billion;

(b) In January, 1996, WoridCom acquired MFS Communications Company, Inc.

('MFS"), the largest competitive local access provider in many U.S. and Western European

metropolitan areas, for $12.5 billion in stock. Through the MFS acquisition , WorldCom gained

control of UUNET. the world's leading Internet backbone provider, which MFS had itself

acquired in August of 1996;

(c) In January 1998, WorldCom acquired another large local access provider, Brooks

Fiber Properties, Inc., for approximately $1.2 billion in stock. Also in 1998 , WorldCom acquired

CompuServe Corp., one of the nation' s leading Internet and data network services providers for

approximately $1.3 billion;

(d) In a related transaction, WorldCom bought ANS Communications, Inc., from

America Online for approximately $500 million. ANS served as one of AOL's primary Internet

backbone networks and, as part of the ANS transaction, WorldCom secured a long-term contract

to provide AOL with Internet backbone services;

(e) WorldCorn also acquired other Internet backbones, including GridNet, Unicorn-

Pipex, InNet, NL Net, and Metrix- Interlink;

(f) In August, 1998, WorldCom acquired control of Embratel Participacoes S.A.,

Brazil's leading long-distance telecommunications provider.

4 - 16 - :9. By far the largest of the acquisitions . described as a transforming event for the

Company, was the acquisition of MCI on September 14, 1998 , for approximately S40 billion.

The deal led to WoridCom's rise to number two in the nation's long distance market.

Commenting on the merger, defendants stated in a press release on September 14. 1998:

The merger creates a new era communications company providing customers around the world with a full set of data, Internet, local and international communications services over its own seamless " local-to - global-to-local " network. "MCI WorldCom is uniquely qualified to lead the industry in growth and to build on the tremendous value we have createdfor our shareholders," said Bernard J . Ebbers , president and chief executive officer of MCI WorldCom . "We have the right network - built for the explosive demand for high - speed data and Internet services - the right talent, and the right strategy at the right time . Simply put, MCI WorldCom is out in front and sets the standard by which all other communications companies will be treasured ." "MCI WorldCom is open for business ," said Bert C. Roberts Jr., chairman of MCI WorldCom. " We have created a new kind of communications company with a unique set of assets, a top-flight group of employees, and a heritage for delivering the benefits of competition to our customers." (Emphasis added).

The "Mega-Mercer" Trend Continues - - Defendants' Announce the Sprint Deal

40. Ebbers' desire to continue making acquisitions did not cease with the MCI acquisition, as Ebbers had yet to reveal the Company's most ambitious plan to date, a merger with another telecommunications giant, Sprint Corporation. On October 5, 1999, WorldCom announced that it had entered into an Agreement with Sprint, a diversified telecommunications company, to merge Sprint into WorldCom in a stock- for-stock transaction valued at 5129 billion.

41. In an October 5, 1999 press release , defendants described the cost savings and the anticipated revenues resulting from the pending Sprint merger. The companies estimated annual

- 17 - cash operating cost savings of $1.9 billion in 2001. increasing to $3.0 billion annually by 2004.

The press release also stated that the combination of MCI WorldCom and Sprint will:

Generate pro forma 1999 revenues of more than $50 billion, a market enterprise value of approximately S290 billion and significant operations in more than 65 countries;

Be a formidable wireless competitor in the United States - with more than 4 million PCS subscribers, leading the industry in growth; and 1.7 million paging and advanced messaging customers.

42. Defendants knew that the Sprint Merger was necessary in order to mask the declining growth in WorldCom' s revenue and to keep posting quarter after quarter of strong revenue growth, which analysts and the investing public had come to expect and rely on in formulating their valuations for the Company. The merger was also necessary to hide the problems with the recent MCI merger, including the poor quality of the Company's receivables and difficulties integrating MCI into WorldCom' s existing operations.

43. Defendants also looked to the Sprint acquisition to add a wireless business to

WoridCom' s existing offerings, an area in which WorldCom was at a significant disadvantage without Sprint. WorldCom, despite its growth and success, did not have any substantial wireless capability - a key element it needed for continued growth and success in the long-distance business - and did not have the time or money to now create a wireless network from the ground up.

44. At the start of the Class Period, WorldCom appeared to be a leader in the telecommunications industry, having apparently successfully completed the merger of MCI, one of its former competitors , and was in the process of completing the massive merger an event that

- 18 - ',would transform WoridCom into the industry leader, despite cutthroat competition - - the Sprint

Merger. Indeed , the price of WorldCom stock traded at nearly S62 per share in November,

1999. In truth, as defendants knew, WoridCom was struggling with the MCI integration, declining revenue growth, and the proliferation of uncollectible receivables.

FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD

The Class Period Begins - Defendants Issue False Statements Describing Fourth Quarter 1999 and Year- end Results

45. The Class Period commences on February 10, 2000, when defendants began releasing a series of statements purporting to describe the Company's financial results for the end of fiscal year 1999. These statements were all materially false and misleading for the reasons detailed in 1¶58-72, 74-99 and 224-266 below.

46. On February 10, 2000 , defendants announced financial results for the fourth quarter of 1999, and full year 1999 results. The Company reported financial results as follows:

Earnings before goodwill amortization ("cash earnings") of $1.6 billion, or $0.54 per common share. Reported net income, after goodwill amortization, was $1.3 billion, or $0.44 per common share. Reported net income, excluding net gain items of $112 million before tax, $64 million after tax or $.02 per share, was $1.2 billion, or $0.42 per common share. On a full year basis, cash earnings were $5.1 billion or $1.75 per common share. Reported net income, after goodwill amortization, was $3.9 billion, or S 1.35 percommon share. Reported net income, excluding net gain items of $87 million after tax, or $0.03 per share, was $3.9 billion, or 51.32 per common share.

47. Defendant Ebbers commented on the Company's seemingly stellar financial rs_a.!ts stating:

- 19 - Our achievements in the quarter and full year 1999 were outstanding given the dramatic changes impacting communications services ... On an annualized basis, data, Internet and international services represent $14 billion of revenues growing at 36 percent year-over-year. Our proven ability to deliver this type of revenue growth, along with industry leading earnings growth is our mark of distinction.

48. In the February 10, 2000, press release , defendants included a table purporting to include pro forma financial results, excluding other gains and merger costs, as if the MCI merger occurred as of the beginning of the earliest period presented, "in order to compare year-over-year internal growth ." The chart presented dramatic increases in core revenues , EBITDA, operating income and net income:

4S In M Jllions ) Actual' Actual Change Actual Pro Change 1999- 1998 1999 Forma 1998

Core Revenues $8,760 $7,599 15% $33,341 $28, 683 16%

Gross Margins $5,203 $4,259 22% $19,365 $15,836 22%

% of Revenues 59.4% 53.2% 57.2% 52.1%

EBITDA $3,252 $2,071 57% $11,326 $7,445 52%

% of Revenue 37.1% 25.9% 33.5% 24.5%

Operating $2,297 $1,121 105% $7,503 S3,543 112% Income

% of Revenue 26.2% 14.0% 22.2% 11.6°/a

Net Income $1 ,227 $428 187% $3,865 $1,243 211%

%o f Revenue 14.0% 5.3% 11.4% 4.1%

49. The press release further discussed the financial improvement in MCI

WorldCom' s business as a result of combining the two companies , stating:

- 20 - The improvement in operating income is due to the realization of merger synergies, a focus on -- and improving mix of -- higher margin revenues. Gross margin dollars continued to expand, growing faster than revenue growth, up 22 percent for the quarter -- underscoring the quality of the earnings improvement.

50. Defendant Ebbers emphasized the Company's success in fiscal 1999, and the resulting positioning of MCI WoridCom as a telecommunications leader, stating:

Our accomplishments in 1999 are impressive. In addition to leading our sector in incremental revenue gains and expanding profitability on those revenues, we substantially strengthened our business through acquisitions and divestitures. The investments in 1999 will provide future revenue growth and wireless data capabilities that will become increasingly more important as the Internet goes mobile. The early successes we have achieved in Internet and data services, coupled with the corresponding capital investments have positioned us to lead the industry in the transition to an "all-distance" advanced communications services platform. With more than S 12 billion of annualized revenues and approximately $3 billion of incremental revenues coming from data and Internet today, we have confidence in our ability to lead the industry in this transition, and a track record of accomplishing it profitably.

51. On February 10, 2000, defendants hosted a conference call for the investing community and analysts. Defendant Ebbers opened the call by announcing that 1999 was an

"outstanding performance year." Additionally, Ebbers touted the MCI Merger as a milestone in

1999, stating:

Our most important success in 1999 has been the MCI integration . For five quarters we've delivered the synergies ahead ofschedule. EB ITDA margins improved by 52% to 35 . 5% of revenues and added $2.6 billion of net income in 1999. Cash earnings grew to $5.1 billion or $1.73 per share, and we accomplished that exceptional growth in profitability while adding nearly 54.7 billion of incremental revenue. I'm proud of How former MCI and WorldCom employees have worked together to accomplish so much, it hasn 't always been easy . Our success with the MCI integration should give you comfort with the Sprint transaction. We know how to put companies together and get the most out of them. (Emphasis added).

- 21 - 52. On the conference call, Ebbers touted growth in the Internet business as another key factor in the Company ' s apparent financial success in 1999, stating:

Second, our Internet business continues to enjoy great success, with customers ordering ever greater amounts of bandwidth. For the first time, our quarterly Internet revenue topped $1 billion. We now have 1.7 million modems in our dial- up business an 80% increase from 1998.

53. Defendant Ebbers also emphasized the Company's successful network expansion, stating:

Thefifth success was the continued expansion of our network reach . We funded the world's most comprehensive network building program to further or on-net vision . One carrier able to serve your voice or carrier requirements from your doorstep to any other doorstep at a lower cost... Our capital spending is focused on extending network reach. reducing access costs, improving quality, speeding up provisioning cycles , and boosting capacity. Access continues to be an opportunity it represents approximately 50% of line costs and controlling it is key to improving profitability and providing quality service. Size and scale matter. In response to approximately $5 billion of incremental revenues in 2000, and with the vast majority of this coming from data and Internet, you can imagine just how much capacity we will actually provision over the next year. We have the capability and networks to do so , and each year we get more experienced handling this type of scaling . (Emphasis added).

54. Defendant Sullivan also spoke on the February 10, 2000 conference call, trnphasizing the Company's outstanding 1999 performance.

I have three quick points to make and one message to deliver. First, we earned a solid 42 cents from operations in the fourth quarter. Second, we produced solid double-digit revenue growth in the fourth quarter . Third, we delivered $2.7 billion in first year synergies with the combination of MCI and WorldCom. And that leads up to my one message. Based upon where we exited 1999 we feel every bit of confidence for 2000 analysts ' expectations, top to bottom . This was another solid quarter for MCI WorldCom. The Company posted another quarter of increased profitability resulting from effective merger synergy execution as well as strong double -digit revenue gains . ( Emphasis added).

- 22 - As Bernie said, we had a busy year in 1999, it was a year of signincant accomplishments . We integrated MCI and WoridCom. We delivered on our synergy plan. We delivered on our operating plan... On top of all the accomplishments , we delivered on the day-to-day business and our earnings targets.

... The fundamentals of our business remain strong. Fourth quarter net income nearly tripled compared to fourth quarter of 1998, while operating income more than doubled. EBITDA margins expressed as a percentage of revenues jumped over 1 1 percentage points during the period to over 37%. Clearly the synergy and growth opportunities presented in our business combinations are driving these improvements. Our results highlight the importance of having an industry-leading cost structure, especially in a rapidly changing marketplace. Given the competitive pricing environment in both the consumer and business markets, we not only competed effectively, we posted $1.2 billion of incremental quarterly revenues ...and we significantly increased our profitability and the quality of our earnings.

55. Defendant Ebbers concluded the conference call by stating: "I hope you can sense the energy and the confidence-we enter the year 2000 with. With the best employee base in the industry, we will achieve the results expected of us."

Defendants' Statements Detailing Fourth Quarter 1999 and Year-End Results Were Materially False and Misleading

56. The statements detailed in ¶146-55 above were materially false and misleading, as detailed in 1158-72 , 74-99 and 224-266, below. Defendants ' financial results for the fourth quarter and year- end 1999 reported grossly inflated revenues, earnings, and earnings per share, in violation of GAAP . Regulation S-X (17 C.F.R.§ 210.4-01(a)(1)] states that financial statements that are not prepared in conformity with GAAP are presumed to be misleading and inaccurate.

See also, ¶1224-266.

57. Although defendants reported across -the-board improvements in operating income, revenue, and profitability and "outstanding " financial achievements , as defendants l:ncw

- 23 - or recklessly disregarded , the Company' s fourth quarter and year-end 1999 revenues and profit were artificially inflated by hundreds of millions of dollars through a variety of improper sales and accounting practices. Defendants' were able to inflate fourth quarter 1999 and year-end

Financial results by backdating documents and by recognizing income on fraudulent or improper invoicing of customers. As particularized below, these practices included: (a) "slamming" or switching long-distance service to WorldCom without a customer's express consent; (b) continued billing of customers who had canceled their accounts; (c) billing customers rates in excess of the rates agreed upon by the customer; (d) duplicate billing for the same service; (e) backdating contracts; (f) deliberately understating expenses and (g ) failing to properly reserve for doubtful accounts and failing to take necessary charges to properly account for uncollectible receivables.

A. Defendants Fail to Properly Account for Uncollectible Receivables

58. The statements in ¶146-55 above were materially false and misleading because defendants failed to adequately reserve for doubtful accounts, and kept over $600 million worth of uncollectible receivables on the books in order to avoid taking a charge to earnings. As a result, defendants' fourth quarter and year-end 1999 results included falsely inflated earnings.

59. According to a former Supervising Paralegal of Corporate Credit based in Tulsa,

Oklahoma, who reported to Bob Vetera, Vice President of Corporate Credit, between 1997 and early 2000, a huge number of WorldCom accounts were in bankruptcy or had been in court "long enough to know that money wasn ' t coming ." According to the former Supervising Paralegal who worked on the receivable write-off disclosed on October 26, 2000, when a company who

- 24 - ;)wed WorldCom money tiled bankruptcy, it was well known by Credit management that

WorldCom would not be paid. From 1998 until 2001, the Legal Group in the Credit Department based in Tulsa (which consisted of six employees) prepared a monthly list of litigated and

bankrupt cases to various WoridCom management officials, so they could be informed of what

accounts were not collectible. The list was sent out every month on a regular basis to: (1) Steven

Rubio - Assistant Controller (based in Atlanta, Georgia); (2) David Myers - the Controller (based

in Clinton, Mississippi), and (3) John Krummel - President of Wholesale Services (based in

Tulsa, Oklahoma ). In addition, the list would be furnished to other Credit Department

employees intermittently if they requested the information. The list was significant because it

was sent every month from 1998 until early 2001 to David Myers - who reported directly to

defendant Sullivan and Ebbers.

60. Between September and December, 2000, the Tulsa legal group was for the first

time, pushed very hard by Steven Rubio to get a large backlog of uncollectible accounts written

off. Rubio was concerned with the tremendous backup of accounts receivables and sent out

emails in October and November of 2000, pressing the legal group to finish the write-offs. In

order to complete a write-off, an employee had to go into the billing platform, till out specific

forms, write a memorandum to management explaining why the write-off was necessary, and

seek express management approval . Although monthly reports were prepared informing

management of accounts in litigation and bankruptcy, actual write-offs were not done in a timely

fashion because the process was cumbersome. According to a former Supervising Paralegal, the

legal group would generally "put the accounts back on the shelf somewhere and say when we

- 25 - have some time we'll do them." The specific procedure in compieting a write -or 'was as follows: ( 1) enter the billing platform and locate the dollar amount owed for each uncollectible account; (2) print off summary sheets contained in the billing platofrn; (3) attach the summary sheets to the requisite paperwork; (3) prepare a memorandum including information from the monthly reports which detailed the case history and the basis of the write-off; and (4) seek management approval.

61. Depending on the amount of the write-off, different management signatures were

required to approve the write-off. Bob Vetera reviewed write-offs up to two million dollars.

David Myers, Controller, reviewed write-offs in excess of two million dollars . Defendant Ebbers reviewed write-offs in excess offifteen or twenty million dollars. Between February 1999 and the swdmer of 2000, the Legal Department portfolio of accounts in default amounted to about $600 million. In late summer 2000, it reached a high of $696 million. A large portion of these accounts were uncollectible, and had been uncollectible for years. For example, according to a

former Paralegal who worked on the October 26, 2000 write-off, the following wholesale

accounts had been in the legal department for years:

(a) American Tel Group, New Mexico - this company went bankrupt on

September 7, 1999 and was not written off until the end of fiscal year 2000. The receivables, of

slightly over $ 1 million, were held since August, 1998;

(b) Cherry Telecom - an account handled by Bob Vetera. The Company went

bankrupt prior to 1998 . The write-off, in late fiscal year 2000. amounted to over 5 225 million

and the receivables were held since 1997.

