Episode 115 – The Whistleblower Who Exposed WorldCom (feat. Cynthia Cooper and Daren Firestone)

The Whistleblower Who Exposed WorldCom (feat. Cynthia Cooper & Daren Firestone) – Crypto Critics' Corner

Cas Piancey and Bennett Tomlin are joined by Cynthia Cooper and Daren Firestone to discuss the history of one of the largest corporate frauds ever, Worldcom, and what it means to be a whistleblower. This video was recorded on October 13th, 2022. Additional resources: Cooper Group http://www.coopergroupllc.com/index.php Extraordinary Circumstances https://a.co/d/9O4C9Vz Levy Firestone Muse https://www.levyfirestone.com/ cryptowhistleblower.com https://cryptowhistleblower.com/ Cynthia Cooper's LinkedIn https://www.linkedin.com/in/cynthiaco… Daren Firestone Linkedin https://www.linkedin.com/in/daren-fir…

Cas Piancey and Bennett Tomlin are joined by Cynthia Cooper and daren Firestone to discuss the history of one of the largest corporate frauds ever, Worldco, and what it means to be a whistleblower.

This episode was streamed live on October 13th, 2022.

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English Transcript:

00:00:04:27 - 00:00:11:27
Cas Piancey
Welcome back, everyone. I am Cas Piancey. I'm joined, as usual, by my partner in crime, Mr. Bennett Tomlin. How are you today?

00:00:12:04 - 00:00:13:18
Bennett Tomlin
I'm doing well, Cas. How are you?

00:00:13:27 - 00:00:40:22
Cas Piancey
I'm great. We have a couple of amazing guests. I am unbelievably excited about this. Cynthia Cooper, who is the CEO of the Cooper Group and is a recognized speaker, bestselling author and a consultant on issues of corporate governance, ethics and leadership. She also was the whistleblower who called out WorldCom. Cynthia, wonderful to have you here. How are you?

00:00:40:29 - 00:00:44:17
Cynthia Cooper
Thank you, Cas. I'm doing great. I'm excited to be here with you and Bennett.

00:00:44:23 - 00:00:58:11
Cas Piancey
Well, thank you for joining us. And then along with Cynthia, we have Daren Firestone, who is a partner at Levi Firestone Muse, a law firm in D.C. where he represents whistleblowers in the cryptocurrency industry. Daren, welcome as well. How are you?

00:00:58:20 - 00:01:04:16
Daren Firestone
I'm great. It's great to be here. I am a avid listener, so it's a thrill to be here in person.

00:01:04:27 - 00:01:27:15
Cas Piancey
Awesome. Well, it's amazing to have both of you. I guess we should start off with WorldCom. That is how I came to know your work. Cynthia, I want to say that you essentially got me on the path that I'm on with your book, Extraordinary Circumstances. Reading that and looking at all of the ways that that transpired, it seemed to feel so similar to what I was seeing currently.

00:01:27:15 - 00:01:35:24
Cas Piancey
But let's talk about that first of all. Maybe you can help our audience understand what was WorldCom and what was your role at WorldCom.

00:01:36:08 - 00:01:57:26
Cynthia Cooper
First, thank you. Cas, for your kind words, your support and for all that you and Bennett are doing. I've loved watching your podcast. I'm actually going to go back to the beginning and watch all the way through. Very important work. So I was the Vice President of Internal Audit for WorldCom. I reported directly to the chairman of the audit committee and dotted line to the chief financial officer.

00:01:58:06 - 00:02:18:12
Cynthia Cooper
So just to kind of let you know where I came from, you know, I didn't walk in with a fully staffed department over an eight year period. I built the department to some 40 internal auditors in Asia-Pac and Europe and different locations in the United States. And to give you just kind of a high level view of WorldCom back in the nineties.

00:02:18:12 - 00:02:49:00
Cynthia Cooper
So we're going way back. WorldCom was really this, you know, rocket ship that was on a one way path up. And WorldCom was constantly setting records. So when WorldCom acquired MCI, it was the largest acquisition in corporate history. WorldCom floated two of the largest debt offerings in history. Scott Sullivan, the CFO, was at one point the highest paid CFO in the country, and he was given the CFO of the Year award by CFO magazine for his work in mergers and acquisitions.

00:02:49:09 - 00:03:11:20
Cynthia Cooper
Bernie Ebbers, our CEO, was on the cover of Businessweek, and he was dubbed the Telecom Cowboy. He wasn't your typical suit and tie CEO, so he was most often seen, you know, walking around the office in blue jeans and cowboy boots and chewing on this long, you know, unlit cigar. So at six four, he really had this power and presence that would absolutely fill a room.

00:03:12:02 - 00:03:39:05
Cynthia Cooper
And he graduated in physical education, started out coaching and teaching seventh graders and just kind of happened into the long distance industry and built the company through growth, acquiring one company after another and bought 60 companies in less than two decades. So you can imagine what that does to a company's internal control environment. WorldCom didn't have one billing system.

00:03:39:05 - 00:04:04:26
Cynthia Cooper
We had 60 plus billing systems, 11 accounts receivable systems. So it was really this patchwork of all these very entrepreneurial start up companies that were brought together. And ultimately, he grew the company to $38 billion in revenue. WorldCom was the second largest long distance company, second to AT&T. And through the acquisition of you, you net at one point controlled the bulk of the Internet backbone.

00:04:05:04 - 00:04:20:05
Bennett Tomlin
You mentioned there that they acquired all of these companies in this very short period. Can you talk a little bit about why Bernie wanted to grow WorldCom through acquisition and how that resulted in some of these mismatches and lack of internal controls?

00:04:20:06 - 00:04:42:11
Cynthia Cooper
Great question. Bernie, when he started out, he actually started in the motel business and he wanted to expand and buy other motels, but they didn't have the capital. And so the government had deregulated the telecom industry and he and some of his buddies got together, said, hey, let's, you know, hang out a shingle and start this long distance company and we'll resell AT&T service.

00:04:42:11 - 00:05:10:04
Cynthia Cooper
So basically we'll buy minutes from AT&T at a low rate, we’ll resell them at a higher rate. We'll take the cash and we'll buy another motel. Pretty quickly, actually, the long distance company LDDS was the name of the company at the time began to go south. It was headed for bankruptcy. And so some of the other investors asked Bernie, hey, can you come in and spend half of your time on WorldCom or LDDS and half of your time on the motels and try to save this company?

00:05:10:12 - 00:05:35:02
Cynthia Cooper
So WorldCom was growing very rapidly, which meant that our stock was trading at a much higher price to earnings ratio than our peers. And so that allowed WorldCom to acquire companies much larger in size. So MCI was three times larger than WorldCom. And so it gave him the leverage to buy bigger and bigger acquisitions. He was a deal maker.

00:05:35:02 - 00:05:49:08
Cynthia Cooper
Right. But he also was a huge risk taker. And in the end, it really became like the gambler's curse. It was unbridled risk taking. He basically did the same thing in his personal life that he did with WorldCom.

00:05:49:13 - 00:06:18:06
Cas Piancey
He was a risk taker doing all these M&A is sorry, mergers and acquisitions. Ultimately, the last final hurrah was the attempt to purchase Sprint, which still exists, I guess, which I think at the time was going to be one of the largest mergers or acquisitions in history. But along with that, as you're saying in his personal finances, he was leveraging all the stock options that he had and he was using those to buy Rice farms and yacht building companies.

00:06:18:06 - 00:06:27:14
Cas Piancey
And the largest ranch in North America and Timberland, hundreds of millions of dollars of stuff. All of this looks great when it's going up.

00:06:28:00 - 00:06:51:00
Cynthia Cooper
That's a very interesting story, a pretty actually a pretty risky retirement strategy. So Bernie was moving closer to retirement, but he did not want to exercise his options or sell his stock to diversify. And in fact, if you read the book, Extraordinary Circumstances in my book, I talk about the fact that he really didn't want anybody in the company to exercise their stock.

00:06:51:01 - 00:07:13:25
Cynthia Cooper
In fact, he held almost all of his stock until the bitter end. And his defense attorneys used that in court. They said if he held a stock until the end, how could he possibly have known that there was a fraud going on in the company? In fact, when he left the company to try and liquidate some of his holdings and repay some of his loans, he took the last couple of million dollars he had and he bought more WorldCom stock.

00:07:14:02 - 00:07:43:10
Cynthia Cooper
Basically, he went Cas, He went to the bank. He took out something like $1,000,000,000 in margin loans, and he put up his stock options as collateral. So just like you said, as long as the price is going up, everything's great. But if it starts to tick down, there's a problem. And that's exactly what happened. So when the dot com bubble burst in March of 2000 and then the telecom bubble burst in September of that year, the price started ticking down and he got a margin call from the bank, I think it was for $50 million.