- 26 - (c) Equainet Corporation - an account handled by Harry Gramlich, a Credit

Analyst who prepared spreadsheets for many of the writeoffs. Equalnet went bankrupt in

September 1998. The writeoff (in late 2000) amounted to approximately $500,000,

(d) SA TeIlAdd Tel - an account handled by Harry Gramlich. The company

.vent bankrupt in November, 1997 and was not written off until November, 2000. The writeoff amount was approximately $5 million - the receivables were held since November 1997;

(e) MRP - an account handled by Harry Gramiich. The Company went bankrupt in February, 1998, the writeoff amounted to over $39 million;

( f) SmartTalk - handled by Bob Vetera. The Company went bankrupt in

February, 1998, the writeoff (in late 2000) amounted to more than $9 million;

(g) Group Five - handled by Bob Vetera. The receivables were held since

1998, and were not written off until late 2000;

(h) JD Services - approximately $30 million was written off in late 2000;

(i) Twister Communications Network - approximately $20 million was written off in late 2000;

0) Shared Telecommunications Systems, Inc. - Receivables were held since

1997 and amounted to approximately $696,000;

(k) Total National Telecom (also doing business as Total World Telecom), the receivables were held since July, 1997. $ 1,800,000 was written off in late 2000;

62. In addition, the former paralegal detailed several smaller accounts which should have been written off earlier, such as: Atlas Equity (a write-off was eventually taken for

4 - 27 - S600, 000 after being held since 1998); World Access Inc. (a write-off was eventually taken for an uncollectible account of over S t million), Commonwealth Telecommunications (a write-off was eventually taken for $250,000 after the account was uncollectible for at least two years) and

Intergram Corporation ( a write-off for 5139, 000 was eventually taken after the account was held since winter of 1998).

63. According to a former Wholesale Credit Paralegal in Tulsa, Oklahoma who left the Company in 2001, once an account was deemed uncollectible, it would still be reflected on the books as a receivable until the actual write-ofjprocess was completed. The former Credit

Paralegal detailed the process as follows:

"As a general rule, at some point the case (against a bankrupt company] would die. We would get our judgment . The company would be out of business. There would be nowhere to get the money, so that would be a bad debt. It would still be marked down as a receivable until we wrote it off to bad debt. We should have said ` this is done . We can ' t collect anything . We're going to write this amount off.' Sometimes it was fifty thousand dollars . Sometimes it was two hundred fifty thousand dollars . Sometimes it was a million dollars . Sometimes it was twenty seven million dollars."

64. According to the former Wholesale Credit Paralegal, the majority of receivables on the books needed to be written off "a long time" before the October 2000, public statement.

The legal group would not take the write-offs until they were instructed to by Bob Vetera. even though a majority of the accounts were uncollectible. For a long period, the legal group did not receive any instructions to take necessary write-offs. Then, suddenly, in late September, 2000, the Finance Group at WorldCom headquarters in Clinton, Mississippi, informed Tulsa to "get this stuff off the books ." In fall 2000, Steve Rubio called the legal group and informed them ic

- 28 - as now time to "start clearing out the books" and "write all this off." in late 2000, the legal group wrote off items that had been uncoUectible since 1996, in addition to matters which had been in litigation for years.

65. According to a former Dallas-based Senior Manager in the Credit, Risk and

Receivables Center, when WorldCom purchased MCI, they formulated four receivable centers with fifty employees in each location to manage the collection of account receivables for the

"key" (major markets) business accounts . The centers were located in San Antonio, Texas,

Dallas ( which handled old MCI accounts under the supervision of George Morarui ); Denver,

Colorado and Tulsa, Oklahoma (both of which handled old MCI accounts). Accounts greater than S 100,000 were managed by an Atlanta. Georgia group, and reseller accounts were handled in Tulsa. According to the former Senior Credit Manager, the old MCI accounts were riddled with problems.

66. WorldCom' s receivables were read off a software program called "IX Plus" while

MCI's receivables were documented in "AIR 2000," Although management intended to integrate these systems, as of February 2001, these systems were still separate. In early 2001, the San

Antonio Receivables Department began transferring the first group of "key" receivable accounts from MCI's records into IX Plus. In the fall of 1999, when the Dallas Department began transferring rescller accounts to the Tulsa Department, the Dallas employees found that the receivables were in extreme disarray. Customers had been overcharged, and none of the reseller billing was accurate. According to the former Senior Credit Manager, WorldCom knew the receivables from MCI were in bad shape as soon as they examined the books, in December 1998 and January 1999.

29 - 67. On April 5, 1999, George Morariu , the supervisor of the Dallas Receivables

Department, addressed a team of new employees for training purposes. He stated that the Dallas

group had $127 million in revenue, and 30% of that revenue was ninety days past due.

According to the former Senior Credit Manager, the actual figure of accounts more than three

months past due was much higher than 30%.

68. According to a former Dallas-Based Senior Credit Manager who had access to all

four receivable centers' figures , the Dallas Receivables team worked regularly with the Denver

Receivables Department which was managed by David Peletier . Denver' s accounts were equally

"dirty". The actual number of accounts written off by the four receivables centers during 1999

was minimal - - approximately $ 10 to $40 million per month . This was only a fraction of what

actually needed to be written off. According to a former Accounts Receivable Collector in the

Major Accounts Department based in Dallas , Texas, many of the accounts were known to be

uncollectible because of overbilling , and continued charging of customers after service

disconnects or cancellations.

69. According to a former wholesale Quality Assurance Analyst based in Tulsa,

Oklahoma, in January, 1999, there was a large influx of MCI accounts coming into the Tulsa

Credit Department because the former MCI Credit and Collections Department was being phased

out. The Tulsa office handled wholesale and reseller accounts receivables . When the MCI

accounts came into Tulsa in 1998, they were in extreme disarray, and included accounts which

were as much as seven years past due. Approximately fifty percent of the customers handled by

the Tulsa department were in arrears by three to seven years. By the time the accounts were

actually reviewed by employees in Tulsa, approximately half of the customers had merged into

other entities , closed their businesses , or filed bankruptcy , making collection impossible or

- 30 - highly unlikely. According to the former Analyst, the accounts were in "absolute shambles" and

the Collections Department came up with arbitrary numbers to write-off.

70. According to a former Wholesale Quality Assurance Analyst based in Tulsa,

Oklahoma, during a March 1999 floor meeting attended by Tulsa Credit and Collections

personnel (which included approximately twenty five wholesale credit representatives and fifteen

commercial credit representatives ), the Company's ballooning receivables were discussed.

During the March 1999 meeting, Bob Vetera, Vice President of Corporate Credit advised the

department that three large wholesale accounts filed for bankruptcy protection in February, 1999

and the amount of loss to WorldCorn as a result would be $100 million for the month of

February alone. Vetera announced in the March meeting that WorldCom would have to write-off

one hundred million dollars as a result, a write-off which continued to be carried on the books

and which, according to a former paralegal in Tulsa, Oklahoma, required Ebbers' express

approval to finalize since the accounts were over $25 million.

71. According to a former Senior Credit Analyst based in Dallas , Texas , WorldCom

would manipulate its books in order to make specific quarters look good. For example,

defendants wrote-off uncollectible accounts in one quarter, and placed the accounts back on the

books at a later date.

72. Defendants knew or recklessly disregarded that the magnitude of the increase in

WorldCom' s receivables during, at least, the six months ended June 30, 2000 was highly

irregular. In furtherance of their scheme to misrepresent the Company 's operating results, the defendants compounded WorldCom' s misleading accounting and reporting of revenues by failing to timely and adequately reserve for uncollectible receivables.

- 31 - B. Defendants Intentionally MisreRresented Rates to Customers

73. The statements detailed in ¶146-55 affirmatively misrepresented the Company's financial statements because defendants recognized revenue improperly through excessive rates and charges during the Class Period. For example, the widespread practice of misleading customers regarding service rates led to increased customer cancellations, disputed billings, and an increase in unpaid accounts.

74. According to a former Customer Service Supervisor in Arlington , Virginia (a center which received approximately five hundred customer calls per day ) who left the Company

in December, 2000, WorldCom management instructed sales employees to mislead customers about rates and services. For example, if there was a rate change, employees were instructed to tall customers that there was a rate change, but not to specify the amount of the change. As a result, customers who felt intentionally misled regarding the services and rates offered would discontinue their contracts, and dispute the bills they had already received.

75. Management condoned WorldCom employees giving false information to customers for the quick infusion in revenues these tactics-provided. Sales representatives were paid commissions on the number of new customers signed up for WorldCom service, and were told to try and get as many customers as possible . For example , regular meetings took place at the Company's Arlington, Virginia customer service offices, which were attended by twelve customer service supervisors , two managers, and a Center Director, Rodney Lawson. According to a former Customer Service Supervisor, the Customer Service employees were instructed specifically to refrain from mentioning mention monthly fees or monthly minimums when

- 32 - potential customers called and to "do whatever you had to do in order to get the sale. "

76. , Because the Company deliberately misinformed customers on applicable rates, after customers received their first bill , typically thirty days after a service change, customers would regularly cancel the account or refuse to pay accounts because the true service rates were higher than the representative verbally advised them.

77. According to a former Mass Markets Customer Service Supervisor employed at the Company from October, 1998 until December 2000, WorldCom management turned a blind eve to employees ' improper sales practices . If WorldCorn received a new customer, the particular representative handling the new account would receive a commission on the deal.

"That's what management was pushing. That's what they would promote, is to try and get as many customers possible, and do it however you can. If you tell (the customers) you can get five cents a minute with no monthly fee, then tell them, even if it's not true." According to the former supervisor, the improper sales activity heightened between March 2000 and December 2000 because WorldCom's stock price and revenues declined, and employees were pressured to "do something to try and bring the stock price back up. "

78. As a result of MCI's policy, customers declined to pay for their service due to the rate misinformation which resulted in a large increase in the amount of bills sent to collections as past due receivables . Numerous international customers threatened to report the Company to the

Securities and Exchange Commission for providing false rates. In fact, between March and

December 2000, Arlington received about two hundred daily customer complaints regarding rate misinformation.

- 33 - 79. According to a former Senior Credit Manager based in Dallas, problems overcharging corporate customers were rampant after the MCI merger. For example, Beaver

Street Fisheries located in Jacksonville, Florida was engaged in an overcharge dispute in which

WorldCom over -billed the Company by over S4 million which led to a service disconnection, as was Better Homes and Gardens Inc, and numerous other corporate customers.

80. Defendants' practice of intentionally overcharging customers in order to inflate earnings was both widespread and regular. The Company's policy of regularly misrepresenting rate and service features to customers which resulted in increased customer cancellations and an increase in uncollectible receivables also resulted in six states filing suit against WorldCom for deceptive advertising. According to a July 20, 2000 Associated Press article, WorldCom failed to disclose monthly fees and charges for its "5 cents everyday" plan. and the restrictions associated with the plan. The State of California sought $20 million in penalties and restrictions as a result of the Company's improper practices, including "cramming" or billing customers for services they had not authorized. WorldCom also charged a "Federal Universal Service Fee" of up to 7. 2 percent on state-to-state and international calls, despite the fact that the government does not set the rate or require WorldCom to collect it . WoridCom' s practices were so egregious that the California Public Service Commission received more than 8,000 complaints about

WorldCom' s long-distance. Due to the prevalence of these practices, WorldCom regularly recognized revenue from these illegal methods during the Class Period.,

81. Defendants' widespread practice of imposing improper rates on customers resulted in several additional lawsuits, detailed in 1183 below, and the issuance of thousands of

- 34 - customer refunds-

C. The Company Improperly Recognized Revenue As a Result of "Slamming"

82. A former Arlington, Virginia based Customer Service Supervisor for Residential

Accounts reported that during the Class Period, customers were regularly "slammed" or set up with accounts they did not actually request. Customers would call the Arlington center and ask why they were being billed from MCI when they did not ask to be transferred to MCI. The telemarketing staff would " slam" customers in order to increase their commissions . This also resulted in the improper inclusion of revenue during the Class Period.

83. In fact, WorldCom' s "slamming" was so egregious, it resulted in a 53. 5 million payment to the United States Treasury pursuant to a federal investigation which ended in a

Consent Decree between MCI WorldCom and the Federal Communications Commission

("FCC"). The Company was also required to: (1) implement a slamming prevention program and disciplinary procedures for employees engaged in slamming; (2) establish a credit program to issue credits to customers who were slammed ; (3) establish an Executive Review Panel to conduct quarterly reviews of quality control; and (4) report regularly to the FCC on its compliance pursuant to the Consent Decree.

D. Defendants Institute a "No-Cancellation" Policy to Artificially Bolster Earnings

84. According to a former Arlington Customer Service Representative , from March

2000 until March of 2001, Lawson (Director of Customer Service) and Ngoctiuh (Customer

Service Manager) instructed customer service representatives to refrain from complying with the customers' requests to cancel accounts in both the wholesale and residential customer service

- 35 - kind of washed under the carpet " in order to report increased sales . In fact, the two sales representatives in charge of the contract were promoted, and were allowed to participate in the

"President's Club" incentive program as a result of the fraudulent revenue recognized from the contract.

87. According to a former National Account Manager based in San Jose, California, the Company regularly avoided paying back credits owed to customers in order to "prevent earnings from taking a hit." These credits related to WorldCom's violations of service agreements, not providing service in a timely manner or not providing the services required. For example, on one occasion, MCI WorldCom' s entire frame relay network went down for an entire week. Customers were told they would receive credits, but theformer Manager was told to delay payment of the credits in order to avoid taking a charge against earnings to "keep [the

Company 's] numbers looking good. "

E. WorldCom' s Financial Deterioration Escalates

88. Due to intense competition resulting in reduced pricing and contract discounting, defendants cut corners wherever possible in an attempt to report acceptable margins . According to a former Finance Manager based in Denver, Colorado, beginning in the first quarter of 2000, the accounts payable department instituted a nation-wide policy of failing to process bills from vendors in a timely manner unless it could be shown that there was a pre-existing contractual basis for payment in response to "tremendous" pressure to meet earnings'estimates . Defendants' failure to process vendor payments was done in order to deliberately understate WorldCom's expenses.

- 37 - 89. According to a former Accounts Payable Analyst based in Hilliard, Ohio who handled accounts payable processing for UUNet, in late 1999 and early 2000 , vendor payments were delayed by ninety to one hundred and twenty days . At the end of a quarter, the Virginia office which was responsible for printing checks would hold the payments (aside from utility bills) until after the beginning of the next quarter in order to inflate earnings . These end of the quarter payment delays were never experienced prior to the beginning of 2000.

90. Defendants also attempted to cut costs in a last ditch effort to stem the Company's increasing decline in profitability. According to a former Atlanta-based sales representative, between 1999 and September 2000, the Atlanta sales office experienced nearly a 100% turnover because WorldCom repeatedly and dramatically changed commission structures in order to meet shareholders' expectations.

F. Defendants Resort to "Double- billing" to Inflate Financial Results

91. Another tactic used by defendants to report inflated financial results was " double- billing." Between the end of April and November 2000, MCI WorldCom employees opened up multiple accounts with different account numbers for the same service. For example, a business account would also be opened up as a residential account in order to recognize double revenue.

This double-accounting was done by sales representatives in Arlington on a daily basis in order to u ta.in additional commissions and to increase the revenue they were bringing in to keep their jobs. In December 2000, management began looking into the commission structure and the representatives discontinued the multiple account activity.

92. Although sales representatives engaged in this activity for their personal gain,

- 38 - management encouraged these practices because of the additional revenue the Company was able to report. According to a former WorldCom Branch Manager based in Manhattan, upper management willingly "turned a head" to certain revenue recognition practices. For example, a customer would be signed up on an MCI billing platform, and would then be migrated to the

WorldCom platform . Management would take the credit for two sales, rather than one, and received additional bonus compensation through a "President's Club" incentive program.

G. Defendants Deeply Discount Products and Services, Backdate Contracts, and Recognize Double Revenue

93. According to a former Director of Business Development based in Jackson.

Mississippi, the financial fraud was due to the fact that "revenues just weren't coming in." This was particularly true after the MCI merger when, the Company was constantly renegotiating customer contracts because of dramatic industry-wide rate decreases and competition. For example, the WorldCom international accounts team discounted the price of products by as much as 60% during the second quarter of fiscal year 2000.

94. When defendants reduced contract prices, rather than eliminating the revenue rrr,rn the original contract, defendants combined revenue from both the original and the renegotiated contracts and recognized the total amount as earnings. According to a former

Manhattan- based sales representative , one example of this widespread "double-billing " scam was

Aubrey G. Lanston and Co. Aubrey Lanston was billed $30,000 for bandwidth services. Due to intense pricing competition, the Company was forced to renegotiate the contract to $15,000.

Instead of documenting the revenue as $15,000, the Company booked the revenue on the account as S45,000.

- 39 - 95. Defendants were able to recognize this additional false revenue because MCI's

Legacy Network' w as not consolidated with WorldCom's computer network after the merger.

When WoridCom renegotiated discounted contracts and entered them into the network, MCI's

Legacy Network was incapable of eliminating the old contract. As a result, when a contract was originally entered into MCI's Legacy Network at a certain price, and the price was later renegotiated, both contracts would appear as sales.

96. Competition increased dramatically during the Class Period, forcing WorldCom to continually renegotiate contracts with customers . In a November 2, 2000 article in USA

Today, defendant Ebbers described the level of competition as cutthroat and lacking in integrity, and described a contract with K-Mart in which WorldCom made a bid which was actually not profitable for the Company, in order to compete for the customer's business. Examples of customers for which defendants decreased rates to keep the customers in the face of increased competition were IDT and tenuity Services, Inc. Both EDT and Genutity generated approximately three to five million worth of revenue per month prior to the promotion. As a result of the promotion, in order not to lose these customers, their rates were reduced and each customer generated only approximately one million per month.