00:07:43:26 - 00:08:06:27
Cynthia Cooper
And it's not until you're way down the road that you realize that the bubbles burst. When you're in the midst of it, people think, well, this is just a temporary downturn in the market. And so the compensation committee said, look, we'll loan you the $50 million to cover your margin. He could have sold some of the stock exercises options, but they didn't want him dumping his stock on the market because that would drive the price down further.

00:08:07:05 - 00:08:30:18
Cynthia Cooper
So they said when the price turns around next quarter, you can just repay the loan. But, of course, you know, you guys know, right? Then that it never turned around. And so he got one margin call after another after another. And ultimately, WorldCom loaned him some $400 million, is the largest loan given in corporate history. And at that time, pre Sarbanes-Oxley, it was legal.

00:08:31:01 - 00:08:51:11
Cynthia Cooper
It was reported to the public. Just because something's legal doesn't mean that it's ethical or the right thing to do. And that's, you know, a prime example of that. So you can imagine that the pressure that that put on Bernie Ebbers, it's not easy to find a buyer for $600 million worth of Timberland if you're having financial difficulties.

00:08:52:01 - 00:09:01:11
Cynthia Cooper
He kept going back to the table in his personal life. Right. Buying bigger and bigger and bigger. It was this insatiable appetite. And he did the same thing with the company.

00:09:01:18 - 00:09:06:07
Daren Firestone
Bernie Ebbers had diamonds lands when there was no such thing, no such term.

00:09:07:18 - 00:09:27:28
Bennett Tomlin
One thing you mentioned there that was really striking to me when I was reading extraordinary circumstances is that he didn't want anyone else to sell and would get lists of employees and insiders who had exercised their options or who had sold their stock. And that when you chose to sell some of your stock to diversify, he even, like, called you out during a meeting about it.

00:09:28:09 - 00:09:32:11
Bennett Tomlin
What kind of effect do you think that had on the culture of WorldCom?

00:09:32:11 - 00:09:59:03
Cynthia Cooper
He viewed holding your stock, I believe, as a sign of loyalty to the company. And he started this company, Right. He was one of the founders. And he believed in it. In fact, he gave everyone in the company stock. He wanted everyone to, you know, share in ownership. And, you know, at one point you look out at the parking lot and you see all the old dilapidated cars start to disappear and it starts to fill up with Mercedes and BMW cars.

00:09:59:03 - 00:10:16:09
Cynthia Cooper
And and so everybody is making money in WorldCom stock. You know, the watercooler conversation is, well, when do you sell your stock? And I can remember my father, he was always telling me, you know, you need to diversify. And I was like, yeah, you know, I had all of my 401(k) in WorldCom stock until the end.

00:10:16:20 - 00:10:22:11
Cynthia Cooper
Listen to your parents. No matter how much you believe in something, it is important to to make sure you diversify.

00:10:22:23 - 00:10:40:12
Cas Piancey
Considering you were heavily invested, a lot of your coworkers were heavily invested and Bernie was heavily invested and levered up. What ended up transpiring to bring this all down? I know you don't ultimately think it was the fraud itself that brought it down, but maybe that helps expedite the process.

00:10:40:17 - 00:11:06:28
Cynthia Cooper
The way I look at it is I think the the fraud really masks the true state of the business and that WorldCom probably should have gone into bankruptcy long before it did. If you look at the failure of WorldCom, yes, there was a failure from a fraud perspective, but there were also some failures from a business perspective. If you look at the market and it wasn't just WorldCom, you have to look at the whole telecom industry and the dot com industry and what was happening.

00:11:07:06 - 00:11:32:00
Cynthia Cooper
The Internet was being commercialized and you had a lot of cheap capital. Venture capitalists were throwing money at any company that had dot.com connected to it. And so it was this kind of winner take. All right. Ideology in the dotcom industry and the telecom industry. Telecom was deregulated. And so you had all of these new entrants, even Enron was wanting to get into the telecom game.

00:11:32:19 - 00:11:55:20
Cynthia Cooper
And so they were rushing into the market. You had cheap capital. They were placing billions of dollars in orders with WorldCom and AT&T and all these big telecom carriers, because there was this belief that the Internet was tripling every quarter and that the first person who got their network built out and got the end user customers would win the day.

00:11:56:03 - 00:12:17:11
Cynthia Cooper
So everybody is just rushing, right, pouring billions into the market dot com and telecom. And it was all just a big mirage from a telecom perspective. There simply were not enough end user customers to support all of these networks that had been built out. And the idea that the Internet was tripling every quarter turned out to be a myth.

00:12:17:19 - 00:12:48:19
Cynthia Cooper
It was growing at a much slower rate, which comes back to the point about making sure that the assumptions that are driving a market or a business are strategic decisions are valid. And then when the bubble burst, that's where the pressure to commit fraud came from. WorldCom's revenues started to decline. All of these companies that had placed orders with the big carriers back in the nineties just started going bankrupt one after another after another, and canceling their orders with the big carriers.

00:12:48:29 - 00:13:28:13
Cynthia Cooper
And so in 1999, if you looked at the backlog of orders for the big carriers, it was just unprecedented. None of them could keep up with the orders. In fact, a lot of customers were placing orders with multiple carriers to see who could provision the service first. So it was just this Wild West gold rush environment, and that's what drove the industry to its heights And those poor strategic decisions spending billions to build out the network, overleveraging and then signing leases with third parties for telecom fiber in places where WorldCom did not have their own network.

00:13:28:13 - 00:13:51:04
Cynthia Cooper
They signed these three and five year operating leases, which are supposed to be expensed in the current quarter to reduce your revenue. And what WorldCom did was they would say, here's what we are. Here's what we told the Street. We were going to be okay, we're $700 million short. And they were literally pick that up and move it from an expense on the income statement to an asset on the balance sheet.

00:13:51:16 - 00:13:54:26
Cynthia Cooper
And then they were depreciated over a much longer period of time.

00:13:55:12 - 00:14:16:10
Cas Piancey
It's accounting shenanigans, right? I mean, this is basically without getting into the weeds, it's basically lying about the numbers. And I think one of the very explicit moments that you talk about is and two words that will never escape my mind, which is prepaid capacity. Why was there this prepaid capacity? And once you saw it, what was the next step?

00:14:16:17 - 00:14:35:18
Cynthia Cooper
Yeah, great question. Usually when there's a fraud in a company, it will be perpetrated in more than one place, Right? And so that's what was going on with WorldCom. They were kind of pull here and pull here. And a lot of people think that accounting is all black and white and it's not. There are lots of errors of judgment.

00:14:35:18 - 00:15:12:11
Cynthia Cooper
So before I talk about, like the prepaid capacity, which is, you know, represented a large portion of the fraud, I want to back up for just a minute and talk about how WorldCom actually went for some of these areas of judgment first. So let's say public companies are pennies short on earnings. Often what they'll do is they will go for an area of judgment, such as the allowance for doubtful accounts, amounts that they are putting aside for customers who they don't believe are going to pay their bills at one point and you've probably read this in the book, someone came to me from the wireless division of the company.

00:15:12:23 - 00:15:37:06
Cynthia Cooper
Wireless represented about $1,000,000,000 in revenue on a $38 billion company. And he said, look, we're setting aside amounts for customers who we don't believe will pay their bills. And the accountants at corporate, they're reversing our entries. Well, you know, what do you think, Cynthia? So I'm looking at this and thinking, okay, we didn't audit the allowance. And and so I decided I would go to Arthur Andersen.

00:15:37:18 - 00:15:57:24
Cynthia Cooper
Arthur Andersen was the external auditor. They were also the external auditor for Enron. And I would just ask them about this allowance because they tested it as a matter of course, when I go to Andersen and asked the partner about this allowance, he's like, Don't worry about Cynthia. It's fine, because we're over in all these other areas of the company.

00:15:57:24 - 00:16:28:12
Cynthia Cooper
So from a total company perspective, everything's good. And I may have left it at that, but I was actually out of the office several days later and I was at the hair salon and my husband calls me and he says, Hey, look, the CFO, Scott Sullivan, has called it is to talk to you. There's it sounds urgent. So I call in to the CFO and, you know, they're like all these people around me, hairdryers going in the background and he conferences and the controller and he's not very happy with me when I explain the situation.

00:16:28:12 - 00:16:47:23
Cynthia Cooper
He said, Look, if you have questions about the allowance, you should be bringing those to the controller, not the external audit partner. Now I didn't audit the allowance, the controller surely doesn't audit. And so I said, Well, I went to the partner, he's the one who audits it and he became very hostile with me at that point, slammed down the phone.