97. In order to meet Wall Street expectations in the face of these adverse circumstances, defendants resorted the fraudulent practices particularized above. In addition, in order to meet quarterly earnings estimates in the face of industry-wide pressure and competition. defendants caused employees to backdate contracts up to two weeks, or offer special pricing in

A "legacy network" is an existing long-term network used by a company.

- 40 - order to complete a transaction within a designated quarter. WoridConi employees referred to the special pricing and rate incentives at the end of a quarter as "going to a new red point."

According to a former Director of Business Development, it was not uncommon for MCI

WorldCom employees to "toss the rules aside at the end of the quarter" if the Company was worried about making numbers.

98. Defendants were able to report additional false revenue and earnings because of the two different billing systems used by MCI prior to the merger, and WorldCom. WorldCom's billing system was called "Option One" and MCI's billing system was referred to as "Option

Two." Option One was billed out of WorldCom' s Tulsa, Oklahoma office, and Option Two was billed out of the Dallas, Texas office. The two networks differed in pricing. For example, according to a former Dallas-based Account Representative, the same Ti service cost $690 per month through the WorldCom network and $950 per month out of the MCI network. Customers had multiple billing contracts on their account at different prices as well as old and new contracts which were all placed on the books as accounts receivables.

99. According to a former Vice President of Sales based in New York, it would be easy to determine whether MCI accounts converted into WorldCom accounts were "double- billed" because the Company had internal information describing the commissions and net revenues by region. If a sales representative was ranked at a 200% commission, yet the revenue for the area was flat, the inconsistencies would be readily apparent. This was information that was prepared internally at MCI and which defendants had access to.

- 41 - H. Defendants ' Statements Regarding the Success of WorldCom's Acquisition Program - - Includin g the MCI Merger Were False

100. ' Defendants ' statements in ¶149-51 and 54, characterizing the success of the MCI

integration as "delivering synergies ahead of schedule" as well as Ebbers' statement that "we

know how to put companies together to get the most out of them" were false. According to a

former Staff Assistant based in Rancho Cordova, California, the two companies were never

actually combined. The highly touted, multi-billion acquisition of MCI, acquired only two years

ago, was not, as previously represented, making WorldCom an all-inclusive shop for tele-

communications , data and Internet services . To the contrary, the combined companies could not

function cohesively as one entity and the deal was not yielding the anticipated cost savings or

revenue increases as revealed by WorldCom 's creation of a separate " tracking stock" for MCI as

detailed below in ¶'J200-201.

101. While defendants represented in ¶50 that WorldCom was "substantially

strengthened through acquisitions and divestitures" including investments that "will provide

future revenue growth" in fact, many of the acquired assets were not strategic fits and were a

financial drain on the Company. According to a November 2, 2000 article in the Daily News.

entitled "Wall St. Hang-Up WorldCom Clobbered on Profit, Sales Woes", and a November 2,

2000 article in the Financial Times, entitled "WorldCom admits its buying spree has failed",

defendant Ebbers was quoted as stating, with respect rb WoridCom's nurperous acquisitions:

"Some of those assets should have been disposed ofearlier, but we didn 't. Now we have to look' at those assets. "

102. The admission that some of the acquired assets "should have been disposed of

42 - earlier" was shocking to investors, as defendants had regularly emphasized the success of

WorldCom's acquisition program, and its ability to rapidly and painlessly integrate acquired companies amounting to billions of dollars.

103. WorldCom also experienced declining revenues after the MCI merger because former MCI employees competed against WorldCom employees to generate new business, and would regularly undercut one another ' s rates. For example, a customer in Rochester, New York had six different sales representatives call and offer lower and lower rates - - competing against one another.

104. MCI and WorldCom never successfully merged. The companies' technical systems were extremely different and were never integrated - - resulting in problems servicing customers. According to a former installation technician based in Tulsa, Oklahoma who performed quality control duties for the Company, the network systems of MCI, WorldCom and

UTJNet were never integrated. WorldCom used a Field and Engineering system, while MCI used a network system called Netpro and UUNet used a database called TCOMS. In early 1999, the

Company instituted a project to create one database utilized by all WorldCom employees, which was abruptly discontinued in November, 2000 despite spending of millions of dollars for the project.

105. The technical incompatibility of the systems also facilitated WoridCom employees' "double-billing " scams, as detailed above.

I. Defendants Misrepresented the Success of UUNET

106. Defendants' statements in ¶147, 50, and 52-53 describing the success of

- 43 - `Y'VorldCom' s Internet division were materially false and misleading . LJUNet, the Company's

Internet backbone, suffered from numerous problems during the Class Period which defendants failed to disclose. For example, sales representatives and management were resigning at record numbers in order to take advantage of the favorable market for employees with Internet knowledge. Similarly, although defendants touted increasing Internet revenues, Internet activity on Worldcom' s platforms was actually decreasing during the Class Period.

107. In addition, according to a former WorldCom Regional Manager in the Switch

Planning Department for the Western United States, LTUNet would provide the Switch Planning

Department with a required quantity of new ports and modem installations for Internet customers. In the past, when. a port or modem line was activated by the Switch Planning

Department, activity or "traffic " would begin immediately , and often the Switch Planning

Department would have to add additional network capacity to support the customers. In late

1999 and early 2000, the trafj'ic.flow over Internet lines and ports declined precipitously - - as did the corresponding revenue derivedfrom that trafficflow. In fact, defendants were forced to reveal on November 1,, 2000, that the Internet Division had experienced a 14% decrease in growth, a decline that defendants knew of or recklessly disregarded was occurring much earlier.

108. In addition, problems arose because UUNet was trying to sell the same services to customers at the same time WorldCom was soliciting the customers . For example, according to a former Manhattan-based sales manager, in the web posting and internet access arena, MCI

WorldCorn and UUNet were going after the same customers, and undercutting each other's prices . The problem became so severe that Steve Dobel ( the former President of WorldCom

- 44 - National Major Accounts ) was forced to write a letter to the President of WT1et asking for cooperation since Whet continually undercut WorldCom's pricing.

J. Defendants ' Statements Regarding Their Increased Growth Through Network Expansion Were False and Misleading

109. Defendants' statements in x'j46-55 describing the Company's strong growth and expansion were also materially false and misleading because, as defendants knew or recklessly disregarded, WorldCom's growth was severely hampered by its inability to add additional network capacity in a timely fashion. For example, Ebbers falsely stated in the February 10,

2000 conference call that " continued expansion of [WorldCom' s] network reach" was the

Company's "fifth major success" in 1999. In fact, throughout the Class Period, defendants experienced severe problems expanding the Company's networks. Beginning in late 1999 and throughout 2000, the engineering department experienced severe backlogs in performing buildouts .5 There was a constant backlog in terms of network construction or expansion which began subsequent to the MCI merger, and according to a former Director of Business

Development based in Jackson, Mississippi, the demand for buildouts well overshadowed

5 A "buildout" refers to the laying of fiber between two sites, at a distance of five miles or more, for the purposes of network or other forms of data expansion. The procedure for getting a network expansion buildout at the Company once a salesperson had a contract involved: 1) submitting a BAR (Business Analyst Request) in order to analyze the potential business generated from the contract; 2) the BAR unit submitted a special pricing, request to the Company's structural engineering department; 3) the structural engineering department formulated a dollar cost for the proposed sales contract; 4) the proposed price was referred to MCI WorldCom corporate financial headquarters in Oakbrook Terrace, Illinois, 5) financial headquarters informed the sales representative of the customer cost to initiate the contract; and 6) the finance department would issue an•AFE (Appropriation for Expenditure) which provides the actual funding to the structural engineering department to conduct the buildout. Once the AFE is alloted, the contract can be initiated.

- 45 - supply.

110. . According to a former Manhattan-based sales representative, delays in performing buildouts were regular. For example, A.B. Watley Group , Inc., a Manhattan based brokerage firm signed a services contract in March 2000, expecting to begin service in April 2000.

However, in July 2000, sixty percent of the Dallas-based structural engineering crew resigned over the course of a single week, and the buildout was not completed. In August 1999, a senior director of the Company, Ed Flemming, told the former sales representative that there was no money left in the 1999 budget for buildouts and the Company was already at 105% of its 1999 budget. The inability to perform on the contracts meant that salesmen, with contracts in hand, could not get their projects up and running, causing sales representatives who could not collect their commissions to resign.

111. According to a former sales representative who worked in the Manhattan sales office, the finance department continually increased the price of various buildouts, creating problems for the sales division in finalizing contracts, because the resources for buildouts had been depleted.

112. According to a former engineer based in Dallas, Texas who was previously employed at MFS Communications Company (which merged with WorldCom in 1996), since the MCI acquisition, the production of the engineering~depar mnent declined dramatically. After the MCI merger, the engineering department increased from twenty six employees to one hundred. However in June and July 2000 twenty four of the original twenty six engineers - - those most knowledgeable about buildout procedures and techniques - - resigned because of

- 46 - engineering difficulties. For example, the engineering department employees' cost of performing

tripled after the MCI merger because of additional processes that the employees were required to

undertake before having a buildout approved. According to the former Dallas-based engineer,

sales representatives lost about 50% of their contracts because the engineering department could

not get the buildouts done . Two major contracts where sales representatives lost opportunities to

generate additional business or where business declined were IBM and NationsBank. These

customers wanted to double their "rings" which meant adding additional fiber for network

expansion , and the MCI WorldCom department was unable to undertake those projects.

113. The Company was also well aware of the problems creating new build-outs because the problems were related to, in part, defendants' contract with Able Telecom Holding

Corporation ("Able"), a company in which MCI WorldCom held a minority interest through

WorldCom's sale of MSFNT (a wholly-owned subsidiary of MFS Communications Company,

Inc., which is owned by WorldCom) to Able in 1998. MFSNT offers network integration services to telecommunications providers as well as system integration services.

114. Pursuant to a six-year Master Services Agreement with Able, Able was contracted to perform 75% of the network build out for WorldCom in metropolitan areas . (See, August 25,

2000 article published by the Associated Press entitled "WorldCom becomes owner of Canadian

Company."). In addition, according to a July 6, 1998 press release issued by Able, the MFSNT deal provided that Able would perform an aggregate $ 1.2 billion backlog of network development and project management services for WorldCom.

115. As defendants knew, Able was a financially troubled company experiencing

- 47 - significant difficulties attempting to integrate the MFSNT acquisition - - a company five times

Able's size. In addition, the MFSNT management knowledgeable about the services and

technical requirements inherent in performing services under the Master Services Agreement had

resigned because of Able's interference with an MFSNT management-led buyout led by its

President, Kevin Moersch. Indeed, Able was sued for fraud by Sint Technologies, a Canadian

company , for its interference in that management led buyout - - litigation which resulted in a jury

verdict against Able, including punitive damages of $30 million. (See, Sint Technologies, Inc., v.

Able Telcom Holding Corp., et. at.. Case No. 98-1153-Civ-Gold (S.D. Fla. 2000). As a result of

Able's tortious interference with the management-led buyout, the MFSNT's President and CEO,

the Senior Vice President of Estimating and Engineering (Robert Thurman) the President and

Chief Operating Officer of MFSNT (Bill Thompson). the Senior Vice President of Network

Sales (Bob Eide) as well as other trained, experienced management-level employees resigned en

masse.

116. WorldCom knew about Able's lack of infrastructure and financial difficulties

because Able had to account for and pay 10% of all cash receipts every two weeks to WorldCom

as part of its deal to acquire MFSNT. (See, Report on Form 8-K for Able Telecom Holdings

Corp., filed July 16, 1998). According to a press release issued by Asensio & Company on

February 4, 1999, as of February 8, 1999 , Able was facing immediate bankruptcy because it did

not have sufficient assets or cash flow to meet its approximately S90 million of debt and

preferred stock obligations.

117. Defendants also knew that Able was a company unable to handle projects in an

- 48 - crTicient or timely manner because of its operational deficiencies , lack of resources and skilled management . Indeed, one of Able's projects, construction of an "E-Z Pass" system for highways in New Jersey was a project transferred from WorldCom to Able in 1999. Able was regularly in default of its performance obligations under that contract , as WorldCom knew because it had guaranteed a performance bond for the project to the State of New Jersey, a fact which

WorldCom never disclosed in any of its Class Period filings . MFSNT - - the entity responsible for the E-Z Pass project, was entirely dependent on WorldCom' s capital and had to receive

S 119,3 89,000 in the last six months of 1998 from WorldCom to even operate at minimal levels.

(See. Audited and Unaudited Arthur Andersen LLP Financial Statements dated June 16, 1998 included in Able Telcom Holding Corp.'s SEC Form 8-KJA filing dated October 2, 1998).

118. Accordingly, defendants knew they were relying on a Company crippled financially and operationally for an astonishing 75% of its local, metropolitan area buildouts - - which contributed to the delays described in ¶1109-112 - - yet failed to disclose any of these problems, instead touting the Company's continued network expansion initiatives.

Defendants ' False and Misleading Statements Result in Across The Board "Buy" Ratings From Analysts

119. Defendants' false and misleading statements were absorbed by investors, as well as Wall Street analysts. On February 10, 2000, several analysts issued positive ratings for

WorldCom stock. For example, Analyst Jack Grubman from Salomon Smith Barney reiterated a buy rating, and urged investors to be "... aggressive buyers on the stock ." Grubman characterized the Company's overall revenue growth of 15.36% as "very strong" noting that the

Company' s "revenue mix continues in the right direction with 82% of incremental revenues

- 49 - ocz-w from data. Internet protocol and international sources. " Grubman added:

MCI WorldCom reported a very good fourth quarter, with operational earnings from the MCI WorldCom stand-alone entity of 42 cents per share, in line with our estimate and a penny above the Street.

120. On February 10, 2000 , ABN AMRO Inc _ analyst Kevin M. Roe issued an analyst report reiterating a "buy" rating for WorldCom stock. The report stated:

We are very pleased with a strong Q4 reported by WCOM. Revenue growth of 15% and EBITDA growth of 57% ... was in line with our expectations. EPS of $0.42 (before gain items) exceeded our estimate of $0.41... On the conference call, management outlined a strong 2000 outlook.

121. Indeed, "buy" ratings were reiterated by many market analysts following the

February 10, 2000 earnings release and conference call. Analyst Gregory P. Miller, of Jeffries &

Company, issued a " buy" rating with a price target of $75 per share. One of the reasons for the high valuation was due to the realization of significant cost synergies resulting from the MCI acquisition. Miller noted that in the fourth quarter, WorldCom achieved approximately $ 509 million of line cost synergies , while SG&A which accounted for 22 .3% of total revenues, improved as a result of. $404 million of synergies. Miller echoed defendant Ebbers' positive statements in the February 10, 2000 earnings call, stating:

We believe this achievement should enable investors to become increasingly comfortable with the idea that the Company can in fact achieve the cost synergies from the MCI merger and later the Sprint merger that has been targeted. Of the more than 40 acquisitions made, the Company`has yet to fail in meeting its merger cost savings articulated to the Street.

122. A report issued by Gerard Kauer Mattison & Co. on February 10, 2000, also reiterated a "buy" rating for the Company, in part due to the Company's "aggressive network

- 50 - expansion strategy " and the "realization of merger synergies." Robinson-Hump nrcy issued a report the nextday, touting the stock and noting that WorldCom is "one of the only-mega-cap companies with the ability to grow revenue 15% while integrating multiple acquisitions and

improving margins in a hyper-competitive telecommunications marketplace."

123. On February 11, 2000, in response to defendants' earnings release reporting

dramatic improvements in WorldCom 's financial condition and defendant Ebbers ' statements

regarding the successful integration of MCI during the February 10, 2000 conference call,

WorldCom stock traded at over $50 per share.

124. On February 28, 2000, Sprint and WorldCom issued a joint press release setting

the date and time of their shareholder meetings to vote on the proposed merger:

MCI WorldCom and Sprint Corp. scheduled a shareholder vote for April 28 on the proposed merger between the nation's second and third largest long distance carriers. . . The companies said they expect to close the deal in the second half, after receiving regulatory and shareholder approvals.

Defendants Report False Information in the Company's 1999 Annual Report to Shareholders and 1999 Form 10-K

125. Defendants' continued their barrage of false public statements, issuing false

statements regarding the Company's financial results in the beginning of fiscal year 2000. These

statements were false and misleading for the reasons detailed in ¶¶58-72, 137-142, and 224-266.

126. For example, in the Company's Annual Report to Shareholders, which was sent in

March, 2000, defendant Ebbers included a letter to shareholders . The letter stated:

..(W]e are leading the charge into this new era. How did we do it? Over the years, we have targeted investments and acquisitions toward the fastest growth areas of communications services.. .

In order to better compete in what is quickly becoming an all-distance

- 51 - communications market and participate more fully in the burgeoning wireless business, we plan to merge with Sprint later this year.

127. In defendant Ebbers Letter to Shareholders, he included a statement indicating the "highlights" from 1999:

Here are a few highlights from 1999. WorldCom, excluding Embratel and before charges, generated over S34 billion of revenue - a solid double digit gain from 1998 pro forma results - and yielded $3.8 billion of net income, up 217% from the 1998 pro forma period. Our successful merger with MCI in part drove these results, which should be a great indication of how the Sprint merger should benefit the Company.

128. In the Annual Report to Shareholders, the Company included a section entitled:

" 1999 was an outstanding year for WorldCom" which discussed the purported success of the

MCI integration, stating:

Our data, Internet and international businesses led us to record revenue growth. The MCI integration ran ahead of schedule and helped us accomplish exceptional growth in profitability. The local and global reach of our network continues to set WorldCom apart from the rest of the industry.

129. Defendants' Annual Report to Shareholders also emphasized WorldCom's

"History of Successful Mergers", stating: "WorldCom knows how to make mergers work." The

Report then detailed several "successful" mergers, including the MCI merger:

At the time it was announced in 1997, the merger with MCI, valued at approximately $40 billion, was the largest in history. The MCI merger let to increased shareholder value, because the power and efficiency of the merged company are greater than the two companies working separately. Thus, value was captured in anticipated synergies. It also joined two companies with highly complementary strengths and assets. Both companies were leaders in transforming the industry from a monopoly utility business into an intensely competitive market.

130. On March 9. 2000, defendants issued a joint Registration Statement/Merger Proxy

- S2 - with Sprint, including a letter from defendant Ebbers recommending shareholder approval of the

Sprint/WorldCom merger.

131. On March 30, 2000, the Company filed its Annual Report on Form 10-K for fiscal year 1999, signed by defendants Ebbers and Sullivan. In the 10-K, defendants repeated the financial information announced in the February 10, 2000 press release . Defendants reported a

104% increase in revenues to $37.1 billion as compared to $18.2 billion for 1998, attributing the increase to the MCI Merger, the Embratel acquisition as well as internal growth. Defendants provided additional information on the proposed Sprint Merger, revealing that the purchase price of Sprint was significantly tied to the performance of WorldCom stock. The report stated , in this respect:

Under the Sprint Merger Agreement, each outstanding share of Sprint FON common stock will be exchanged for $76.99 of WorldCom common stock, par value $. 01 per share, subject to a collar. In addition, each share of Sprint PCS common stock will be exchanged for one share of a new WorldCom PCS tracking stock and 0. 116025 shares of common stock.. . the.actual number ofshares of common stock to be exchangedfor each share ofSprint EON common stock will be determined based on the average trading prices of common stock prior to the closing, but will not be less than 1.4100 shares (if the average trading price of common stock equals or exceeds $53.9007) or more than 1.8342 shares (if the average trading price of common stock equals or is less than S41.4350)(Emphasis added).

132. Accordingly, by virtue of the Sprint Merger Agreement, defendants were motivated to keep WorldCom trading at artificially inflated prices in order to consummate the merger on terms more favorable to WorldCom by avoiding dilution of the Company's stock.

133. In the March 30, 2000 10-K, defendants touted their experienced employee base, stating:

- 53 - At MCI WorldCom, our employees are our greatest resource . Built from over 60 acquisitions , MCI WorldCom benefits from the expertise and entrepreneunal spirit of the companies who have come together to form MCI WorldCom. A customer-focused attitude permeated MCI WorldCom.

134. In the 10-K, defendants also discussed the Company' s rates and charges, stating:

The Company' s rates are generally designed to be competitive with those charged by other long distance and local carriers . The rates offered by the Company may be adjusted if other [ telecommunication comparuesi continue to adjust their rates. To date, continued improvement in the domestic and international cost structures have allowed the Company to offer competitive rates while maintaining acceptable margins.

135. The Company emphasized its attention to customer service in the March

30, 2000 10- K stating:

in each of its geographic markets , the Company employs full service support teams that provide its customers with prompt and personal attention. MCI WorldCom' s localized management, sales and customer support are designed to engender a high degree of customer loyalty and service quality.

136. On March 30, 2000 , after the 10-K was disseminated to the public , the price of

WorldCom stock rose from $42 to over $45 per share on March 31, 2000.

Defendants Statements in the 1999 Annual Report to Shareholders and the Form 10-K Misrepresented WorldCom' s Financial Results

137. Defendants' statements in the Annual Report to shareholders and the 1999 Form

10-K were materially false and misleading. The financial results included in the documents were artificially inflated due to the Company's failure to properly reserve for doubtful accounts and to timely record write-offs for uncollectible accounts. Defendants' accounting violated Generally

Accepted Accounting Principles ("GAAP "), as detailed in ¶¶ 224-266.

138. Defendants' financial results included in the 10-K and Annual Report to

- 54 - Shareholders were also false because defendants caused WoridCom employees to engage in improper revenue recognition practices and/or knowingly acquiesced in and condoned these

Yjractices . These practices afforded WorldCom the ability to mask the waning demand for the

Company' s services , the impact of increased p ricing pressures, and to allow defendants to meet analysts' estimates . These revenue inflation tactics included i.e.,:

(a) Intentionally misrepresenting service rates and features to customers resulting in a higher incidence of customers who refused to pay, and consequently, a higher number of uncoilectible accounts;

(b) "Slamming", or switching service to WorldCom without authorization (¶J82-83);

(c) Refusing to cancel customer accounts and recognizing revenue from accounts which had been canceled months before (¶¶84-87);

(d) "Double-billing" or setting up multiple accounts for the same service and recognizing twice the revenue for one account (1191-92):

(e) Deeply discounting services at the end of financial quarters and failing to properly account for the renegotiated contract price (Jn93-96);

(f) Deliberately understating expenses (1"88-89), and;

(g) Back-dating contracts to increase quarterly revenue and meet analysts' estimates

(J97) _

139. Defe'ndants' statements in 1J¶128 and 129 that:"the MCI integration ran ahead of schedule and helped us accomplish exceptional growth in profitability"; and "the power and efficiency of the merged company are greater than the two companies working separately" were,

- 55 - as defendants knew or recklessly disregarded, false. For example:

(a) MCI and WorldCom failed to integrate their billing systems , facilitating employees " double-billing" scams, as accounts were easily duplicated in WorldCom' s accounting system ("IX Plus") and MCI's accounting system ("A/R 2000") to generate multiple accounts with different prices for the same customer;

(b) Rather than working together, former MCI employees regularly competed with

WorldCorn employees, undercutting already rapidly-declining rates; and

(c) A huge number of accounts carried over from MCI' s billing platform were uncollectible and in disarray, and were as much as seven years in arrears.

140. The fact that MCI never successfully merged with WorldCom was confirmed by the Company' s November 1. 2000 announcement creating a separate "tracking stock " for MCI, despite touting hte unified nature of MIC and WorldCom during the Class Period.

141. Defendants' statement in 1133, emphasizing the Company's strong employee base and industry expertise "built from over 60 acquisitions " was also false and misleading to investors. As defendant Ebbers conceded in a November 1, 2000 conference call, some of the acquisitions were not contributing to the company' s growth and profitability, and should have been disposed of sooner.

142. Similarly, defendants' statement in 1134, that despite a competitive environment

WorldCom was still able to offer rates yielding acceptable margins was false . As defendants knew, due to increase pricing pressures, the Company was forced to routinely renegotiate contracts and deeply discount rates --and actually recognized revenue from the original contract

- 56 - ,nd the discounted contract.

Defendants Continue to Conceal WorldCom 's Financial Condition in the First Quarter of Fiscal Year 2000 In Order to Facilitate the Sprint Mert=er

43. Defendants continued to misrepresent WorldCom's financial condition in the first

uarter of 2000 in order to ensure that Sprint shareholders viewed WorldCom as a Company with

tremendous growth potential , and voted in favor of the merger . Defendants ' statements regarding

he Company's first quarter results were materially false and misleading for the reasons detailed

in ¶!j58- 72, 74-99, in 159-166 and in 224-266, below.

i 44. On April 13, 2000, an article was published by Post-Newsweek Business

Ihnformation , entitled "MCI WorldCom Shifting Focus to Servicing E-Business ." The article

revealed that the Company announced a 'fundamental shift in [WorldCom's] corporate strategic course for the 21st century by becoming a provider of services to e-businesses ." The article quoted defendant Ebbers as stating that because of the growth of the Internet, along with the enhanced economy and "unprecedented" amount of mergers and acquisitions which are currently taking place, WorldCorn announced a fundamental shift in its investments , how the company trains its employees , and how it deploys its resources - - in order to offer "a whole range of value added services." The article stated:

These services will be deployed under the branding of WorldCom's "Generation D". The branding is signficant as it has always been the intention of MCI WorldCom to be known internationally by just one corporate name, "WorldCom"

145. On April 27, 2000, defendants issued a press release reporting WorldCom's financial results for the first quarter of fiscal year 2000, the quarter ending March 31, 2000.

- 57 - gamines before goodwill amortization (cash earnings) increased 59 percent year-over-year to

S 1.6 billion, or $0 . 54 per common share . Net income increased 80 percent to S 1.3 billion, or

50.44 per common share.

i 46. Comrnentin= on the seemingly stellar first quarter results . defendant gibbers stated:

WorldCom continues to enjoy success in its focus markets. On an annualized basis, data, Internet and international services represent more than s 18 billion of annualized revenues growing at 32 percent. We are clearly leading the communications industry into a new era dominated by data- and Internet-based services, and our newly announced generation d initiatives leverage our existing strengths.

147. The press release included a section entitled "profitability measures" in which defendants stated:

Gross margins increased by 4 percentage points year-over-year, generating S5.9 billion of gross profit. This represents 18 percent growth from the first quarter of last year. ..Selling, general and administrative expenses declined 3 percent from the year-ago period. Much of the cost savings stem from synergies attributable to the MCI merger. EBITDA (earnings before interest, taxes, depreciation and amortization) margins increased by 7 percentage points year-over-year to 36 percent of revenues or 53.6 billion, Operating income grew 62 percent from the first quarter of 1999 to S2.4 billion with depreciation and amortization growing only 4 percent from that period.

148. In the April 27 , 2000 press release , defendant Ebbers commented on the

Company' s outlook, and said:

We continue to expect strong growth from our data, Internet and international businesses in 2000. The investments that we are making in these fast growing areas are driving our growth as we lead our industry's transition to all-distance services.

149. On April 27, 2000, defendants held a conference call with analyst and investors,

- 58 - to discuss first quarter 2000 results . Defendant Ebbers announced "we arc achieving our results profitably", stating:

Our network and operations group did a great lob in implementing the latest technological innovations to increase the capacity and reach of our networks, positioning us to capture more revenue and drive line costs lower to keep the bottom line moving.

150. With respect to Sprint Merger, defendant Ebbers stated that he expected both

Sprint and WorldCom to approve the merger on April 28, 2000. Ebbers announced that the

Company expected to have discussions with respect to FCC and European Community "w rapped up" in a "couple of months."

151. On the conference call, Defendant Ebbers stated that the Company "remains cc irnfortable" with analysts' estimates of 13.5 to 15. 5% revenue growth estimates for 2000, and with consensus earnings estimates of $1.89 for the full year of 2000. He added on the conference call that "in fact, we have indications in the first quarter that some ojthis growth may be accelerating"

152. On the April 27, 14000 conference call, defendant Sullivan also spoke about the

Company's seemingly stellar financial results, stating:

This is another quarter where we produced strong results in an extremely competitive marketplace . Most notably, our earnings per share surged 83% to 44 cents per share, and our revenue growth remained solid at 14%.

153. In order to keep up the barrage of favorable publicity while WorldCorn and Sprint shareholders were considering whether or not to approve the merger, and to conceal the fundamental deterioration in WorldCom's core business and especially the MCI integration, defendants falsified and inflated WorldCom 's first quarter financial results by failing to take

- 59 - proper and timely reserves for uncoiiecuble accounts receivable , ;:,rough (detail additional

revenue recognition practices). These manipuiauons enabled WorldCom to report increased

profitability and strong revenue growth, the day before the shareholder vote to approve the

Sorrnt Merger. By making WorldCom appear to be achieving proatable growth, W'oridCom

and Ebbers were attempting to make it more likely that Sprint's shareholders would vote to

approve the merger. On April 23, 2000. defendants careful manipulations were rewarded when

both Sprint and WorldCom shareholders voted to approve the merger.

!54. On May 15, 2000 , defendants filed a quarterly report on Form 10-Q for the period

ceding March 31, 2000, the first quarter of fiscal year 2000, signed by defendant Sullivan. The report revealed that the name of the Company had changed from "MCI WorldCom" to

' WorldCom" - - purportedly to further the impression that the Company was operating successfully as a whole . The quarterly report included the financial results announced initially on April 27, 2000. With respect to financial growth, the quarterly report added:

Revenues for the three months ended March 31, 2000, increased 9.4% to $10.0 billion as compared to $9.1 billion for the three months ended March 31, 1999. The increase in total revenues is attributable to internal growth of the Company,

155. The financial information included in the quarterly report included a preface indicating that the statements were prepared in accordance with GAAP, and fairly represented the Company' s financial condition:

[t]he financial statements included herein, are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission ("SEC") regulations. In the opinion of management, the financial statements reflect all adjustments (of a

- 0'0 - normal and recurring nature) which are necessary to present fatr!v thefinancial position , resu izs of operations results of operations and cash flows for the interim periods. (Emphasis added).

156. On May i6, 2000, WorldCom stock traded at S43 per share.

Defendants' False First Quarter Public Statements Convince Market Analysts who Issue Favorable Ratings for the Company

157. On April 27, 2000, in response to the conference call and the Company's nnancial

;esuits, analyst Tony Ferrugia tom A.G. Edwards issued an "accumulate" rating for the stock,

,oting that : " We continue to believe that the WCOM -FON combination will be one of the best positioned telephone companies in the world ... "

158. Analyst Steve Shook from Wachovia Securities also issued a " Strong Buy" rating for WorldCom stock, noting that management reported first quarter results in line with estimates, and noting that "we believe now is an excellent time to purchase shares in one of the premier telecom companies in the world." An April 28, 2000 report issued by Dresdner Kleinwort

Benson raised WoridCom's EPS estimates based on the Company's first quarter performance, affirming management 's estimate of 51.89 per share in 2000. One of the reasons for the rating was "strong cost controls and MCI merger synergies. The Company generated just under S I billion of merger synergies in the quarter."

Defendants ' Statements Issued in the First Quarter of 2000 Were Materially False and Misleadin? to Investors

159. Defendants ' statements detailed above in 11144-152 and 154- 155 were materially false and misleading. Defendants' statements reporting increased revenue growth and

- 61 - profitability were intended. to and did. convey the impression to investors - including Sprint shareholders - that the Company was financially strong. Defendants knew it was vital to keep up

,he facade of increasing growth because Sprint shareholders were scheduled to vote on the proposed merger on April 28, 2000 - the day after defendants released WorldComs {aiseiv

nflated first quarter financial results.

160. The financial results reported by defendants on April 27, 2000, including Fbbers' statement that "earnings per share surged 83% ..." and his expression of comfort with 13.5% to

1 5.5% revenue growth estimates for 2000 and earnings of 51.89 per share for the full year of

2000 were false . Ebbers also stated on an April 27, 2000 conference call that " in fact we have indications in the first quarter that some of this growth may be accelerating. " As defendants knew, WorldCom's revenue growth was experiencing negative growth. Prior to and during the

Class Period the telecom industry became increasingly subjected to competitive pricing pressures , which resulted in lower revenue growth and shrinking profit margins. For example, during the nine months ended September 30, 2000, WorldCom reported revenues of $29.5

`pillion. Of this amount, $13.9 billion , or 55%, of the Company ' s revenue was derived from its voice and wholesale and consumer business segments. These two business segments experienced negative revenue growth relative to the comparable 1999 nine month period.

161. WorldCom's first quarter 2000 results, including earnings and earnings per share were inflated through: (a) failing to take proper and timely reserves for uncollectible accounts receivables of at least $ 685 million ; and (b) through the improper revenue recognition practices detailed herein.

- 62 - 162. According to a former Mass Markets Customer Supervisor , defendants diegal activity heightened between March 2000 and December 2000, as the Company's revenues declined. Employees were pressured to "do something" to bring the stock price up. ine

something " to bring the stock puce up included backdating contracts to recognize additional sales at quarter-end, and offering cut-rate pricing to get contracts signed.

163. Defendants' statements discussing the new " Generation D" initiative in ¶144 .,ere also materially misleading. According to a former Senior Marketing Analyst based in Clinton. the Company had no products built for Generation D in early 2000, and lacked the capacity to build the web hosting products they publicly announced. In addition, the Company could not bill for web hosting services even if it did have the products , because the existing billing system did not allow it.

164. According to a former Dallas-based engineer, " Generation D" was "hype" which had no basis. As Ebbers later admitted, the Company had not kept on the "cutting edge" and had neglected to develop new products during the Class Period due to managements' focus on pushing the Sprint merger through . ( See, January 22, 2001 Fortune article). In April 2000, someone came into the engineering department after the close of business one night and put up posters on the wall touting Generation D. No one in the engineering department, which was mainly responsible for the planned implementation of the Generation D network expansion initiative, had any idea what Generation D was referring to.

165. According to a former Executive Manager for Business Development, the

Generation D products were very expensive and difficult to provide. The marketing department

- 63 - prepared internal estimates for Generation D products, which indicated that if the products were deveioped, the revenue generated from these products would be minimal, at best, dunng fiscal year 2000.