00:16:48:01 - 00:17:08:25
Cynthia Cooper
At that point, my antennas kind of went up if someone is acting in a way that is out of character or they're hostile as an auditor or a certified fraud examiner. That is a potential behavioral warning sign. And so that made me even more curious. And so I thought, you know what? I'm going to go and pull Arthur Andersen's work papers, and that's what I did.

00:17:08:25 - 00:17:24:29
Cynthia Cooper
So I went back to work the next day, went to Andersen, got their work papers, got several of my staff in the conference room and were poring through these work papers. And we don't see where they're over in all these areas. And it looks like they're under by, you know, several hundred million dollars. So I go back to the CFO.

00:17:24:29 - 00:17:42:19
Cynthia Cooper
He says, we're going to bump the allowance up by 40 million a quarter. And based on the rule of ten, by the end of the year, everything will be fine. So I'm sitting there thinking, okay, I don't remember anything about the rule of ten on my CPA exam, learning about that in my accounting class, there is no rule of ten, right?

00:17:43:05 - 00:18:12:17
Cynthia Cooper
So ultimately they did bump the allowance up. They probably just pulled it from some other bucket. But that's one of the first things that we identified that started causing me some concern. Now, if you flash forward and talk about the prepaid capacity, Cas, what you mentioned, that really started with a an audit of capital expenditures. So for those who are listening, who are not auditors, they'll just have to kind of hang with us here for a minute.

00:18:12:17 - 00:18:34:14
Cynthia Cooper
But a capital expenditure is, you know, an asset of the company. It's expensed over a long period of time, depreciated over a long period of time. And we had audited capital expenditures before, but we had never heard this term prepaid capacity. So what happened was in the early stages of this audit, we're given these two schedules that didn't agree.

00:18:34:14 - 00:18:50:28
Cynthia Cooper
And when I asked one of the finance directors, Hey, you know, what's the difference in these schedules, he could easily explain a portion of them out. But there was a part of it that he said, I don't know what that is. It's something called prepaid capacity. If you want to know more about that, you'll have to go and talk to the controller.

00:18:51:26 - 00:19:16:26
Cynthia Cooper
And so at this point, we had access to the company's accounting systems. Arthur Andersen did not. They actually relied on management to provide them with all the schedules that they needed to conduct their audits. And so I called in I had about four or five techie auditors who were really great on my team. And so I called one of those guys in and I said, Hey, look, can you go into the accounting system and see if you see anything called prepaid capacity?

00:19:16:26 - 00:19:40:21
Cynthia Cooper
And he came back pretty quickly and found an amount and one account with that description. But we didn't know what it represented. And we realized in one of our prior audits that we could only see half of every accounting entry. So the comptroller, by the way, later testified in federal court that he had intentionally cut my system access and my team system access to try and keep us from finding these entries.

00:19:41:06 - 00:20:02:06
Cynthia Cooper
But all we know is we can only see half of the entry. One of my auditors says, Hey, look, I know somebody in information technology who has developed this homegrown program that's supposed to allow you to trace transactions through the SAP accounting system. And he's been begging someone to beta test it, and he can't get anybody to volunteer.

00:20:02:06 - 00:20:30:05
Cynthia Cooper
So he said, look, let's volunteer and see if it works. And basically what it did was give us a backdoor into the accounting system. Now, internal auditors are supposed to have full and free access to whatever we need to do our jobs. And it allowed us to see both sides of this entry. It also allowed us to trace this entry back to what seemed to be its origin and then forward to what appeared to be its final resting place within the books.

00:20:30:17 - 00:20:48:29
Cynthia Cooper
And so we actually go to the conference room and we get up on the marker board, and we're going back to what's known in accounting as these TI accounts. We're basically trying to understand all these transfers of entries. They're moving this round dollar amount in and out of all these different accounts. That absolutely made no sense to me from an accounting perspective.

00:20:49:19 - 00:21:10:15
Cynthia Cooper
But once I said, hey, look, okay, when you take the movement out of the middle, you're really left with this large round dollar amount moving from an expense on the income statement to an asset on the balance sheet. My staff were like, So what? There are times when it's perfectly appropriate from an accounting perspective to move amounts from expense to a capital account.

00:21:10:15 - 00:21:30:05
Cynthia Cooper
Okay, well, we've got this entry. We don't know what it is, but then I get this odd email from the comptroller. Cynthia, you know, you're totally wasting your time in this area. You should be auditing all of these other areas of the business. This is a complete waste of company resources. And so I emailed back and said, Well, we've already started the audit.

00:21:30:05 - 00:21:55:16
Cynthia Cooper
And then he emails me again and he's more firm with the second email. You know, we don't have time for this. We're extremely busy working on additional debt financing. There. We're about this close to obtaining debt financing, which would have sustained them from a cash flow perspective. And so that was kind of odd. So, you know, I get this email, I have this entry and then several days pass and I get a voicemail from the CFO, Scott Sullivan.

00:21:55:16 - 00:22:15:18
Cynthia Cooper
So I report administratively to the CFO. He says, I want you to be in my office in 10 minutes and plan to spend a good bit of time with me. I want to know what you guys are working on. So I rushed to his office. This was very out of character. We did not spend a lot of time together and different people in my team, they're throwing internal audit reports in my folder.

00:22:15:18 - 00:22:37:06
Cynthia Cooper
I go to his office, he spends some three plus hours with me that day and I'm going through different reports and calling in different members of my team. And the first thing he does is to pick up the phone and call the company's general counsel. And I can only hear half of the conversation. But he says, okay, so the audit committee chair is no longer going to be on the audit committee, is that correct?

00:22:37:21 - 00:22:57:29
Cynthia Cooper
I think in hindsight, he was trying to send me a message that the person who gives you some independence may not be there for you. So that's the person who I reported directly to. And as I come to this audit of capital expenditures, I decide I'm going to ask him about what is this prepaid capacity? And when I ask him about it, he's very calm.

00:22:57:29 - 00:23:23:02
Cynthia Cooper
They said, look, Cynthia, this represents telecom fiber that we've leased from third parties that either has no utilization, so no traffic running across the fiber or very low utilization. And we're so busy with this additional debt financing, we really don't have time to deal with this audit right now. If you don't mind, if you could just delay your audit until the third quarter and look at second quarter numbers, that would be great.

00:23:23:11 - 00:23:48:09
Cynthia Cooper
That would really help us out a lot. He later testified in federal court that he wanted me to delay the audit and look at second quarter numbers because he had a plan in his mind to fix what he had done fraudulently moving these amounts from the income statement to the balance sheet. And he was going to take what's known in accounting as an asset impairment charge, effectively writing off all of these amounts in one fell swoop.

00:23:48:18 - 00:24:06:20
Bennett Tomlin
It seems pretty common in stories of fraud where you'll hear that the person who ended up committing it say that they expected it only to be this one time thing that they were going to then correct. But often it ends up harder for them to correct that than they initially anticipated. That seems like a pretty clear example of that.

00:24:06:26 - 00:24:17:24
Bennett Tomlin
They were trying to do what they needed to get the debt financing to keep the business going with the goal of making things right in the long term. Do you think that was like an accurate read of what Scott intended at this point?

00:24:17:24 - 00:24:28:24
Cynthia Cooper
Yeah, I really do. Based on his testimony, he told the judge that it was a misguided attempt to try and save the company and save jobs. Yes, I really think that that's what he was planning to do.

00:24:29:00 - 00:24:44:06
Daren Firestone
Humans don't like to think of themselves as bad actors when somebody starts stealing from the company. So I'm going to pay it back and then the next time I'll pay that back too. But by the sixth time, they're in too deep and they can't stop.

00:24:44:14 - 00:25:09:27
Cynthia Cooper
Most people don't wake up and say, I want to become a criminal today, Right? It's a slippery slope. And people go down that slope one step at a time. And I think that's what happened in this case. Some of the drivers were greedy. So a lot of these executives were loaded up with stock options in the nineties with short term vesting periods, and that impacted the decisions they made, making decisions that might not be in the best long term interests of the company.

00:25:10:10 - 00:25:30:03
Cynthia Cooper
Pride, I think even more than greed. Sometimes as executives are used to being praised on Wall Street. You know, Bernie Ebbers was on the cover of magazines. He was on Forbes list of wealthiest people in the country. And of course, I mentioned Scott Sullivan was, you know, this financial genius, highly respected on Wall Street and within the company, highly regarded.

00:25:30:18 - 00:25:55:25
Cynthia Cooper
So I think greed and pride and misguided loyalty. The controller testified that he felt a strong sense of loyalty to Scott Sullivan, the CFO. There comes into play as some of the mid-level managers who became complicit with the fraud. They were afraid of losing their jobs and having no way to support their families, and then rationalization as humans, we can easily rationalize our decisions.

00:25:56:03 - 00:26:00:20
Cynthia Cooper
So there are all these drivers that I think it's really important for people to be aware of.

00:26:01:01 - 00:26:16:02
Cas Piancey
It sounds to me like you. It's just one thing after another that you were like, Oh, that's weird. I'm going to keep asking questions here. And then it was like, Oh, no, no, no, that's really weird. And I'm just wondering, like, as opposed to, I would assume a lot of other people where they'd be like, Oh, okay, prepaid capacity.

00:26:16:10 - 00:26:22:19
Cas Piancey
Cool. I don't know what that is, but it sounds fine. Like, what do you think caused you to just keep pushing on this?

00:26:22:20 - 00:26:41:22
Cynthia Cooper
Well, I think, you know, I move from simply being curious to increasing levels of suspicion. Going back to the point at which I was in Scott Sullivan's office and he's asking me to delay the audit and he picks up the phone and calls the general counsel and says, okay, the audit committee chair is no longer going to be on the audit committee.

00:26:42:00 - 00:27:07:26
Cynthia Cooper
That's the point at which I move from being curious to being suspicious. And sometimes, you know, you have to trust your gut instinct. If something doesn't seem or feel quite right and you have these different disparate data points in your head, right. You have to listen to that instinct. And so I left his office and went back and ask the auditor who had pulled the first entry out of the system, Hey, can you go back and see, is there another entry?

00:27:07:26 - 00:27:24:28
Cynthia Cooper
Is this the only one? And ultimately, by the end of the audit, we had identified 54 of these prepaid capacity entries. So it's not like you looked at these entries and said, you know, on the face of the entry, oh, this is a fraud. So I had a couple of these entries. I showed them to the partner. He's not concerned at all.

00:27:24:28 - 00:27:50:17
Cynthia Cooper
In fact, he said, Cynthia, you need to make sure that you are separating emotion from business. At this point, I didn't know that. Hey, maybe there's fraud here. I was a certified information systems auditor and a certified fraud examiner. I was used to finding issues, reporting issues, fighting battles. If you're an auditor, people do not always like what you have to tell them.

00:27:50:17 - 00:28:10:20
Cynthia Cooper
You have to get comfortable with being uncomfortable. So part of it was just what I felt as a professional duty, right? The training that I'd had over many years to the CPA, CFA, CSA, I think that came into play. I think values definitely came into play. As you know, most of our values, I think are instilled at a pretty young age.

00:28:11:00 - 00:28:32:12
Cynthia Cooper
And I can remember my mother, she was always trying to teach lessons to my brother and me and two of the things she would say are think about the consequences of your actions and don't ever allow yourself to be intimidated. And I think as much as anything, her words really helped me to find my courage at different points in my life when I needed it the most.

00:28:32:12 - 00:28:54:25
Cynthia Cooper
And that doesn't mean that I was always this, you know, courageous, strong person. There were times going through this situation where literally I felt fearful, where my hands were shaking and my heart was pounding, and I had to find a way to push forward in the face of that fear. But I think her words really have helped to empower me throughout my life.

00:28:55:01 - 00:29:13:11
Cynthia Cooper
So I was pushing forward. At this point, nobody was mentioning the word fraud, but we were like, okay, well, what you know, this is kind of odd. And I go to the external audit partner, as I mentioned, and the audit committee chair, and he tells me, look, I don't want you to do anything else with this audit and I don't want you to ask any more questions.

00:29:13:11 - 00:29:31:19
Cynthia Cooper
In fact, he said, I've talked to Scott Sullivan. He's going to call you on Monday, and I think he will have a really good explanation for these entries. So I want you just to sit back, chill, wait for him to call you. So every accounting entry is supposed to have support or backup. You just you don't just keep an accounting entry to the accounting system.

00:29:32:03 - 00:29:54:09
Cynthia Cooper
Here's what I didn't understand. Why would anybody possibly tell me not to ask for support? Why would they care if I asked for support? I do think it's important for us to kind of take the emotion out of things and make sure that we do keep going back to the facts. And so that's what I did. And I decided, look, I've already heard the CFO explanation.

00:29:54:20 - 00:30:15:10
Cynthia Cooper
I'm going to go to the accounting department. And one of my directors was going to go with me and we were debating, well, who do we go to? And I thought I decided, look, I'm going to start with Betty Vinson. We saw her user ID in the system. She was a manager in the accounting department. We walk into her office and when I ask her about this prepaid capacity, she said, Well, yeah, you know, I keep some of the entries.

00:30:15:10 - 00:30:36:28
Cynthia Cooper
You probably saw my ID in the system, but I have no idea what the amounts are for. I just see the numbers. If you want to know, you'll have to talk to my director, Buddy Yates. So we walk out of her office right next door to the director's office, and I ask him again about prepaid capacity. He leans back in his chair and he puts his hands behind his head.

00:30:36:28 - 00:30:54:01
Cynthia Cooper
He said, I don't believe I know what you're talking about. So I said, Well, can a person reporting to you, you know, book an entry of this magnitude without you guys know it? And he's like, Well, yeah, he said, my boss, the controller, he often comes to my team asking them to book entries. I'd never heard of prepaid capacity.

00:30:54:01 - 00:30:54:28
Cynthia Cooper
You'll have to ask him.

00:30:55:06 - 00:31:11:15
Bennett Tomlin
Is it typical for a controller to go to their underlings and ask them to book specific numbers under specific categories? Would that be normal behavior for a company the size of WorldCom with the people who are booking the numbers, not having any understanding of what they represent or why they should be booked?

00:31:11:17 - 00:31:33:05
Cynthia Cooper
I think it depends. Well, certainly the latter part of what you said. No, I mean, you should have an understanding of what the numbers are, why they should be booked. But depending on the company and how it works, it may not be unusual for the controller to come and ask, you know, the staff to do things. So we walked down the hall and the controller is on the phone at the time and his second line is ringing over and over again.

00:31:33:18 - 00:31:52:24
Cynthia Cooper
It is his director calling to warn him that we're coming. When he hangs up the phone, we walk in a sit down and I ask him about prepaid capacity. He picks up the phone and he says, Well, you're too late. They're already here. He's very honest with me. He said, Look, Cynthia, there's no support for these entries. There's there's no support.

00:31:52:24 - 00:32:11:15
Cynthia Cooper
He said, I could I could go back and try to create some, but I'm not going to do that. I asked him if there were any accounting pronouncements supporting what he had done. No, there weren't any accounting pronouncements. He said, You know, I can't imagine that all of our competitors aren't making these exact same entries. They've got to be making the same entries.

00:32:11:27 - 00:32:16:28
Bennett Tomlin
So this was a typical thing for the telecom industry to be doing this kind of prepaid capacity type accounting.

00:32:17:01 - 00:32:33:02
Cynthia Cooper
No, I mean, he said he said he couldn't imagine that they weren't doing it. Okay, because the telecom industry has imploded. And so in his mind, for them to be reporting the numbers they were reporting, he thought they had to be doing the exact same thing.

00:32:33:05 - 00:32:51:24
Cas Piancey
We get so much of this in the cryptocurrency industry, we call it. Whataboutism. Like his idea for responding to you was I understand that this is probably not kosher, but what about everybody else? And it's like, What are you talking about, man? What do you how could that possibly be? The response is like, well, everybody else is doing it.

00:32:51:24 - 00:32:51:29
Cas Piancey
Yeah.

00:32:51:29 - 00:33:13:15
Cynthia Cooper
I mean, and that's another one of the rationalizations that people make, right? Everybody's doing it. There are no real victims. That's another one that I hear sometimes. But he said, you know, we probably never should have made these entries once we made them the first time, it was really hard to stop. And that's the point at which I knew how serious this was.

00:33:13:15 - 00:33:37:24
Cynthia Cooper
His wife later told the Wall Street Journal that he had made a personal decision that if I came to him and asked him face to face about these entries, he would tell me the truth. And she said that long before I asked him about these entries, that he had become very depressed, that he was contemplating taking his life and he drove his car faster and faster, something like 120 miles an hour.

00:33:37:28 - 00:33:39:10
Cynthia Cooper
Fortunately, he didn't do that.

00:33:39:18 - 00:33:41:12
Cas Piancey
He almost wanted you to catch him than, huh?

00:33:41:23 - 00:33:59:15
Cynthia Cooper
He said cas that two of the most poignant moments in his life were the birth of his children and the day he sat across from me and told the truth. As human beings, when we do things that go against our values, whether we recall it or not, our lives can begin to implode. And that's exactly what was happening to him.

00:33:59:15 - 00:34:00:09
Cynthia Cooper
On What.