166. _%ccording to a former Telecom Technician who left the Company in June, 2000,

Ebbers was intently focused on completing the Spnnt deal, and played up the anticipated merger,

;announcing that the stock would "go through the root„ if the Sprint deal was completed. In fact, according to a former Dallas-based Regional Manager in the Engineering Department, from

October 1999 until June 2000, management was solely devoted to consummating the Sprint merger. Defendants had frequent negotiations with Sprint personnel, and had regular meetings with Sprint to plan construction and the laying of new phone lines. For example, if Sprint and

MCI WorldCom were planning network expansions in the same area, one company would be ordered to cease construction in anticipation of the merger . These in-depth planning meetings continued until the very day WorldCom publicly announced the formal termination of the merger, on July 13, 2000, when a team of high-level WorldCom managemer' abruptly flew home from Kansas City where meetings were taking place.

Defendants Complete Debt Offerings of M re than $5.5 Billion While Issuing- False Statements in the Second Quarter of 2000

167. Defendants continued issuing false statements in the second quarter of 2000 in order to, among other things, complete a massive multi-billion public debt offering and to obtain a favorable credit rating for the debt issuance . These statements were false and misleading for the reasons described in ¶¶58-72, 74-99, 159-166 and 224-266.

168. On May 18, 2000, the Company issued a press release indicating that Duff &

- 64 - ?helps Credit Rating Co., issued a rating of "A-" for WorldCom s soon to be issued multi billion

senior debt offering. Explaining the reason for the favorable rating, the press release stated:

WorldCom's rating reflects the company' strengthening competitive position and steadily improving financials. The company has experienced strong EBITDA growth led by its expanding data. Internet and international operations. The revenue contribution of WorldCom's data, Internet and international operations are expected to grow 32% in 2000... The rating also considers WorldCom's pending merger with Sprint that is expected to create a company with pro forma revenues of more than S73 billion in 2001 and EBITDA in excess of S25 billion.

169. On May 22, 2000, defendants tiled a Prospectus for the sale of S5.0 billion in

debt securities signed by defendants Ebbers and Sullivan. The Prospectus incorporated by

reference defendants' previous SEC filings, including defendants' false and misleading Annual

Report on Form 10-K filed on March 30, 2000. The debt securities offered by the Prospectus

were intended to repay commercial paper, which was issued for "general corporate purposes" and

in order to allow the Company to incur additional debt to pay off debt and to incur additional

indebtedness for possible use in connection with costs associated with the Sprint merger.

170. The Prospectus included historical financial data which included combined

rinancial information as a result of WoridCom' s merger with MCI as that information appeared

in the March 30, 2000 Annual Report on Form 10-K. The Prospectus, by including the financial

information in the 10-K, was false and misleading for the reasons detailed above

171. On May i2, 2000, defendants filed a Prospectus for the sale of an additional

560,000,000 in debt securities signed by defendants . The Prospectus was supplemented on May

31, 2000, and incorporated by reference defendants ' earlier SEC filings.

172. On May 24, 2000, John Sidgmore, a WoridCom Director privy to inside

- 6S - information regarding WoridCom s deteriorating nnanciai condition. said 314,239 shares of WorldCom stock at S38 .19 per share in a private sale, generating proceeds of over

S12 million.

Throughout the month of June, the Sprint Merger e xoenenced hurdle after hurdle with regulatory agencies, and approval of the highly anticipated deal seemed unlikely. On July

13, 2000, defendants announced that due to a failure to obtain federal regulatory approval of the

Merger, the Sprint WorldCom Merger had been called off. The failure of the Merger created new problems for WorldCom. For example, as reported in June 27, 2000 article in the Kansas

City Star, after the merger began co, fall through, WorldCom itself was perceived by the market as a takeover target. In order to avoid a possible takeover, WorldCom needed to find another company to buy that would provide the wireless operation it did not have , or to concentrate on more lucrative corporate or Internet services.

174. A July 18, 2000 press release issued by the Company stated that despite the cancellation of the Merger, WorldCom would "push ahead" with plans to expand overseas. The

Press release noted that by the end of the year, WorldCom intends to "extend its data relay service to 45 countries , widen its ATM geographic footprint in foreign markets, and undertake private line expansions in 26 Asian and European countries." Defendants also re-emphasized a push towards expanding the "Generation D" product line to overseas customers , stating that

Generation D services "form the underlying infrastructure of e-business and e-commerce."

175. On July 27, 2000, defendants issued a press release announcing results for the second quarter of fiscal year 2000, the period ending June 30, 2000. WorldCom, reported:

- 66 - .. (S]olid profitability gains in the second quarter ended June 30, 2000, driven by revenue increases in data, Internet and international services, combined with declining access and technology costs. Communications services revenues, net of voice access costs, increased 18 percent year-over-year. Including access costs paid to local exchange carriers, communications services revenues grew $1.2 billion or 14 percent year-over-year to $10.2 billion. Excluding WorldCom's interest in the Brazilian communications company, Embratel, communications services, revenues were $9.4 billion, a year-over-year increase of 13.3 percent or S 1.1 billion. EBITDA increased by $824 million or 29 percent from the year-ago period to $3.7 billion. Operating income increased by S724 million or 41 percent from the second quarter of 1999 to $2.5 billion. Cash earnings (earnings before goodwill amortization) per share increased 44 percent year-over-year to $0.56 per common share. Net income increased 54 percent to $1.3 billion, or $0.46 per common share.

176. In a section of the press release describing "highlights" for the quarter, defendants stated:

Internet revenues increased 40 percent from the year-ago quarter, fueled by robust demand for higher bandwidth dedicated access and value-added services as corporate customers increasingly embrace the Internet to improve business functions. Customers spent nearly 1.6 billion hours connected to WorldCom's dial-up Internet service during the quarter, an increase of 62 percent from the same period last year.

177. Commenting on WorldCom's outlook, defendant Ebbers stated in the

July 27, 2000 press release:

We are exploring opportunities to separate portions of our switched voice operations into separate companies or tracking stocks. This would allow more efficient management of the voice business while enhancing WorldCom's effectiveness in targeting commercial customers. Revenues from commercial customers grew 20 percent year-over-year this quarter, while wholesale and consumer revenues grew 1 percent

178. On July 27, 2000, defendants hosted a conference call to discuss the Company's second quarter results . During the conference call, defendant Ebbers stated : "WorldCom posted a strong quarter with record revenue and record profits." In response to the conference call,

- 67 - analyst Steve Shook from Wachovia Securities reported a "strong 'buy" rating for WoridCom stock. A July 27, 2000 report noted that second quarter results were in line with estimates. For

2000, Shook estimated EPS of 51.89 per share, and 52.46 for 2001, numbers which defendants indicated they were comfortable with.

179. On July 27, 2000, \VorldCom stock traded at over S39 per share.

180. On August 1 , 2000, defendant Sullivan exercised options at S 17.33 per snare and sold them on the same day, for 338.20 per share, generating proceeds of S9.9 million at artificially inflated prices - - in marked contrast to Ebbers's statement in ¶178 expressing confidence in WorldCom s ability to grow revenues and profitability.

181. On August 14, 2000, defendants filed a quarterly report on Form 10-Q for the second quarter of fiscal year 2000, the period ending June 30, 2000, which was signed by defendant Sullivan . The 10-Q reiterated the financial results detailed above, and again affirmed management's position that the financial statements were prepared in conformity with GAAP, and fairly presented the Company's financial condition.

182. The quarterly report also depicted strong increases in revenue and profitability by segment . For example with respect to commercial voice revenues , the Company reported

i ;Lreases, stating:

Commercial voice revenues for the three and six months ended June 30, 2000 increased 4.0% and 3.0%, respectively, over the prior year periods, driven by gains in traffic of 10.6% and 8.3%, respectively, as a result of customers purchasing "all-distance" voice services from the Company. These increases were driven almost equally by demand for both local and long distance services. Access charge reforms along with declining network costs have facilitated the reduction in pricing. Voice revenues include both long distance and local domestic commercial switched revenues.

- 68 - 183. The quarterly report also revealed that several class action suits had been filed alleging that WorldCcrn improperly charged "pre-subscribed" customers "non-subscribed" or

"casual" rates for certain direct dialed calls, and challenging the Company's credit policies for

'rion-subscriber" traffic. The complaints sought rebates and punitive damages on behalf of all affected customers. The class actions arose from a prior litigation against WorldCom, a case entitled Halprin, Temple, Goodman & Sugrue v. MCI Telecommunications Corporation (FCC pile No. E-98-40 ) which involved customers whose lines were presubscribed to MCI (that is, they could place calls using MCI on a i+ dialing basis)`. However, those customers were not listed in MCI' s billing records as being MCI subscribers. As a result, the customers had been charged very high rates ($ 0.38 per minute plus a S2.49 per call surcharge ) rather than MCI's basic subscriber rates . The customers complained that these high rates and MCI's practice of imposing such high rates on presubscribed "non-subscribers" was illegal and violated federal law as well as state consumer protection laws against deceptive and unfair practices. In a November

1998 ruling, the FCC agreed with the complaining customers, found that MCI"s practice violated the Communications Act, and ordered MCI to refund to the customers the difference between

6 The actions were consolidated and coordinated as multi-district litigation, under the caption In re: MCI Non-Subscriber Telephone Rates Litigation, MDL Docket No. 1275 (S.D. Ill.) (J. Herndon). The Consolidated Class Action Complaint ("Complaint") alleged that MCI engaged in an "unjust, deceptive, and unreasonable nationwide practice of rate slamming." These charges included "substantial hidden surcharges" up to more than fifty times greater than the direct dial long distance rates which MCI marketed and promoted to customers. The Complaint alleged that if a customer found out about the illegal rates and surcharges, MCI would refund or credit the customer all or part of the overcharge in an effort to keep the customer quiet. See, Complaint, ¶ 39.

- 69 - .'*ICI's basic service rates and the non-suoscnber rates.

Defendants Press Releases and Quarteriv Report Detailing Second Quarter Results W ere False

184. The statements detailed above in 168-172, 174-1 7 8 and 181, above, were

m aterially false and misleading for the reasons detailed in 58-72. 74-99, 159-166, 2.4-266, and

7ecause:

(a) the financial statements were artificially inflated due to defendants' failure

'o properiv account for doubtful receivables , and to take a necessary charge to writeoff at least

5685 million worth of uncollectible receivables;

(b) defendants knew of the huge amount of backlogged uncollectible accounts which w ere being held on WorldCom's books by virtue of a monthly written report detailing

accounts in bankruptcy or prolonged litigation. in fact, defendants received a package of

information which included a detailed analysis of how long the account had been uncollectible,

the date of the bankruptcy, the status of litigation , an analysis of costs related to the receivable

and a memorandum on what activity or action was done by the Legal Group and Receivables

Groups in connection with the account. Ebbers himself received these reports because he was

the individual at WorldCom responsible for authorizing writeo fs in excess of $25 million

(c) defendants knew of the large and increasing amount of uncollectible

receivables , including uncollectible accounts in excess of $25 million which required Ebbers' express authorization to write-off - - consent which he failed to give during the Class Period;

(d) even after defendants knew an account was uncoilectible, the account would still be included as a valid receivable in order to avoid taking a charge to earnings, until a

- 70 - gush in late September 2000 to "waste all this stuff off;

(e) the former MCI accounts were in extreme disarray, and included accounts which were as much as seven years past due. Indeed approximately 50% of the accounts handled

5v WorldCom's Tulsa office were in arrears by three to seven Years;

(f) as early as February 1999, defendants knew that WorldCom would have to writeoff at least 5100 million of uncoilectible accounts; and

(g) as detailed below in ¶224- 266, defendants financial statements included in the quarterly report were not prepared in accordance with GAAP, and did not, as defendants

new or recklessly disregarded, fairly present the Company's interim results.

185. By June 30, 2000, WorldCom' s accounts receivable had mushroomed to a very unusual level. This was due to the fact that collections on customer accounts began to slow.

Indeed, throughout the Class Period, it was widely recognized within WorldCom that the

Company was having significant problems collecting its accounts receivable . As a result, the age of the Company's outstanding receivables progressively increased. For example,

WorldCom's average days' sales outstanding (i. e.. the average number of days it takes to collect receivables) at June 30. 2000 totaled approximately 70 days.

186. The defendants knew or recklessly disregarded the risk that WorldCom would be unable to collect on its receivables increased as the receivables remained uncollected over an extended period of time , and that GAAP required that WoridCom establish an adequate reserve in its financial statements to account for probable uncollectible receivables.

187. For example, although WorldCom's gross accounts receivable increased by

- 71 - .oproximateiv 30.8% during the nine months ended June 30. --_j. its reserve for uncoiiectible recetvables increased by about half that amount, or i6.6% during the same time trame. In violation of GAAP, WorldCom' s Financial statements failed to adeouateiv reserve for

nco ilecttble accounts receivable.

188, In addition to defendants' knowledge or reckless a:sregard for the out of control receivables situation , \VorldCorn employees inflated revenues through a variety of other duplicitous means, particularized above in ¶158-72, such as:

(a) placing already written off accounts "back on the books" at a later date in

irder to make specific quarters look good;

(b) intentionally misleading customers about rates and services;

(c) recognizing revenue from canceled accounts and then rewarding the sales representatives for their improper conduct through the "Presidents Club" incentive program;

(d) reducing sales commissions suddenly, backdating contracts, and failing to pay vendors on time to meet analysts' estimates;

(e) competing for the same customers and undercutting their own rates;

(f) discounting contracts and renegotiating contracts while failing to take the required loss and instead recognizing revenue from both the original and the renewed contract; and

(g) "double-billing ", slamming, and otherwise " tossing aside the rules at the end o i a quarter" to make financial results look better than they were.

189. Defendants statement regarding the increase in revenues from commercial

- 72 - customers in 1182 was also false. On a November 1, 2000 conference call, defendant Ebbers admitted that the Company had protected declines in the voice sector. Ebbers was asked by John

`Jan of Chicago Tribune about the fact that the decline in voice/long-distance had been declining

,or a very long time, and was asked why the Company did riot plan for that. Ebbers admitted that the transition to wireless services had a matenai, adverse impact on the Company's voice

.ervices, and stated that: "I don't think it's a real big surprise that our voice services are decreasing at the rate they're decreasing at." The following exchange occurred:

[Vanj: "so you weren ' t suprised [by the declines in voice revenues]?"

[Ebbers]: I think that's what I said.

[Van]: I thought originally you said that you had been surprised I'm sorry I

misunderstood, so you've not been surprised by the declining margins in voice?

[Ebbers], Well I was really talking about revenues more than margins. You know

the declining margins in voice, the margins in voice have not been declining, on

the business side have been declining some, but on the consumer have not been

declining substantially. I don 't think it was a surprise to us, it was a little steeper

incline that maybe we had been projecting.

Defendants Announce an Additional Acquisition Using WorldCom 's Inflated Stock as Currency

190. On September 5, 2000, defendants issued a press release announcing the acquisition of Tampa-based Intermedia Communications Inc., and its controlling stake in Digex, Inc., a leading operator of computer centers that run Web sites . The deal was

- 73 - priced at S2.9 billion in a combination of cash and WorldCorn stock. Pursuant to the merger,

ICI WorldCom would acquire a controlling interest in Digex Incorporated, a managed web and application hosting services company. Uender the merger agreement. each outstanding share of

:ntermedia common stock would be exchanged for common stock of MCI WoridCom. The actual number of shares would be determined based upon an average closing puce formula of

MCI WorldCom common stock prior to the closing date of the transaction . (See, Form 10-Q, dated November 14, 2000).

1 9 1 . On September 1 1, 2000, an article quoted defendant Ebbers, stating with respect co the acquisition: "[w]ith this merger, \VoridCom accelerates by 112 to 18 months our ability to provide world-class managed Web and application hosting services , one of the highest growth markets in the industry." The Intermedia merger would also result in significant cost savings for

MCI WorldCom. According to a September 5, 2000 article published on the Business Wire, the merger would add synergy cost savings in the range of $750 million to $1 billion, with additional interest savings of $150 million annually.

192. On September 23. 2000, defendant Ebbers sold 15% , or 3,000.000 shares, of his

WorldCom holdings, with a market value of approximately S78 million. The shares were purchased in the open market in 1996, and were subject to a forward sales contract. Under this type of contract, Ebbers could receive payment for the 3 million shares in advance, permitting him to pay down a margin loan . The contract would also require Ebbers to deliver the shares at a later date, and may allow him to share in any gains in WorldCom stock during the interim. In this fashion, according to an October 5, 2000 Bloomberg News article,

- 74 - fibbers could "gct sonic money up trout nuU still get appreciation over uric ute of the contract.

i93. :. November 17. 2000 article to ttte Sew inrk Limes entttied "'W'JurldCom s t3emte

Ebbcn Scrambles to Raise Cash", discussca 1.bbcrs margin luau. stating:

WorldCeat stock is down 75%% from the pe-ak it reached in the sumntet nt 1999, but the sharc9 [Ebbersl uwru are wnrth 5263 million at the current prier of Sl6. i; you assume tha the margin loans that Mr. Ebbers took cut without WorldCotn ,uarnnttees are Mid outstanainq - - in assumption that seems r°aauuablc aithougn the Cnrnpany says he will r or ni.scuss the issue - it seats Aossihlc that he does not have very rnueb cowry left.

F-inw did that happen? The urobahle answer is that Mr. Ebbuc ran hts pcrsonai portfolio the way lie ran hi.1 company - - on the edge 'i'hc company grew by beUiuy un trcnri.9 and gobbling up other unnhantcs... [H]e evidently uecdal more mnncy than he was being piiid So he took out margin luau. With the stock using, such louu were readily available whenever hr wanted. Now the lender lire tlrurandtng cash. Fortunately Col: Mr 1'hhcr3, he - unlike other WnrldCom shareholders . - eppaiultly r-in narrow as much as he w n is from the company to cover 'ttia margin calls.