00:34:00:09 - 00:34:07:09
Bennett Tomlin
Were the things that followed that led to you deciding to blow the whistle on this and revealed this.

00:34:07:19 - 00:34:26:03
Cynthia Cooper
From there I went back to the audit committee chair and told him about the conversation. He was not very happy with me. He said, I thought I told you not to do anything else with us. I went to external audit partner. He thought they were playing some kind of a joke on me and so treating me as if I was green.

00:34:26:03 - 00:34:47:21
Cynthia Cooper
I encouraged him to go and talk to the comptroller himself. I didn't mention that When I got to work that Monday morning, I had a voicemail from Scott Sullivan, the CFO, and the voicemail said, Look, I've spoken with the audit committee chair, Max Bobbitt, and he tells me there's some kind of tension between your department and the accounting group, and I just want to talk to you and put that to bed.

00:34:48:07 - 00:35:04:10
Cynthia Cooper
He later testified in federal court that the audit committee chair actually never asked him about these entries on the corporate jet. He simply told him there seemed to be some kind of tension between the two groups and would he mind giving me a call and working through that?

00:35:04:15 - 00:35:08:21
Bennett Tomlin
Were you able to work through it with a simple phone call?

00:35:08:21 - 00:35:28:07
Cynthia Cooper
Well, once I had that message that morning, that's the point at which I decided I was going to go to the county department that I had already heard his explanation after talking to the audit committee chair and to the external audit partner. At that point, I was not comfortable with having one member of my audit committee who knew about this, three who didn't.

00:35:28:20 - 00:35:47:13
Cynthia Cooper
And so I asked the audit committee chair, Hey, can you call an audit committee meeting? And he says, No, it's still premature. We're not going to do that. We're not calling a meeting. The days are passing. I then get a voicemail from the CFO's administrative assistant saying he wants you to be in New York tonight. Come by yourself.

00:35:47:13 - 00:36:02:25
Cynthia Cooper
Don't bring any of your staff. He wants to meet with you and the comptroller privately. I wasn't about to do that at this point. So finally I said, Look, if you guys don't call a meeting, I'm going to call one. And I was told, Well, you can't do that. And I said, Well, you know, I know how to dial phone numbers.

00:36:04:13 - 00:36:30:15
Cynthia Cooper
Ultimately, an audit committee meeting was called and I flew to Washington and sat across from the CFO. As he came in to this emergency committee meeting, the CFO was given the weekend to go back to the accounting literature and write a white paper trying to support these fraudulent entries, which he did. But ultimately, Arthur Andersen concluded that the entries were not in accordance with what's known as generally accepted accounting principles.

00:36:30:27 - 00:36:54:03
Cynthia Cooper
The CFO was terminated, the comptroller resigned. And this particular case, five people pled guilty to fraud. The CFO received a five year sentence. The CEO is the only one who went to trial and received a 25 year stint as the longest night's given for a white collar crime at that point. So that's a huge gap in sentencing between the CEO and the CFO.

00:36:54:03 - 00:37:05:21
Cynthia Cooper
And I was actually the first witness subpoenaed by the defense to testify at Bernie Ebbers trial because there was nothing that internal audit identified that directly implicated Bernie Ebbers.

00:37:06:18 - 00:37:26:00
Cas Piancey
As you're expressing all of these people you knew you interacted with, some of them did jail time. Some of them were fined. Some of them, I assume, had other issues, maybe difficulty finding a job after all of this. I think a misperception about whistleblowers in general is that there's this desire to destroy these companies that have their evil companies.

00:37:26:07 - 00:37:52:17
Cas Piancey
And the perception from whistleblowers is that you're just you're going to take them down. But I remember when I was reading your book, like one of the things that really stuck out to me and was a little bit hard for me to wrap my head around was how much it was painful to you to do this, to try to pull attention to this fraud, how you knew you were going to ruin some of these people's lives, how they were your friends and coworkers and almost family to some degree.

00:37:52:22 - 00:38:01:27
Cas Piancey
You've been working with them for years and years and years. I guess I just want to talk about that, about the difference of perception and reality when it comes to what it is to be a whistleblower.

00:38:02:05 - 00:38:22:02
Cynthia Cooper
Yeah, I appreciate you bringing that up. And what I can tell you is that most whistleblowers are pretty average citizens who are just, you know, doing their job, going to work every day, trying to support their family. At this point, I was 37 years old. I had two daughters. My oldest daughter was 12. My youngest was 11 months old.

00:38:22:14 - 00:38:42:02
Cynthia Cooper
My husband was a stay at home dad. So I was the sole supporter of my family. And, you know, I loved WorldCom. I loved the people I worked with. We had worked very hard to help build this company. It was a celebrated company all over the world. And especially imagine in Mississippi, these were jobs that were very important to the state of Mississippi.

00:38:42:10 - 00:39:06:09
Cynthia Cooper
WorldCom, at this point employed something like 100,000 people. Most of all, those people were honest, average citizens going to work every day doing their job. So there was absolutely nothing to celebrate here. It was heartbreaking. It was gut wrenching. And as you mentioned, even the people who were complicit with the fraud, these people weren't strangers to us. These are people who we had known for years.

00:39:06:09 - 00:39:39:09
Cynthia Cooper
We knew their spouses. We knew their children. The director of accounting, his son went to school with my daughter, to church. So these are people in our community. We see them in the halls and the cafeterias. So it's very different when people you work with are perpetrating a fraud versus reading about something in the Wall Street Journal when you look behind, I guess, but the machinations of all these fraud scandals and how they're perpetrated behind the accounts and the numbers, these are always stories about people and choices.

00:39:39:27 - 00:40:05:11
Cynthia Cooper
And that's why I have felt such a passion for sharing this story. I've spent the last 20 years analyzing many, many frauds. You know, what do they have in common? How can they be prevented? Because that's ultimately what we want to do. How can we detect them more quickly? How can we make sure that we set up strong systems of ethics and compliance within our organizations how do we get the right balance of regulation and oversight?

00:40:05:14 - 00:40:22:18
Cynthia Cooper
There's a book called The Cheating Culture, and in that book, the author says, look, a high percent of people who cheat in high school, well, cheat in college, and then they'll cheat in the business place. He also reported that a very high percent of golfers admit to cheating on their golf game. Apparently, it doesn't look good. Not to be a good golfer.

00:40:23:02 - 00:40:41:21
Cynthia Cooper
So we're all faced with these dilemmas. And that's why I think it's so important that we prepare ourselves before we come to that point, before you're sitting across from someone who's pressuring you to do something that you don't think is right, that's not the time to make the decision, right? I don't think characters forged at the crossroads of some major event.

00:40:42:02 - 00:41:03:00
Cynthia Cooper
I very much believe our character is built decision by decision and the foundation of our characters, like Brick by brick, because of all of the innocent people who suffered. We are literally in the aftermath, watching tens of thousands of our coworkers being laid off and wave after wave and carrying the last of their belongings out of the building, these small cardboard boxes.

00:41:03:00 - 00:41:21:26
Cynthia Cooper
And you think about all of the shareholders who lost all our portions of their retirement. And it's easy when you're young to start over. But a lot of the people invested. We're moving closer to retirement. My parents had a lot of their retirement invested in WorldCom. Even There are, you know, suicides in a lot of these cases that involve fraud, a lot of suffering.

00:41:22:01 - 00:41:42:14
Cynthia Cooper
Most whistleblowers or just average citizens trying to do their jobs. And I know that there are different perceptions of whistle blowers when the Time magazine came out and Sherron Watkins and Coleen Rowley now were on the cover, my mother called and said, hey, look, they're running across the scroller on one of the major networks, three snitches named Persons of Year.

00:41:43:19 - 00:41:52:09
Cynthia Cooper
You know, so there is this perception with some people, but the path of a whistleblower can be very difficult.

00:41:52:11 - 00:42:16:10
Daren Firestone
I've been working with whistleblowers for more than a decade, first as a federal prosecutor in the tax division of the DOJ and now in private, helping whistleblowers go to the government and reveal the information that they have. And there are several different types. The best type from, say, a prosecutors perspective is someone like Cynthia, who just finds themselves in a situation and says, How did I get here?

00:42:16:22 - 00:42:48:00
Daren Firestone
I never expected to be finding what I'm finding, but now that I found it, I can't unsee it. Let me tell somebody about it. Maybe they can do something about it. That person is usually going to come across on the stand as completely credible, but that doesn't mean that other whistleblowers can't be helpful as well. You do have the kind of whistleblowers that you described who are angry maybe they got laid off, maybe they weren't being paid what they thought they were worth, and that's why they come forward in the first place.

00:42:48:09 - 00:43:12:03
Daren Firestone
Or there's the type of whistleblower who might even have been, at least at one point, a part of the fraud. You take Bradley Birkenfeld, who is one of the most, from a monetary perspective, successful whistleblowers in history. He received a reward of $103 million from the IRS for revealing the fraud at UBS. But he also spent significant amount of time in prison because he participated in that fraud.

00:43:12:17 - 00:43:21:05
Daren Firestone
So whistleblowers can run the gamut. As a whistleblower attorney, I'm open to anybody coming to me, but I want someone like Cynthia. That's the gold standard.

00:43:21:27 - 00:43:40:09
Bennett Tomlin
So you mentioned that this one whistleblower was very financially successful in whistleblowing. Can you talk a little bit about what process of actually whistleblowing and how yet you went through whistleblowing back then, what it looked like and how some of the bounty programs and stuff these agencies have developed have changed that since WorldCom?

00:43:40:22 - 00:44:04:25
Cynthia Cooper
Yeah. So the process I went through, let me pick up after the full board is called together, the fraud as reported to the public, the Department of Justice, the aftermath, the two years following the fraud was the most difficult time. So from the point that we the very first entry into the point I was sitting across from the CFO at this emergency meeting was less than a month.

00:44:05:08 - 00:44:30:14
Cynthia Cooper
It went pretty quickly. We didn't just sit on it, but in the aftermath it was over two years before I was finally testifying at Bernie Ebbers trial. Once you step over that invisible line that you don't even know exist, right, and you become a, quote, whistleblower, strange things will start to happen in your life. A senior executive who comes to me regularly and he gives me these messages.

00:44:30:14 - 00:44:56:25
Cynthia Cooper
Look, he said two of the top executives with the company are saying that you should not talk to anybody in the press. And when I asked, well, who are these two top executives? Well, I can't tell you that. Right. And then he shows up another day and says, I need you to take your entire staff, all your team, and I want you to move them from where you are over to this other building beside me, because I've been told that I need to keep an eye on you guys.

00:44:56:25 - 00:45:12:27
Cynthia Cooper
And so I wasn't going to do that. So all these strange things start to happen. My mother calls me one day and she says, Hey, look, I opened the door. There was this reporter at the door from the Wall Street Journal. They're telling me they're going to run this front page article and they can't find a photo of you anywhere.

00:45:12:27 - 00:45:28:06
Cynthia Cooper
So they've gone to the high school and gotten your old high school yearbook picture, which they're going to run on the front page if I don't give them an updated photo, you know, what do you want me to do? So that was back in the eighties, right? You probably wouldn't want your old eighties picture on the front page of The Wall Street Journal.

00:45:28:06 - 00:45:49:13
Cynthia Cooper
And we're not used to working with the FBI and press and we're just average citizens trying to, you know, go about our lives. And so this is all very foreign to us. I get a call saying I'm going to be subpoenaed to testify live before Congress. The company's general counsel has very hostile and pushy with me at times since the fraud was reported.

00:45:49:13 - 00:46:05:07
Cynthia Cooper
And he calls me and says, you have to be in New York first thing in the morning. And if you're not there to meet with the Southern district of New York, he said the U.S. Marshals are going to come and pick you up. So I start asking questions. This is an informal interview. And he said, yes. And I said, well, do you have a subpoena?

00:46:05:07 - 00:46:21:00
Cynthia Cooper
Said he did. And so I said, well, can you read the subpoena to me? And he said, What's in the next room? So I asked him if he could go and get it. So he left and came back and he said, Well, the door's locked. I can't get in.

00:46:21:00 - 00:46:44:03
Cas Piancey
This is just unreal how pathetic the excuses are, like on every level of this fraud. You know, it's just like, Oh, I didn't know the person above me knows or it's in another room. I can't grab it like, Oh my gosh, that's just insane. It's one lie leads to another and they're each one being less and less and less believable, I guess.

00:46:44:28 - 00:47:05:00
Cynthia Cooper
So he comes back from the other room and he says, Well, I can't get in. You know, the door's locked. And so at that point, Cas I mean, I decided, okay, let's shut the call down here. And when you get the subpoena, give me a call back. And I director and I leave WorldCom's headquarters. We actually drive to my parents house, and this is back in the day of the Yellow Pages.

00:47:05:00 - 00:47:23:07
Cynthia Cooper
So we go for the Yellow Pages and we are paying particular attention to the half and the full page ads. If you're wondering if the full page ad works, you know, sometimes it might be worth investing in. And so we rushed down to the lawyer's office, as he calls general counsel, and he says this is not proper service of a subpoena.

00:47:23:07 - 00:47:41:00
Cynthia Cooper
We are going to quash that in the morning. I'm thinking I had no idea what this meant, but I like the way it sounded and we did not have to be in New York the next morning. But there were, you know, a lot of politics going on behind the scenes, a lot of agendas. A general counsel, by the way, does not represent you.

00:47:41:00 - 00:48:04:05
Cynthia Cooper
They represent the company. So it's very important if you find yourself in an odd situation like this to obtain your own counsel. Once you obtain your own counsel, general counsel can no longer communicate directly with you. At this point, I'm being told that I am to go in and talk to members of the S.E.C., the FBI and the Department of Justice that they're on a plane tonight.

00:48:04:05 - 00:48:25:03
Cynthia Cooper
They'll be here first thing tomorrow morning. And minority attorney tells me and my director, he said, look, there's probably something to tell you. I'm also representing three other employees in this case, the two mid-level managers we talked about, and their boss who were complicit with the fraud. Now, I'll let Daren weigh in here.

00:48:25:18 - 00:48:34:05
Daren Firestone
That would be a conflict of interest. Yes. I'm also impressed because maybe the the ad, you know, attracted all four of you.

00:48:34:14 - 00:48:51:11
Cynthia Cooper
I have no idea how we all ended up with the same lawyer. But that is a conflict of interest. And you're supposed to tell someone before they engage you if there is a potential conflict. But at this point, I'm scheduled to go in the next morning and speak with all these people who are flying in from Washington and New York.

00:48:51:22 - 00:49:21:09
Cynthia Cooper
So we stick with our counsel through the next day, go through the interviews, and, you know, you go into this room and they are literally, I don't know, some 20 people sitting around the table, FBI agents, people from the DOJ, the SEC. And for the average person, that can be kind of intimidating. Right after that meeting, I decided, look, we probably need to get an attorney, obviously, who doesn't have a conflict of interest, but also someone who knows their way around the hill because I'm being told I'm going to have to testify before Congress.

00:49:21:21 - 00:49:42:20
Cynthia Cooper
And so that's at the point when I changed lawyers and called Bob Muse, who is Daren's partner. He was just a tremendous attorney, a very wise counsel. And attorneys who work with whistleblowers will tell you that, you know, the first few hours when when they're talking to someone, you have to play with a lot of different hats. Right.

00:49:42:20 - 00:49:50:12
Cynthia Cooper
You're not only attorney, but you have to be counselor. And in some cases, I think psychologist. And you can manage that, right?

00:49:50:12 - 00:50:13:26
Daren Firestone
Oh, yes. When you first meet with a whistleblower, it's a pivotal moment. You're trying to figure out, well, who is this person? Do they have a good case? Can I trust them? And they're trying to figure out the same thing that might involve a very legal, staid, systematic examination of the facts. But it usually goes well beyond that because they're scared and they don't know where this is all going.

00:50:13:26 - 00:50:33:29
Daren Firestone
And you have to be able to say, All right, let me be your guide. I'm going to help take you through this process. And you couldn't have had a better guide than Bob Muse. A little pitched to my partner, the youngest member of the Senate Watergate Investigative Committee. He's handled just about every major scandal in Washington. So he knows the system perfectly.

00:50:33:29 - 00:50:38:13
Daren Firestone
And if you have someone like that, it's going to demystify the process for you.

00:50:38:20 - 00:51:01:27
Cynthia Cooper
Whistleblowers also go through a lot of trauma. A lot of whistleblowers have PTSD. There are a lot of articles on whistleblowers. But this particular book was called Whistleblowers, Broken Lives and Organizational Power. On the front of the book, there's the School of Purple Fish swimming in one direction and then one red fish swimming in the opposite direction. And most of us don't really want to be the one red fish, right?

00:51:02:12 - 00:51:23:28
Cynthia Cooper
Except for maybe you. So I don't know. Most of us don't want to. I'm just kidding. Most of us don't want to be the one red fish. Most of us want to be part of the team. So I'm reading what this author says, and he says, Of all the whistleblowers he's interviewed, a high percent of them end up suffering from some depression, alcoholism, their marriages end in divorce.