194. Ott Sehtembcr 29. 20001 WorldCunt stoc.lc traded at over $30 per share.

THh; 1KUTH IS REVEAL RD

195. On October 26, 2000, defendants issued a press rclcute rcportrnng third quarter

2000 results and lower than expected revenues . Excluding one-time items , the Company reported prolis of $1.4 pillion, or 47 cents a share , compared with S 1.1 billion, or 37 cents, a year earlier . Including one-time charges . WorldCorn 's thins-quarter net income was 5967 uiIlion, or 33 cents a share. Defctdants' rcveeied that the growth of WorldCotn's tntcmct division, UUNet, - - which they had represented on July Z7, 2000 as one of the Cutupany'<

"high -crowih " sectors - - had actually declined . The Internet division actually experienced a l456 decrease to growth - - Guru 40% in the .ccond quarter of fiscal 2000 to 26*/A in the third

- 17 - ^uuartcr. D fendtint~ also disclosed icr ripe first ttme ii it al" to baru

wnoiesale customers, rnw Company -mre down e405 rntii un In rece:vJOleS On &LI Mrtc- tax o:sls,

jr SASS before tares. 71cc wntc-ot-f was citaracren7cd by anaiysts, i,tcludtng Bill Mann from i he

.4'lorlvv pool, 1 a difficuik Pill for WorldCom snareiwiricrs to swatlow,"

196. :decd, the Companys dUIL:locure that the 5685 iuiiiion charge in September i000

vas assocI ed with rpcctiic accounu W at wcrt no longer Ponied co il ctibie dje ru

;anlo uprcies, lttigurini: and serriemon0 uj coniroCt uai d sptdas is ^,u,Ocstt\'e tttat the

iclaycd recognizinu a ions nn its uncoilectiblc rrcc ,va'olcs until Weil -after it -as probable U.4L

such ln.mc3 were incurred N< contcrnpiated under GAAP

197. Defcudauts uiso revealed that lacy would announce a ro tnictllnng on NoveIDCr

;, 2000 A ttcr the news was 6 s.scmtnatca, t;e pric:c ul 'sVoridCom -,lock dropped rmm 535.2.5 on

October 25, 2O00, on trading volwites of approximately 40 million, to 121.75 on Octuucr 26,

2000, on trading volnmc3 of nearly 67 rntThnn. .Aftct the full extent and magnitude of

WoridCor is flnanci-al condition and growth utospccr4 were revealed the fuilowing week,

World(:om declined to its 52-week low.

198. nn November 1, 2000, tlctcndants delivered in additional blow to the investing

community . DeCcndants issued an earnings warning , blaming the lowered earnings outlook uu

hig,hcr spending for businc.ct growth- pressure on prig ing, unfavorable foreisu exchanec rotes and

the shit{ of consumer voice to w i rciess tccrtnologies. T-tc Company stated that fourth inarter

rruug: would be a far cry from die 50 .49 rer shore anlysie and iuve..stors expected - - ;uuiuua

in at between 50.34 and %0.3'/ per mare . Defettdanrt revealed that the outlook for the Company

- 76 -

4 Lf iOOl is Ak,0 stgluticanuy icss than the S-13 anaiy^,te cstLrnate "r-.c Curnony revised earnings per shuc estimates to betwecu 51.55 and $1.65. Rcvc:,uc growtn was revise-; downward dramatically, to netween 7 and 9°/% for 20Ul. For MCI, thr. company aanouiu:cd that revenue would be flat or slightly down in 2001. or SO.75 to 50,30 per shar=

199. Defendants also discioseci in in-, November 1, 2000 ncess release that the

Company will separate its hustncsses into t,+o pu b licly traded "traciui g" .cocks. A tracking

;rock traits separately but sit.arcc the directors and Cnao ccs of its parent . Tlie Company arunounccd that the two stocks will inciude WorldCom ( rcflectinv high-growth core businesses of data. internal dint Web ho3tine , eorpucate meal and lone distance ^,e vices and internatiuual

;)ustncsscsl and MCI ( rcfiermng the slower- Sruwrh husincsses of corm uurcr and small business tckcommunicntions services ). •.harcnoiderz will 1 MCI share for every 25 WorldCom shares they own . According to a November 1, 2(0N1 article published n m (.u SMarlcenvaich.co,n, the upshot is, it's iuat clear what WorldCorn b.+Mcd trom buying MCI."

200. Accunling to a November 1, 2000 article published on MurninE .ctar.com;

Our biggn( concern is with the new MCI tracking stock. Eartriuss before interest, taxes, depra:iation, and amortization (EBITT)A) for thi: unit are expect i to be $4.5 billion this year, but decline nearly 30% next year to $3.2 billion. MCI is also expected to pay S300 million in dividends to its shareholders annually, with the remainder of cash flow going to capital spcuiling and debt repaytuent. With cash flow decliuiug at such a rapid pace, we expect investors will initially require a very high dividend yield on this stock, holding the price of the shirc-3 dawn cnnsiderabty.

201. Also shocking to investors who viewmi WnrldL om as a company capahic of acquiring and integrating related asacta and companies , a nci essity in compete in the modern-day

- 77 'ciecommunications industry, Ebbers adrmutted that the Company s aggressive acquisition

grogram could not continue . In a November i, 2000 article published in AtX Eirovean Focus,

Ebbers stated that the Company will not be buying a wireless company or other such assets in the

:,.ear term. calling such an acquisition a "definite no-no in the short term."

-_02. in response to the Novernoer 2, 2000 announcement. analysts downgraded

WoriaCom's ratings. For example, Steve Shook from '\Vachovia securities, who had previously

;aced the stock a "buy" changed the rating to "neutral ". Shook stated in a November 2, 2000

report, "she company surprised us with its revised guidance for growth in its data, Internet,

intemationai, and business voice : venue. '

203. The impact on investors was devastating. During a November 1, 2000 conference

call, defendant Ebbers stated, " we've let our investors down ." As reported in a November 9,

2000 Business Week article, Ebbers stated during the November 1, 2000 conference call, "I'm

sure with the recent performance of the stock people have a legitimate right to ask if I'm the right

person to lead this company ." Investors agreed. The stock dropped over 20% on November 1,

2000, falling 55.13 to $18.63.

ADDITIONAL SCIENTER ALLEGATIONS

A. The Individual Defendants ' Were Provided With Inside Information Including Monthly Reports Which Detailed The Company's Uncollectible Receivables

205. The scienter of the Individual Defendants is also supported by the fact that they

were provided with complete access to all of the adverse information regarding WorldCom's

operations by virtue of their status as the Company's highest ranking executives , The Individual

4

- 78 - Defendants were provided with such adverse, matenai information by means of. fn ter aua. their access to internal corporate documents (including the Company's contracts, operating plans, budgets and forecasts and reports of actual operations compared thereto), reguiar communications with other officers and employees at WoridCom. attendance at meetings o f the management and Board of WoridCorn and committees thereof, and via reports and other

;nformation provided to them in connection therewith.

206. Specifically , both defendant Ebbers and Sullivan commented on each and every quarter of the Company' s announced financial results , both in press releases and on conference calls with investors and analysts . in addition, defendant Sullivan signed the Company's quarterly reports and the Company's Annual Report on Form 10-K (which was also signed by defendant

Ebbers). In the Company's quarterly reports, defendants verified that the financial .statements included therein were presented fairly and in compliance with GAAP. Therefore , the Individual defendants knew or recklessly disregarded that revenue had been improperly recognized in material amounts throughout the Class Period through the practices described above.

207. Most importantly, as detailed above, regular monthly reports describing which customer accounts were in litigation or bankruptcy - - i,e., hkely uncoilecttble - - were prepared by the legal group in the Corporate Credit Department in Tulsa Oklahoma, which were given each month to WorldCom's Controller, David Myers, who reported directly to defendants

Sullivan and Ebbers and attended meetings with the individual defendants on a regular basis.

B. Cooking The Books to Meet Analysts' Estimates

208. As defendant Ebbers acknowledged in a November 1, 2000 conference call,

- 79 - public companies are 1udQed on their revenue growth and their EP S growth." As discussed in detail above, it was essential for the Company to foster and maintain publicly the illusion of being a high-growth company in the face of increasing competition in the telecommunications

ndustrv. This illusion was necessary in order to, inter aiia. allow the Company to position itself

.o acquire Sprint as soon as regulatory approval was received. addition, defendants' misleading presentations to rating agencies, including Duff & Phelps, allowed the Company to sell over 5 S billion of debt securities with a high "A-" credit rating - - the proceeds from which defendants intended to pay off existing commercial paper to free up additional debt for the Sprint merger.

209. The importance of meeting analysts' estimates was also crucial in order to allow defendants to merge with Sprint on more favorable terms, as detailed above. Indeed, defendant

Ebbers made a point of noting that the Company was "comfortable" with analysts estimates for

wns and earnings in 2000. Defendants also regularly issued press releases indicating that

WorldCom was reporting financial results " in line with analysts' estimates ." As set forth herein, defendants falsified WorldCom' s earnings during the Class Period, among other reasons, to create the illusion that WorldCom was meeting analysts' expectations . The individual Defendants engaged in the fraudulent practice of "earnings management " by cooking WoridCom's books in part because they knew its failure to meet analysts' estimates would have resulted in a drastic decline in the stock price.

210. As set forth above, WorldCom's reported EPS figures met or exceeded analysts' consensus estimates in every quarter during the Class Period. If the defendants had reported the

- 80 - company s Financial results in accordance with GAAP, WoridCom would have missea analysts cstimates in virtually every quarter during the Class Period . For example , WorldCom reported pro forms earnings per share of $0.46 in the quarter ended June 30, 2000, as detailed above in

175. These earnings were lust above the one-half cent threshold necessary to round up to the

nearest cent - - and accordingly meet analysts' estimates for the quarter. Moreover. had

WorldCom pro-forma earnings for the June quarter amounted to just S I million Tess than the

..ported figure (i.e., 51.229 million versus the reported $1.330 million), the Company would have reported pro-forma EPS of 50.45 versus the reported 50.46, thus falling snort of the consensus estimates of $0.46 per snare. as published by First Call Corporation. S.e. October 2,

2000 Report on WorldCom issued by the Center for Financial Research and Analysis. Inc.

C. Defendant Sullivan Failed to Disclose the Truth in Order to Sell Millions Of Dollars Worth of WorldCom Stock at Inflated Prices

211. Defendant Sullivan was also motivated to condone the accounting manipulations and improper revenue recognition which was widespread at WorldCom in order to sell significant amounts of shares at artificially inflated prices . On August 1 , 2000, Sullivan exercised options at 517.33 per share, and sold the shares for $38.20 per share, gaining

$9,913, 250. Similarly, John Sidgmore, a Director of the Company who participated in several earnings conference calls with Ebbers and Sullivan and was privy to inside knowledge regarding

WorldCom's declining growth, sold 314,239 shares of WoridCom stock on May 24. 2000 in a private sale, for S 12,000,787.

- 81 - 0. Defendants Were NIotivated to Conceal the Truth in Order to Receive Performance Bonuses Pursuant to the 1997 Performance Bonus Plan

212. According to the Company's Proxy Statement tiled on May 1, 2000, to i 999,

of 5935,000. or 1999, defendant Ebbers received a base saiary ; fiscal year the Company 's stock once increased from 547.83 to 553.06 ver snare. The Company reported $91.1 billion in total assets as of December 3 1, 1999 and 537.1 billion in revenues. Since the Company met established performance goals for 1999 under the Performance Bonus Plan with respect to revenues, Ebbers was granted a bonus of 57.500,000. For 2000. Ebber's salary was increased to

31,000.000. Ebbers was also granted options exercisable for an aggregate of 1.800,000 shares of common stock.

213. In 1999, defendant Sullivan received a base salary of $600,000, with a cash bonus of $2,760,000. He was also granted 900,000 options with a potential realizable value of over S26 million.

214. According to the Company's Proxy filed on May 1, 2000, the key components in determining the amount of cash bonuses awarded include the financial performance of the

Company, and revenue growth. The Proxy stated "[ b]ased largely upon internal growth, the successful completion of various transactions and the attainment of quantitative performance goals the Committee awarded bonuses for 1999 which fell between the median and high end of the range of bonuses at comparable companies."

215. Defendants knew if the Sprint Merger or other significant business combinations were consummated during 2000, they stood to be handsomely rewarded as a result of the

Company's 1997 Compensation Plan. At the same time, defendants knew that if the Sprint deal

- 82 - were not approved and WorldCom stock continued to deciine, ^VoridCorn itself could become a

takeover candidate. If WorldCom were acquired or experienced a "change of control",

defendants knew they were cushioned and could immediately cash in their options . .according to

the Company's 1999 Proxy, defendants considerable options become exercisable in "three eouai

annual installments beginning January i, 999 through January 1, 2001, but vesting may be

accelerated upon the consummation of a specified change of control transaction as determined by

the Committee." Accordingly, defendants were motivated to misrepresent WorldCom's

profitability and growth in order to either finalize the Sprint Merger , or to position \VorldCom as

art attractive acquisition candidate.

E. Defendant Ebbers Had Strong Personal Motivatious to Inflate WorldCom's Stock Price

216. Defendant Ebbers knew that if the Sprint merger were to be approved , WorldCum

stock would "go through the roof' and he stood to gain hundreds of millions of dollars.

Conversely, if the Sprint deal did not proceed , and WorldCom was unable to quickly make

another significant acquisition to mask the Company's declining revenue and growth, Ebbers

stood to lose millions from a possible forced sale of 3,000,000 WorldCom shares due to a margin

call. Indeed, on September 28, 2000, Ebbers filed with the SEC an intent to sell S79 million

worth of WorldCom stock to pay offa loan he had taken to buy the shares in 1996.

217. Accordingly, a main objective of all of the foregoing fraudulent activities was to

bolster the price of the Company' s stock, because Ebbers' personal fortune was at stake . Ebbers

and WorldCorn allowed Ebbers to borrow money from the Company as if it were his personal

bank. As noted in a January 14, 2001 article published in The New York Times:

- 83 - Some iarge ioans to prominent e;:ecutives have more to do with personal finance than corporate finance . Bernard l.Ebbers, the chief executive of WorldCom, the telecommunications company , ran into personal financial trouble last fall, when .is substantial stake in the company fell in value . Struggling to meet margin caiis, Mr. Ebbers turned to WorldCom for help. Last September, the company ient him S50 million. Two months later, it aereed to guarantee up to $100 million n debt that Mr. Ebbers owed to an outside tender, and offered him an additional 525 million in credit. By Nov. 14, Mr. fibbers had tapped S 1 1.5 million of that ; fine. In all, he has borrowed $61.5 million from WorldCom 's shareholders.

S. As further noted on November 14, 2000, when Defendants caused the Company

the its 2000 third quarter Form i0-Q with the SEC ("the third quarter 2000 Form i0-Q")-

(a) The Company loaned S50 million to Ebbers on September S, :000 (a copy of the promissory note is attached as Exhibit 10.4 to the September 3 0, 2000 Form io-Q).

(b) The Company agreed to loan Ebbers up to an additional S25 million on

November 1, 2000 (a copy of the promissory note is attached as Exhibit 10.5 to the September

30, 2000 Form 10-Q), of which $11.5 million had been borrowed as of November 14, 2000.

(c) The Company agreed to guarantee up to $100 million principal amount of indebtedness. together with any related interest, attorneys' fees or costs, owed from time to time

,:)v Ebbers to an institutional lender (as of November 14, 2000, no advance under the guaranty had been made).

(d) Ebbers used, or planned to use, the proceeds of the loans from the

Company and the loan guaranteed by the Company to repay certain indebtedness under margin loans from institutional lenders secured by shares of the Common Stock held by him.

(e) Ebbers pledged to the Company shares of the Common Stock held by him co secure his obligations under the loans and guaranty. The pledge is subordinated to obligations

84 - :.o his existing tenders.

2 19, The Company's 2000 Form ? 0-K subsequently disciesed the fact that:

(a) The Company agreed to guarantee up to an aggregate of S 150 million

--nncipal amount of indebtedness, together with any related interest, owed from time to time by

bbers to Bank of America. N.A.

(b) the Company agreed to guarantee the following amounts otherwise

?ayable to Bank of America, N.A. by Ebbers or certain companies controlled by him: (1) S36

million due and payable on June 30, 2001, :mess an approximately X45.6 million letter of credit

sea to support financing to an unrelated third party (the "Letter of Credit") is cancelled and the

Lender is reimbursed for all draws thereunder other than as a result of the liquidation of collateral

by the Lender; (2) S25 million due and payable on September 30. 1-001,,(3) Any amounts subject

to a margin call with respect to certain margin debt (the "Margin Debt") which are due and

payable on the following business day; (4) Additional amounts depending upon the price at

which WorldCom Common Stock closes ; (5) All of the Margin Debt ( including interest,

principal, fees and expenses) - which is due and payable on the business day following the first

day on which WorldCom Common Stock closes at 510 per share or iess. together with a cash

payment or equivalent sufficient to fully coilateralize the Letter of Credit.

(c) As of March 30, 2001, Ebbers' indebtedness to the Company pursuant to

the above- described loan arrangements was $84 . 6 million , including accrued interest.

(d) As of March 30, 2001, the Margin Debt aggregated approximately S 183.7

million, including accrued interest, pursuant to various loans which become due and payable on

- 85 - ^ r before January 31, 2002.

(e) The loans are secured by the pledge of aporoximateiv i I.3 million snares

,f WorldCom Common stock owned by Ebbers.

(f) The obligations of Ebbers to Bank of.^rnenca, NA. (including the 556 million , S25 rruili. on, etc. described at above) become due and payable upon an event of default which included, among other things, any materially adverse change in his compensation package from the Company.

220. Significantly, the Companv's April 19, 2001 Form S-+/A contained the following disclosure:

Mr, Ebbers has used, or plans to use, the proceeds of the loans from us to repay certain indebtedness under margin loans secured by shares of our common stock owned by him and the loans guaranteed by us are also secured by such stock and the proceeds of such loans were used for private business purposes. The loans and guaranty by us were made following a determination that they were in the best interests of WorldCom and its shareholders in order to avoid additional forced sales of Mr. Ebbers' stock in WorldCom_ The determination was made by our Compensation and Stock Option Committee as a result of the pressure on our stock price, margin calls faced by Mr. Ebbers and other considerations. Such actions were ratified and approved by our board of directors. (Emphasis added).

F. Defendants Inflated WorldCom Stock to Use as Currency to Negotiate Kev Acquisitions

221. As defendants knew, consolidation was the key to continued profitability in the telecommunications industry. To that end, defendants had for years been acquiring companies using WorldCom stock as a major component of the purchase price.

222. One of the key reasons defendants were motivated to artificially inflate the price of WorldCorn stock was to acquire Sprint on more favorable terms . The Sprint deal involved a

- a6 - stock swap based on an average ciosing price for WoridCorn stock. Accordingiy, the higher

WoridCom' s stock price, the less dilution would be generated from the merger - eiiminaung a material, negative impact on the Company 's earnings per share.

223. The same racionaie applied to the Company' s deal to acquire Intermedia. On

September 3, 2000, defendants announced that the Company had entered into an agreement to

purchase Intermedia Communications, Inc., pursuant to which MCI WorldCom would acquire a

controlling interest in Digex Incorporated, a managed web and application hosting services

company. Under the merger agcement, each outstanding share of Intermedia common stock

Would be exchanged for common stock of MCI WorldCom . The actual number of shares would

be determined based upon an average closing price formula of MCI WorldCom common stock

prior to the closing date of the transaction. ( See, Form 10- Q, dated November 14. 2000).

G. Defendants Issued False Statements in Order to Complete Two Public Offerings of Debt Securities

224. Defendants also concealed the Company' s dramatic increase in uncollectible

accounts receivables in order to receive favorable ratings from credit agencies prior to offerings

of debt securities, detailed above in X168. Defendants announced offerings of debt securities in

May and June of 2000 , generating proceeds of nearly $6 billion for the Company - - to be used

in part to finance costs related to the Sprint Merger. Had the truth been known about the

Company's (list), these offerings would not have been possible at such favorable terms.

- 87 - DEFENDANTS FALSE FINANCIAL PORTING ANND VIOLATIONS OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

A. WorldCom 's Financial Statements During the Class Period Violated GAAP

225. As particularized below, during the Class Period, Defendants knowingly filed alse financial statements vioiative of Generaily Accepted Accounting Principles ("GAAP") that understated the Company's expenses and overstated the Company's revenues and earnings while simuitaneously issuing false and misleading statements in press releases and other publicly disseminated documents. Defendants' scheme centered upon the concealment of known adverse information, the frauduient recordation or-hundreds of millions of dollars of revenue upon the issuance of false, erroneous or otherwise improper invoices, and the non-recordation of (bad

'ebt) expense associated with non-collectibility of these bogus invoices. When the adverse information and the hundreds of millions of dollars worth of non-legitimate and uncoilectible receivables could no longer be concealed, the Company was compelled to make belated disclosures and take a belated catch-up charge to earnings,

226. The Company's revenue recognition policy as set forth in the financial statements which were contained in the 1999 Form 10-K stated:

The Company records revenues for telecommunications services at the time of customer usage. Service discounts and incentives are accounted for as a reduction of revenues when granted or, where a service continuation contract exists, ratably over the contract period. Revenues from information technology services is recognized, depending on the service provided, on a percentage of completion basis or as services and products are furnished or delivered.

227. The Company' s revenue recognition policy, as set forth in the financial statements which were contained in the first quarter 2000 Form 10-Q and in the second quarter 2000 Form

- 88 - 10-Q, incorporated the above revenue recognition policy by reference, and assured investors that the interim financial results were prepared in accordance with GAAP, and in the opinion of management, fairly presented the Company's financial results.

228. The foregoing representations were materially false and misieading because the

Company ' s revenue recognition policies were not in compliance with Generally Accepted

A.ccounting Principles ("GAAP"). In this regard, the issuance of invoices based upon the

Company' s slamming practices could not reasonably be expected to result in payments by consumers who did not request or authorize services from the Company.

22 similarly, the Company could not reasonably be expected to receive remittances based upon its issuance of invoices evidencing excessive charges to phone companies and competitive local exchange carriers (which were 'historically disputed"), the issuance of invoices to customers for service after the date of termination of service, the issuance of invoices to customers for service at rates in excess of the rates quoted and agreed upon, and the issuance of duplicate invoices.

230. Specifically, the Company's recognition of revenue based upon the foregoing practices violated GAAP which provides that: (a) Profit is deemed to be realized when a sale in the ordinary course of business is effected. (Chapter IA of Accounting Research Bulletin No.

43, paragraph 1); (b) Revenues should ordinarily be accounted for at the time a transaction is completed with appropriate provision for uncoilectible accounts. (Accounting Principles Board

Opinion No. M, paragraph 12); (c) Revenues and gains generally are not recognized until realized or realizable, and revenues are considered to have been earned when the entity has

- 89 - .uostantiaiiy accomplished what it must do to be entitled to the benel is represented by the

°_

'hat might result in gains usually are not reflected in the accounts since to do so migh t recognize revenue prior to its reaiization . tStatement of Financial Accounting Standards No. 5. paragraph

231. This GAAP has been reaffirmed by the SEC on numerous occasions. For

:oxamvle, it was reaffirmed by the SEC in Accounting And Auditing Enforcement Release No.

S12 (September 5, 1996 ) which states: ' Generaily Accepted A ccounting Principies ("GAAP") irovide that revenue should not be recognized until an exchange has occurred, the earnings process is complete , and the collection of the sales price is reasonably assured. These conditions ordinarily are met when products are exchanged for cash or claims to cash, and when the entity has substantially performed the obligations which entitle it to the benefits represented by the revenue."

232. As a result of the improper recognition of revenue and the failure to appropriately provide for uncollectible accounts , the Company materially overstated receivables, revenues, income, and net worth in all financial statements which were disseminated to the investing public throughout the Class Period. Accordingly, the Company's year end 1999 financial statements and all interim financial statements disseminated to the investing public during the Class Period were not presented in accordance with GAAP.

233. The Company ' s policies of slamming, excessively billing traditional phone companies and competitive local exchange carriers, issuing invoices to customers for service

- 90 - after the date of termination oc service, issuing invoices to customers for service at rates in excess of the rates quoted and agreed upon, and issuing duplicate invoices were concealed from the investing public in violation of GAAP (A.PB Opinion No. 22. Disclosure Of Accounting

Policies' and the contingency arising from the existence of the Company' s massive accumulation of disputed billings was concealed from the investing public in violation of GkAP (FASB

Statement No. 5, Accounting For Contingencies ). These non-disclosures were necessary in order

'o conceal the fact that the Company' s earnings , in significant pan, were based upon the generation of bogus or otherwise uncollectible invoices,

234. Defendants knew or recklessly disregarded the facts which indicated that the 1999 and all interim financial statements of the Company which were disseminated to the investing public during the Class Period were materiaily false and misleading for the reasons set forth herein and were presented in a manner which violated the principles of fair financial reporting and GAAP.

235. In this regard, Defendants knowingly or in reckless disregard of the truth caused he Company's interim filings with the SEC on Form l0-Q to state that the financial statements contained therein "statements reflect all adjustments (of a normal and recurring nature) which are i,,c:cCssary to present fairly the financial position, results of operations and cash flaws for the interim periods."

236. As of the February 10, 2000 date of the Company's fourth quarter 1999 earnings release , Defendants were aware of the existence of no less than $685 million of grossly delinquent, disputed and uncollectible receivables which existed as a result of the above

- 91 - articuianzed improper billing practices . U stated by numerous empioyees. it was 'common

:owledge " at the corporate level that the Company had been carrying an inordinate level of

'mown uncoilectible receivables and that Defendants knew , as of February 10, 2000, that these receivables (. aggregating no leas than x685 million) which the Company had reflected as a

-, aluable asset on its balance sheet, was worthless. Despite this fact, :.Ile Company's 1999

tnancial statements failed to reflect this worthlessness, through charges against income, as required by GAAP. In this regard , Defendants caused the Company's financial statements to improperly reflect a material overstatement of receivables and earnings in contravention of

GAAP. Defendants continued this violation of GAAP throughout the Class Period.

237. Pursuant to GAAP (FASB Statement No. 5, par. 3), an estimated loss from a loss

:.ontingency "shall be accrued by a charge to income" if (i) information available prior to issuance of the financial statements indicated that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the amount of the loss can be reasonably estimated.

?38. Both of these conditions were satisfied as of the February 10, 2000 date of the

Company's fourth quarter 1999 earnings reiease. However, Defendants failed to cause the

Company's financial statements to reflect an accrual, by a charge to income, in an amount even remotely close to being sufficient to recognize the worthlessness of the $685 million of grossly delinquent, disputed and uncollectible receivables.

239. Throughout the Class Period, Defendants continued to turn a blind eye to this failure to comply with GAAP and, thus, knowingly permitted the Company's balance sheets to reflect no less than 5685 million of grossly delinquent, disputed and uncollectible receivables as

- 92 - valuable asset and knowingly permitted Lhe Company' s income statements to Iaii to reflect a charge to earnings to reflect the wnte-off of these receivables.

240. GAAP, as particularized above , mandates the recognition of a provision for non-

--oilectible receivables.

2 41. The GAAP requirement for recognition of a provision for non-coilecuble receivables also applies to interim financial statements as evidenced by APB Opinion No. 23, i nterim Financial Reporting . This authoritative pronouncement states ( in paragraph 1,) that:

The amounts of certain costs and expenses are frequently subjected to year-end adjustments even though they can be reasonably approximated at interim dates. To the extent possible such adjustments should be estimated and the estimated costs and expenses assigned to interim periods so that the interim periods bear a reasonable portion of the anticipated annual amount. Examples of such items include... allowance for uncollectible accounts...

242. The objective of providing for reserves against receivables is to assure that:

"Accounts receivable net of allowances for uncollectible accounts... are effectively stated at the amount of cash estimated as realizable." (Accounting Research Bulletin 43, Chapter 3, Section

A, paragraph 9)

243. By failing to comply with GAAP , throughout the Class Period, the amount of the receivables which were reflected in the Company's financial statements which were purported to be effectively stated at the amount of cash estimated as realizable, were materially overstated.

Accordingly, the Company ' s December 31, 1999 financial statements , March 31, 2000 financial statements and June 30, 2000 financial statements , as was each and every Company press release which disseminated to the investing public the results of operations and financial position which

- 93 - gas presented within these rinanciai statements, was matenaily false and misleading in vtoiation

-)[the above particularized GAAP.

244. 'or the reasons set forth herein, the financial statements of the Company which vere disseminated to the investing public during the Class Period did not fairly present (AICPA

Professional Standards Volume 1, U? S. Auditing Standards . Section 411, Paragraph 4) the

Company's results of operations and financial position in conformity with generally accented accounting principles because : (a) The accounting pnncip iies selected and applied did not have general acceptance ; (b) The accounting pnnciples w ere not appropriate in the circumstances; (c) ihe financial statements, including the related notes, were not informative of matters that at= feted their use, understanding, and interpretation; (d) The financial statements did not reflect the underlying events and transactions in a manner that presented the financial position and the results of operations within a range of acceptable limits that were reasonable and practicable to attain in financial statements.

245. The SEC has stated, in Securities Act Release No. 6349 ( September 8, 1981), that:

... it is the responsibility of management to identify and address those key variables and other qualitative and quantitative factors which are peculiar to and necessary for an understanding and evaluation of the individual company.

246. In addition, as noted by the SEC in Accounting Series Release 173:

...it is important that the overall impression created by the financial statements be consistent with the business realities of the company's financial position and operations.

247. The Company, in contravention of GAAP , failed to (1) disclose the foregoing

- 94 - (acts, ( ii) provide those disclosures which were required by CRAP, and (iii) identity and address those key variables and other qualitative and quantitative factors wroth were peculiar to and necessary for an understanding and evaluation of the Company. Consequently, the overaii

mpression created by the financial statements was not consistent with the business realities of the Comoany' s reported financial position and operations.

248. The undisclosed adverse information concealed by Defendants during the Class

Period is the type of information which, because of SEC regulations, rules of the national stock exchanges and customary business practice, is expected by investors and securities analysts to be

_^isciosed to the investing public. This information is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed.

249. The market for the Company' s common stock was open , well-developed and efficient at all relevant times. As a result of the materially false and misleading statements and failures to disclose the full truth about the Company, its business and future prospects, the

Company's common stock traded at artificially inflated prices throughout the Class Period,

Plaintiff and other members of the Class purchased or otherwise acquired the Cornpanv's common stock relying upon the integrity of the market price of the Company's common stock and rxiarket information relating to the Company or, in the alternative, upon Defendants' materially false and misleading statements, and in ignorance of the adverse, material undisclosed information and false financial statements known to Defendants and have been damaged thereby.

250. Throughout the Class Period, Defendants disseminated press releases , financial

- 95 - tatements, and the reports referred to herein which falsely portrayed the Company's financial condition, results of operations and business prospects . These documents and public statements contained untrue statements of material fact and omitted to state material facts necessary in order

'o make the statements made , in iight of the circumstances under which they were made, not misleading as set forth above.

2 5 The Companys non-disclosures and misrepresentations described herein above successfully concealed from the investing public the inflation of the Company 's revenues and net

'Income. Subsequent to the Class Period, Defendants disclosed the fact that the 5685 million

write-orf had been, in significant part , due to the protracted accumulation of a material amount of unpaid and disputcd billings . As stated in the Company's 2000 Form 10-K:

Results for 2000 include...a $685 million pre-tax charge associated with specific domestic and international wholesale accounts that were no longer deemed collectible due to bankruptcies, litigation and settlements of contractual disputes that occurred in the third quarter of 2000...we billed the traditional phone companies and competitive local exchange carriers for traffic originating on the traditional phone company's or competitive local exchange carrier's networks and terminating on our network. The traditional phone companies and competitive local exchange carriers have historically disputed these billings...during the third quarter of 2000, court rulings and Congressional discussions led to our negotiation and settlement with certain traditional phone companies and competitive local exchange carriers for these outstanding receivables. Based on the outcome of these negotiations, we recorded a specific provision for the associated uncollectible amounts.

B. Defendants Failed to Disclose the Impact of SAB 101

252. Similarly, subsequent to the Class Period, Defendants disclosed the fact that the downward revision to the Company' s earnings for the fourth quarter of 2000 was, in significant part, due to a 5135 million pre-tax charge to earnings (described by the Company as "S85

- 36 pillion, net of income tax benefit of 350 million') to bring the Company's accounting for activation and installation fee revenues in compliance with guidance set forth by the SEC in

T )ember 1999. As stated in the Company's 2000 Form 10-K:

During the fourth quarter of 2000, we implemented Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", or SAB 101, which requires certain activation and installation fee revenues to be amortized over the average life of the related service rather than be recognized immediately...As required by SAB 101, we retroactively adopted this accounting effective January 1, 27000, which resulted in a one-time r 'ense of S85 million, net of income tax benefit of 350 million. (Emphasis added).

253. Defendants knew, at the beginning of the Class Period, of the approximate earnings impact and the magnitude of the imminent charge to earnings which would result from the mandated implementation of the provisions of Staff Accounting Bulletin No. 101 and concealed this information from the investing public.

254. Significantly, the 1999 Form 10-K and the first quarter 2000 Form 10-Q were silent with regard to Staff Accounting Bulletin No. 101 and the second quarter 2000 Form 10-Q stated:

In December 1999, the SEC issued Staff Accounti--g Bulletin No. 101, "Revenue Recognition in Financial Statements "; ("SAB 101"). In June 2000, the SEC issued an amendment to SAB 101 which allows registrants to wait until the fourth quarter of their fiscal year beginning after December 15, 1999 to implement SAB 101. SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. The deferral of telecommunications service activation fees and certain related costs are specifically addressed in SAB 101. WorldCom is currently assessing the impact ofSAB 101 on its consolidated results of operations or financial position and there can be no assurance as to the effect on the Company's consolidated financial statements. (Emphasis added).

255. The non-disclosures in the 1999 Form 10-K and the first quarter 2000 Form 10-Q,

- 97 - and the disclosure in the second quarter 2000 Form i0-Q parncuLaxized above , were matenaily

f.,lse and misleading because, at all re levant time, Defendants knew and concealed the fact that

,he impiementation of SAB 101 would have a material (as discussed in Staff Accounting Bulletin

99) of ect on the Company's financial performance.