00:51:24:12 - 00:51:43:16
Cynthia Cooper
They have trouble finding employment. And he wrote that the typical fate is for a nuclear engineer to end up selling computers at RadioShack. It made me realize that there is this kind of, you know, whistle blower phenomena and that anybody could step over this line into my shoes and they would start experiencing some of these same things. And I had a choice.

00:51:43:16 - 00:52:00:09
Cynthia Cooper
Either I could let this, you know, ruin my life or I could find a way to move forward. But I chose to go into this different direction because I felt really a mission and a passion to share the story, to write the book, that that was going to be my contribution to to society.

00:52:00:16 - 00:52:27:09
Daren Firestone
At the time when when Cynthia blew the whistle, she did it because it was the right thing to do. And that still describes most whistleblowers and should. But in addition, she had to suffer the costs and there was no financial reward for her at the time. Now, the whistleblower programs that the SEC, the CFTC, the IRS, FinCEN all offered up to 30% of whatever the government collects.

00:52:27:23 - 00:52:52:07
Daren Firestone
So the government collects $100 million. The whistleblower can literally get up to $30 million. My partner Bob, who we just mentioned a bit ago, is one of the lawyers who represented the Ranbaxy whistleblower who ended up being paid out $48 million. So with those kinds of numbers, it definitely changes the calculus. And then the other way they change the calculus is through helping whistleblowers remain anonymous.

00:52:52:07 - 00:53:25:21
Daren Firestone
Now, there's never any guarantee that you can remain anonymous, but all of these programs have a commitment to confidentiality, and most of the whistleblowers do remain anonymous so they can provide their information. If somehow it ends up going to trial, the government may have to reveal who the whistleblower was but their policy is they don't do it. I think the government has started to learn, hey, whistleblowers are important and we need to protect them because it is really a difficult process.

00:53:25:21 - 00:53:36:00
Daren Firestone
If you're out there on your own and in public making accusations regardless whether or not they're true. It's not a panacea, but we're definitely moving in the right direction.

00:53:36:19 - 00:53:59:25
Cynthia Cooper
A lot of people are willing to stand up, step up to the plate and raise their hand because it's the right thing to do. But what this does is incentivize even more people to stand up because they know that they are going to be able to have anonymity, say that they will have an attorney supporting them, and that if they lose their job, they will have some means of supporting themselves financially.

00:54:00:06 - 00:54:40:16
Cynthia Cooper
The number one way in which frauds are identified is through tips. The Association of Certified Fraud Examiners shows that year after year after year, the top two reasons people don't come forward are because, number one, they fear retaliation. And number two, they don't think anything will happen anyway. So what these bounty programs have done is really encouraged and pushed corporations across the country to spend more time making sure they have strong systems of compliance with chief compliance officers, focusing more on ethics, making sure they have a speak up culture, because what a company wants to do is have people within the company come to them so that they can fix the problem.

00:54:40:16 - 00:54:51:12
Cynthia Cooper
And so now corporations know, wait, if I don't listen to the person, then they may go to the SEC or one of these other regulatory bodies and report the the fraud.

00:54:51:21 - 00:55:07:06
Daren Firestone
Cynthia brings up a good point about retaliation, because in a lot of these laws, there are new protections for whistleblowers. So that's another very important piece of the puzzle. You don't want to be fired if you're found out to be a whistleblower. But now if you are, there are ways for you to bring in an action under the law.

00:55:07:10 - 00:55:22:29
Cynthia Cooper
Yeah, there are laws protecting whistleblowers, but most whistleblowers end up leaving their companies within a year. So it is very difficult to speak truth to power and then be considered part of the team again. So a lot of times whistleblowers will choose to go in a different direction.

00:55:23:15 - 00:55:42:15
Bennett Tomlin
One of the things you mentioned there was that one of the benefits of the bounty program is that it provides for the whistleblowers potential financial windfall to help support themselves because they are at increased risk of losing their job or of being forced out of the company or feeling like they need to leave the company or whatever. Going back a little bit to WorldCom.

00:55:42:21 - 00:56:13:20
Bennett Tomlin
You mentioned in your book that for a lot of the time you were there, the actual like salaries being paid were relatively low and that people who ended up being compensated highly were largely because of the stock they were getting, the options they were getting and things like that. Do you think that kind of structure can make it so people are more likely to go along with a fraud because they know that their compensation and their net worth and everything is so intimately tied up in the value of this asset in the stock.

00:56:13:26 - 00:56:32:12
Cynthia Cooper
And let's just not only talk about the employees at WorldCom, the board at WorldCom also owned hundreds of millions of dollars of WorldCom stock. You know, the members of the compensation committee own lots of WorldCom stock. The chair of the audit committee was also on the compensation committee who agreed and approved to the loans that Bernie Ebbers received.

00:56:32:19 - 00:56:56:25
Cynthia Cooper
So I think any time you have employees, executives, board members who have massive amounts of stock options with very short term vesting periods, it can impact the decisions they make. Again, we talked about greed and pride and all those things. And so I think from a human behavior perspective, yes, I mean, I think it puts people in a position where they have to make decisions.

00:56:57:01 - 00:57:21:03
Cynthia Cooper
What's more important to me, my integrity or my salary or my stock options or for one K or whatever, I mean, sometimes it comes down to what is your highest value. For me, that's. I think most people would agree that we want to make sure we minimize fraud in any industry. I think that's critically important to the survival and success of the industry and trust in the capital markets.

00:57:21:16 - 00:57:43:03
Cas Piancey
I see so many people in cryptocurrency suggesting, especially to people like Bennett and I. Do you want to be right or do you want to make money as though it's a binary option, right? You cannot have both. It's either you can be right about there being ongoing fraud and discrepancies and problems in the industry, or you can just dump money into it and make off like a bandit.

00:57:43:03 - 00:58:04:29
Cas Piancey
That is like an ongoing kind of narrative. Well, you're never going to make money being ethical. I don't think that's like a new concept. Jim Chanos suggested this is the golden age of fraud. I think about the time that you whistle blew for WorldCom, and it was WorldCom, Enron, Tyco, the FBI, like anything you can imagine, was basically doing some sort of accounting fraud.

00:58:04:29 - 00:58:13:06
Cas Piancey
MicroStrategy. But apparently it's even worse now. Do you think that's a problem? Do you think that it's worse now than it used to be?

00:58:13:10 - 00:58:49:01
Daren Firestone
Frankly, when it comes to crypto, most of my interactions with people in the industry who are on the up and up and knowledge that the industry is rife with fraud and want to see a crypto industry that matures. So they believe that eventually the more reliable, the more legitimate and useful portions of this industry remain. I think that those people who are telling you, well, you can either be rich or you can be right, probably reached that point where they look in the mirror and they say, well, I guess this is who I am and I'm going to own it.

00:58:49:08 - 00:58:50:19
Cas Piancey
That makes me feel a little bit better.

00:58:51:07 - 00:59:16:04
Cynthia Cooper
I think you've heard the saying that history repeats itself. Mark Twain says that history doesn't repeat itself, but history rhymes. So if you go back to the dot com and telecom when there were like the boom period, and even when you look at the 2008 financial crisis and you had all this cheap money flowing into the market, venture capital is throwing a lot of money and lack of regulation.

00:59:16:06 - 00:59:44:16
Cynthia Cooper
You had a lot of fraud back then it was like the gold rush, just like what you guys are seeing in the crypto area. But guess what? Eventually the train hits the mountain and if you don't have proper transparency, oversight, smart balance regulation, because we certainly don't want to overregulate and quash innovation, weigh down the economy. But you also, if you have no regulation at all, what happens?

00:59:44:18 - 01:00:16:07
Cynthia Cooper
We can look back at history and see that when you go back to the 2008 financial crisis talking about regulation and deregulation of the market, Alan Greenspan did not believe that derivatives should be regulated. So he said regulation of derivatives transactions that are privately negotiated by professionals is unnecessary. Regulation that serves no useful purpose, hinders the efficiency of markets to enlarge standards of living.

01:00:16:20 - 01:00:17:03
Cynthia Cooper
I'll read a.

01:00:17:03 - 01:00:22:04
Cas Piancey
Couple able coin Fans are going to love this and just adore this.

01:00:22:18 - 01:00:46:19
Cynthia Cooper
I haven't finished reading yet. Right. We're not to the end of the story. So this is a quote at back in 2008 by the SEC chairman Christopher Cox. And he says the regulatory black hole for credit default swaps is of the most significant issues we are confronting in the current credit crisis. And it requires immediate legislative action. The market for CDS is barely ten years old.

01:00:46:24 - 01:01:10:15
Cynthia Cooper
It has doubled in size. That's just two years ago. It has grown between the gaps and seams of the current regulatory system, where neither the commission nor any other government agency can reach it. So there was this belief that the market would self-regulate. Right. That was the belief at the time. And there were flaws in Alan Greenspan's philosophy.