256. SEC Staff Accounting Bulletin 74 (Topic 11 ,1) requires disclosure of the

potential financial statement effects of adoption of recently issued accounting standards. Staff

accounting Bulletin 74 states that:

The objectives of the disclosure should be to (1) notify the reader of the disclosure documents that a standard has been issued which the registrant will be required to adopt in:the future and (2) assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when ad'opted...The following disclosures should generally be considered by the registrant: (a) A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier; (b) A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined; (c) A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registra:it, unless not known or reasonably estimable. In that case, a statement to that effect may be made; (d) Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged.

257. The mandates of Staff Accounting Bulletin No . 101 were, at all times , very clear.

Defendants, in violation of GAAP (and in order to postpone a stock price drop ), failed to make or cause the Company to make the required disclosures (regarding Staff Accounting Bulletin No.

101) in the SEC filings (earnings releases and other statements) particularized above.

258. Given the fact that Defendants ( not the investing public) knew what amounts were recognized on its books as activation and installation fee revenues, at all relevant times,

- 98 - Defendants knew what arnouncs were required to be adjusted throuzh a charge to e.rntngs.

259. Disclosure of the impact of the Company' s required adoption of Staff Accounting

Bulletin No . 101 was intentionally omitted from the above particularized SEC filings (earnings releases and other statements). Accordingly, these documents were materially misleading.

260. APB Opinion No. 22, Disclosure of Accounting Policies. states:

The Board concludes that information about the accounting policies adopted by a reporting entity is essential for financial statement users. When financial statements are issued ...a description of all significant accounting policies of the reporting entity should be included as an integral part of the financial statements.

Disclosure of accounting policies should identify and descnoe the accounting principles followed by the reporting entity and the methods of applying those principles that materially affect the determination of financial position, changes in financial position, or results of operations. In general, the disclosure should encompass important judgments as to appropriateness of principles relating to recognition of revenue and allocation of asset costs to current and future periods...

261. In violation of APB Opinion No. 22, Defendants failed to cause the Company's

financial statements to disclose the fact that the Company had been recognizing activation and

installation fee revenues or to provide any information regarding the Company's accounting

policy with regard to such revenue recognition.

262. Because, during the Class Period, Defendants failed to cause the Company to provide any disclosure of the fact that the Company had been recognizing activation and

installation fee revenues or the magnitude of the amount of such revenues, no investor could have reasonably expected the adoption of Staff Accounting Bulletin No. 101 to result in a S 135 million charge to earnings.

- 99 - C. Violations of SEC Rules And Reguiations

263. Item 303(a)( ii) to Regulation S -K requires the following discussion in the

`4D&A of a company' s publicly filed reports with the SEC:

Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. if the registrant knows of events that will cause a material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in relationship shall be disclosed.

264. Paragraph three of the Instructions to Item 303 states in relevant part:

The discussion and analysis shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This would include descriptions and amounts of (a) matters that would have an impact on future operations and have not had an impact in the past ...

265. Notwithstanding, at no time during the Class Period did the defendants discuss the

following existing, known adverse trends in the Company ' s public filings with the SEC as

required by the preceding SEC Regulation (See, e. g., 1158-72) :

(a) Failure to integrate the MCI operations with Worldcom' s operations,

(b) Customer attrition due to poor customer service, decreasing demand,

obsolete products, chaotic billing practices, and fierce competition;

(c) Salesperson attrition due to mismanaged sales forces, and a chaotic compensation scheme;

(d) Increased regulatory scrutiny and sanctions , as well as litigation

resulting from illegal practices such as "slamming," double billing, refusal to cancel customer

1.00 - contracts, late payments to vendors. misrepresentation of rates; and

(e) uncollectability of accounts receivables and loss of significant contracts due to financially unsound or bankrupt customers, and customer disputes arising from improper billing practices.

266. Defendants were required to cause the Company to disclose , in its financial statements, the existence of the material facts described herein and to appropriately recognize , and report revenues and expenses in conformity with GAAP. The Company failed to make such disclosures and to account for and to report revenue and expenses in conformity with GAAP.

267. SEC Regulations require that financial statements filed with the SEC conform with GAAP . Financial statements filed with the SEC which are not prepared in conformity with

GAAP are presumed to be misleading or inaccurate. [17 C.F.R. §210.401 (a)(1)]. The

Company's financial statements referred to above were false and misleading for the reasons alleged herein and because they constituted an extreme departure from GAAP by violating the following GAAP concepts and principles, among others particularized herein above: (a) The concept that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions (FASB Statement of Financial Accounting Concepts No. 1); (b) The concept that financial reporting should provide information about an enterprise's financial performance during a period (FASB Statement of Financial Accounting Concepts No. 1); (c) The concept that financial reporting should be reliable in that it represents what it purports to represent (FASB

Statement of Financial Accounting Concepts No. 2), (d) The concept of completeness, which

- 101 - means that nothing material is left out of the information that may be necessary to ensure that it

validly represents underlying events and conditions (FASB Statement of Financial Accounting

Concepts No. 2); (f) The concept that conservatism be used as a pnident reaction to uncertainty

to try to ensure that uncertainties and risks inherent in business situations are adequately

considered (FASB Statement of Financial Accounting Concepts No. 2); (g) The princinie that if

no accrual is made for a loss contingency, then disclosure of the contingency shall be made when

there is at least a reasonable possibility that a loss or an additionai loss may have been incurred

(Statement of Financial Accounting Standards No. 5); (h) The principle that contingencies and

other uncertainties that affect the fairness of presentation of financial data at an interim date shall

be disclosed in interim reports in the same manner required for annual reports (APB Opinion No.

28); (t) The principle that disclosures of contingencies shall be repeated in interim and annual

reports until the contingencies have been removed, resolved, or have become immaterial (APB

Opinion No. 28); (j) The principle that management should provide commentary relating to the

effects of significant events upon the interim financial results (APB Opinion No. 28); (k) The

concept that an expense or loss is required to be recognized if it becomes evident that previously

recognized future economic benefits of an asset have been reduced or eliminated, or that a

liability has been incurred or increased , without associated economic benefits (FASB Statement

of Financial Accounting Concepts No. 5).

STATUTORY SAFE HARBOR

268. The federal statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false statements pleaded in this

Complaint. Further, none of the statements pleaded herein which were forward-looking

- 102 - statements were identified as 'forward-looking statements" when made. Nor was it stated that actual results "could differ matena.ily from those projected." Nor were the forward-looking statements pleaded accompanied by meaningful cautionary statements identifying important

:actors that could cause actual resuits to differ materially from the statements made therein.

Defendants are liable for the forward -looking statements pleaded because, at the time each of those forward-looking statemc.. :s was made, the speaker knew the forward-looking statement was false and the forward-looking statement was authorized and/or approved by an executive officer of WorldCom who lrnew that those statements were false when made.

APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE

269. At all relevant times, the market for WorldCom common stock was an efficient market for the following reasons , among others:

(a) WorldCom common stock met the requirements for listing, and was listed and actively traded, on the NASDAQ, a highly efficient market;

(b) As a regulated issuer, WorldCorn pled periodic public reports with the

SEC and the NASD;

(c) WorldCom stock was followed by securities analysts employed by major brokerage firms who wrote reports which were distributed to the sales force and certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace; and

(d) WorldCom regularly issued press releases which were carried by national newswires. Each of these releases was publicly available and entered the public marketplace.

- 103 - ,perated as a fraud and deceit upon the purchasers of the Company s common stock in an effort

to maintain artificially high market prices for WorldCom common stock in violation of Section

0(b) of the Exchange Act and Rule iOb-5. These defendants are sued as primary participants in

the wrongful and illegal conduct charged herein. The Individual Defendants are also sued herein

as controlling persons of WoridCom, as alleged below.

274. In addition to the duties of full disclosure imposed on defendants as a result of

their making of affirmative statements and reports, or participation in the making of affirmative

statements and reports to the investing public, they each had a duty to promptly disseminate

truthful information that would be material to investors in compliance with the integrated

disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C. F.R. § 210.01 et

seg.) and S -K (17 C.F.R. § 229. 10 et seq .) and other SEC regulations , including accurate and

truthful information with respect to the Company' s operations , financial condition and

performance so that the market prices of the Company's publicly traded securities would be

based on truthful, complete and accurate information.

275. WorldCom and the Individual Defendants , individually and in concert , directly

and indirectly, by the use of means or instrumentalities of interstate commerce and/or of the

iuails, engaged and participated in a continuous course of conduct to conceal adverse material

information about the business, business practices, performance , operations and future prospects of WorldCom as specified herein. These defendants employed devices, schemes and artifices to defraud, while in possession of material adverse non-public information and engaged in acts, practices, and a course of conduct as alleged herein in an effort to assure investors of

- 105 - ',VoridCom's value and performance and substantial growth, which included the making of. or the

,articination in the making of. untrue statements of matenal facts and omitting to state material

acts necessary in order to make the statements made about WorldCom and its business.

iperations and future prospects in the ii_ht of the circumstances under which they were made,

,:ot misleading, as set forth more earncuiarly herein, and eneaged in transactions, practices and a

course of business which operated as a fraud and deceit upon the purchasers of WoridCom

.ecuriues during the Class Period.

76. teach of the Individual Defendants' primary liability, and controlling person

lability, arises from the following facts: (i) each of the individual Defendants was a high-level executive and/or director at the Company during the Class Period; (ii) each of the Individual

Defendants, by virtue of his responsibilities and activities as a senior executive officer and/or director of the Company, was privy to and participated in the creation, development and reporting of the Company's internal budgets, plans, projections and/or reports; (iii) the Individual

Defendants enjoyed significant personal contact and familiarity with each other and were advised of and had access to other members of the Company' s management team, internal reports, and other data and information about the Company's financial condition and performance at all relevant times; and (iv) the Individual Defendants were aware of the Company's dissemination of information to the investing public which they knew or recklessly disregarded was materially false and misleading.

2 77. These defendants had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they tailed

- 106 - to ascertain and to disclose such facts. even though such facts were readily avaiiabie to them.

ttcil defendants' material misrepresentations and/or omissions were done knowingly or

eckiessiv and for the purpose and of ect of concealing VorldCcm 's operating condition,

-usiness practices and future ousiness nrosoects from the investing public and supporting the

.-rtificiaily inflated price of its stock. As demonstrated by their overstatements ana

misstatements of the Company's financial condition and performance throughout the Class

?enod, the Individual Defendants, it they did not have actual knowledge of the

misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by

.,eliberately refraining from taking those steps necessary to discover whether those statements

were false or misleading.

278. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market price of WorldCom's common stock was artificially inflated during the Class Period. In ignorance of the fact that the market price of WorldCom's shares was artificially inflated, and relying directly or indirectly on

:ae false and misleading statements made by defendants, or upon the integrity of the market in

which the securities trade, and/or on the absence of material adverse information that was known to or recklessly disregarded by defendants but not disclosed in public statements by defendants during the Class Period, plaintiff and the other members of the Class acquired WorldCom

;or mon stock during the Class Period at artificially inflated high prices and were damaged

,hereby.

279. At the time of said misrepresentations and omissions, plaintiff and other members

- 107 - of the Class were ignorant of their falsity, and believed them to ec true. Had plaintiffs and the

other members of the Class and the marketplace known of the true performance, business

.practices, future prospects and intrinsic value of WorldCom, which were not disclosed by

defendants, plaintiff and other members of the Class W ould not have purchased or otherwise

acquired their WorldCom securities during the Class Period, or. i they had acquired such

securities during the Class Period, they would not have done so at the artificially inflated prices

which they paid.

180. By virtue of the foregoing, WorldCom and the Individual Defendants each

.'iolated Section 10(b) of the Exchange Act and Rule iOb-5 promulgated thereunder.

281. As a direct and proximate result of defendants ' wrongful conduct, plaintiffs and

the other members of the Class suffered damages in connection with their purchases of the

Company's securities during the Class Period.

COUNT 11

For Violations Of Section 20(a) Of The 1934 Act Against Individual Defendants

M. Plaintiffs repeat and reailege the allegations set forth above as if set forth fully

herein . This claim is asserted against the Individual Defendants.

283. The Individual Defendants were and acted as controlling persons of WorldCom within the meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their high-level positions with the Company, participation in and/or awareness of the Company's operations and/or intimate knowledge of the Cornpanys actual performance, the Individual

- 108 - Defendants had the power to influence and control and did influence and control , directly or

!,lsilrectly , the decision -making of the Company , including the content and dissemination of the various statements which plaintiff contends are false and misleading. Each of the Individual

Defendants was provided with or had unlimited access to copies of the Company' s reports, press releases, public filings and other statements alleged by plaintiff to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the

tatements or cause the statements to be corrected.

'84. In addition, each of the Individual Defendants had direct involvement in the day-

'o-day operations of the Company and, therefore, is presumed to nave ha he power to control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same.

285. As set forth above, WorldCom and the Individual Defendants each violated

Section 10(b) and Rule iOb-5 by their acts and omissions as alleged in this Complaint. By virtue of their controlling positions, the Individual Defendants are liable pursuant to Section 20(a) of

.he Exchange Act. As a direct and proximate result of defendants' wrongful conduct, plaintiffs and other members of the Class suffered damages in connection with their purchases of the

Company' s securities during the Class Period.

PRAYER FOR RELIEF

WHEREFORE , plaintiffs , on their own behalf and on behalf of the Class, pray for

udgment as follows:

(i) Declaring this action to be a class action pursuant to Rule 23(a) and (b)(3) of the

- 109 - Federal Rules of Civil Procedure on behalf of the Class defined herein;

(ii) Awarding plaintiffs and the other members of the Class damages in an amount which may be proven at trial, together w ith interest thereon;

(iii) Awarding plaintiffs and the members of the Class pre-judgment and post-judgment interest, as well as their reasonable attorneys' and experts' witness fees and other costs; and

( iv) Such other relief as this Court deems appropriate.

TURY DEMAND

Plaintiffs demand a trial by jury.

DATED: June , 2001

Respectfully submitted,

BARRETT LAW OFFICE, P.A.

By: Don W . Barrett Jesse Harrington Richard Barrett Court Square North P.O. Box 987 Lexington, MS 39095 Tel: (662) 834-2376 Fax: (662) 834-4024

MILBERG WEISS BERSHAD HYNES & LERACH LLP Kenneth J. Vianale Maya Saxena 5355 Town Center Road, Suite 900 Boca Raton, FL 33486 Tel: (561) 361-5000 Fax: (561) 367-8400

and

- 110 - Melvyn 1. Weiss Steven G. Schulman Samuel H. Rudman One Pennsylvania Plaza New York. NY 10019 Tel: (212) 594-5300 Fax: (212) 868-1229

WECHSLER HARWOOD HALEBIAN & FEFFER, LLP Robert I. Harwood Frederick W. Gerkens, III Thomas J. Harrison 488 Madison Avenue, 8th Floor New York, NY 10022 Tel: (212) 935-7400 Fax: (212) 753-3630

Lead Counsel for Lead Plaintiffs and the Class

STULL STULL & BRODY Jules Brody Aaron Brody Tzivia Brody 6 East 45th Street New York, NY 10017 (212) 687-7230 (212) 492-2022

LAW OFFICES OF DENNIS J. JOHNSON Dennis J. Johnson 1690 Williston Road South Burlington, VT 05403-6428 Tel: (802 ) 862-0030 Fax: (802 ) 862-0060

- ill - LAW OFFICES OF BERNARD M. GROSS, P.C. Deborah R. Gross 1500 Walnut Street. 6th Floor Philadelphia, PA 19102 Tel: (215) 561-3600 Fax: (215) 561-3000

SCHIFFRIN & BARROWAY, LLP Andrew Barroway Marc A. Topaz Three Bala Plaza East, Suite 400 Bala Cynwyd, PA 19004 Tel: (610) 667-7706 Fax: (610) 667-7056

SAVETT FRUTKIN PODELL & RYAN, P.C. Barbara A . Podell 325 Chestnut Street, 7th Floor Philadelphia, PA 19106 Tel: (215) 923-5400 Fax: (215) 923-9353

WEINSTEIN KITCHENOFF SCARLATTO & GOLDMAN LTD. Paul J. Scarlato Mark S. Goldman 1608 Walnut Street, Suite 1400 Philadelphia, PA 19103 Tel: (215) 545-7200 Fax: (215) 545-6536

LAW OFFICES OF BRUCE G. MURPHY Bruce. G. Murphy 265 Lloyd's Lane Vero Beach, FL 32963 Tel: (561) 231-4202 Fax: (561 ) 231-4042

- 112 -

TOTAL P.03 WOLF HALDENSTEIN &DLER FREEMAN & HERZ Fred Taylor Isquith 270 Madison Avenue New York, NY 10016 Tel: (212) 545-4602 Fax: (212) 545-4653

FINKELSTEIN . THOMPSON & LOUGHRAN Donald J. Enright 1055 Thomas Jefferson Street, NW Washington. DC 20007 Tel: (202) 337-8000 Fax: (202 ) 337-8090

LAW OFFICES OF MARC S. HENZEL Marc S. Hemel 210 West Washington Square Philadelphia, PA 19106 Tel: (215) 625-9999 Fax: (215) 440-9475

MILLER FAUCHER and CAFFERTY LLP Marvin A. Miller 30 South 15th Street, Suite 2500 Philadelphia , PA 19102 Tel: (215) 864-2800 Fax: (215) 864-2810

Counsel for Plaintiffs

- 113 -