01:01:10:16 - 01:01:40:06
Cynthia Cooper
So he believed that the banks would self-regulate. Here is a response from Alan Greenspan following the 2008 financial crisis. Chairman Waxman says, So you found a flaw and he says yes, I found a flaw in the model that I perceived as the critical functioning structure that defines how the world works, so to speak. Chairman Waxman, in other words, you found that your view of the world, your ideology was not right, it was not working.

01:01:41:05 - 01:02:09:27
Cynthia Cooper
Mr. Greenspan Precisely. That's precisely the reason I was shocked, because I had been going for 40 years or more with the very considerable evidence that it was working exceptionally well. So you had these credit default swaps that were not regulated, and you had these big banks that were not required to keep adequate reserves. It wasn't a requirement. And so the banks would give out bad loans.

01:02:10:15 - 01:02:37:20
Cynthia Cooper
Then they would take their profit, bundle the loans, divide them into tranches, sell them off, throw the risk over the wall to someone else. And the government did not really understand the systemic risk. You had the banks who were not properly reserved and not required to be properly reserved. And then you had AIG, which was the go to insurance company for the banks, and they were using a model that was developed by a Yale professor.

01:02:37:20 - 01:03:11:22
Cynthia Cooper
And the analysts at AIG using this model came back to the executives saying there's only a 1% chance that will ever have to pay out on these credit default swaps. So AIG reserves nothing. Right? It was like a series of dominos. And my point in bringing this up is, had there been smart, balanced regulation requiring the banks to be properly reserved for these credit default swaps, had Congress really understood the systemic risk that was posed?

01:03:12:04 - 01:03:42:07
Cynthia Cooper
Right. And we had smart policy in place, then that collapse would not have happened. It was because of no regulation, Right. Because of a lack of regulation that we found in the situation we found ourselves in 2008. I think one of the gaps that we are facing in the world and in our country is a lack of managing, monitoring and understanding systemic risk across a broad array of areas.

01:03:42:09 - 01:04:11:26
Cynthia Cooper
I think that we are way too reactive, and when Congress comes in in reactive mode, legislation often causes us to swing too far in the opposite direction. Like originally, when Sarbanes-Oxley came out after the WorldCom and Enron collapse, there was way too much money and effort spent auditing and implementing these very detailed transactional controls down in the bowels of a company that are not likely to prevent a detect these large on top collusive frauds.

01:04:12:10 - 01:04:33:01
Cynthia Cooper
So it would be much more effective if we could find a way to be more proactive and to make sure we understand these systemic risks that are building across a broad array of areas. So how do we identify these harms and the levers that we can pull to mitigate the harms? I think that's really important.

01:04:33:07 - 01:04:58:05
Daren Firestone
I think that the regulators have woken up on crypto in representing crypto whistleblowers in front of the CFTC and the SEC. I get to talk to the regulators, the enforcement attorneys, and I can tell you that crypto is the highest priority right now. It is the hardest topic for those two agencies to the point where there's literally tension between them to regulate the industry.

01:04:58:13 - 01:05:26:17
Daren Firestone
When my client shows up to talk actually anonymously, nine people from the SEC show up to hear what my client has to say. That's not typical. And you want to be in that position and where your regulars really take this seriously because they understand that, you know, when you're talking sometimes about billions of dollars in value that can be traced, they see that as a systemic risk and they're going to try to do something about it.

01:05:26:17 - 01:05:50:02
Daren Firestone
So to those who have rightly chided some of the regulators for being slow to act, I don't think that's the case anymore. Now, is it everything that needs to be done? Is there some kind of comprehensive scheme? I think some of that may take legislation. We all know that there are a lot of different bills right now to determine how various aspects of the crypto world need to be regulated.

01:05:50:11 - 01:06:04:16
Daren Firestone
But when you're looking at fraud, at market manipulation, those pieces of the puzzle that have really weighed down the industry and made victims of so many people, that's in the crosshairs.

01:06:04:28 - 01:06:05:29
Bennett Tomlin
Well, that's good to hear.

01:06:06:00 - 01:06:30:09
Cynthia Cooper
Yes, I think the president's executive order that came out and you know, the report that just came out to the president where all the regulators got together, I mean, they're clearly moving on this. There's no question about that. We could save ourselves a lot, a lot of pain if we could be more proactive in identifying and monitoring those systemic risk and unintended consequences for society in a more structured, intentional way.

01:06:30:25 - 01:06:50:12
Bennett Tomlin
Talking a little bit more about crypto, there's one character in the WorldCom story who every time I read about them, I'm like, This person would have been great if they were becoming a young working professional during the crypto era. And that's Jack Grubman. Can you talk a little bit about his role in WorldCom and in the WorldCom stock and what he was up to during this period?

01:06:50:12 - 01:07:15:15
Cynthia Cooper
So. Jack Grubman was one of the primary analysts in the telecom industry, and we have to talk about the super banks while we're talking about Jack Grubman. So what happened? These super banks like Citibank, for example, that on one side of the house, you had the investment bankers, on the other side of the house, you had the commercial, and then you had when Salomon Smith Barney was acquired, you had the analyst.

01:07:15:28 - 01:07:39:12
Cynthia Cooper
So Jack Grubman followed WorldCom stock and he, until the bitter end, basically told people, you know, load up the truck by as much of the stock as you can. Well, we talked about a little bit about Bernie Ebbers and the loans he took out. He went to Citibank on the commercial side to take out a lot of his loans, put his stock up or stock options as collateral.

01:07:39:12 - 01:08:04:03
Cynthia Cooper
And then on the other side of the house, the investment banking side, they were making, you know, tens of millions of dollars and advising WorldCom on acquisitions. Jack Grubman, who's touting the stock, think about all those conflicts of interest. If the stock price starts going down on the commercial side of the house, then their loan is at risk.

01:08:04:15 - 01:08:22:25
Cynthia Cooper
There's supposed to be a wall. Are, I mean, right. An invisible hole. But obviously, he had an incentive to keep the stock price high. And back when I think it was the Glass-Steagall Act, right. That actually broke up the super banks and then it was rolled back. And now we have those conflicts again.

01:08:23:04 - 01:08:49:27
Daren Firestone
And in the crypto world, we've got our analogs, right? I've noticed on Twitter lately some good work from ZachXBT and Bitfinex and others like that who are pointing out that there are promoters out there who are shilling coins and privately without anybody knowing selling high. What's the difference between that and boiler Room? Penny pump and dump scheme, You tell me.

01:08:50:07 - 01:09:11:08
Daren Firestone
Jack Grubman The problem is he had his incentives wrong. He had every incentive to keep saying this is going to go up so that his bank can keep making the fees, as do these crypto promoters have an incentive to keep the good news coming because they hold those coins and they they have that power. In order to be a whistleblower, you don't have to be an insider.

01:09:11:19 - 01:09:32:13
Daren Firestone
You can be an expert. You can have that technical knowledge as long as you have what's called information. And that can mean that you have looked very carefully at something. You've done your sleuthing and you've come up with information that's not really out there or you need to put the puzzle together that can be a whistleblower. That's the the Bernie Madoff whistleblower.

01:09:32:13 - 01:09:42:06
Daren Firestone
That's what he did. Right. He he figured out that there was a fraud going on there by putting together somewhat arcane information and applying his technical skills and brought it to light.

01:09:42:13 - 01:10:00:05
Cas Piancey
In a closer comparison than even just the promoters is a clear, more or less a 1 to 1 to what you guys were just discussing. We also have entities in cryptocurrency like Cumberland Global and a handful of others. They function as like the same way you're talking about the super banks. They function as like, we're going to market make.

01:10:00:11 - 01:10:22:20
Cas Piancey
Also, we're going to invest also, we're going to have an exchange like FTX and Alameda. We're going to have our hands in every single cookie jar. And ultimately, like BitMEX, it was proven they were trading against their customers. These guys had access to the order books and they could trade against their own customers and front run them and spoof and do whatever it took to liquidate their own customers.

01:10:22:21 - 01:10:26:08
Cas Piancey
It just seems like such an obvious like, Oh, well, that's a problem.

01:10:26:09 - 01:10:48:27
Daren Firestone
And to me, that's the vanguard of enforcement in the crypto industry. It has just started to happen. So we're going to see more cases on market manipulation, more cases on insider trading and whether that market manipulation is just as you described, whether it's front running or spoofing or wash trading, that's where the SEC is going to this point.

01:10:49:09 - 01:11:27:17
Daren Firestone
The SEC and the CFTC as well have really focused on offering unregistered securities or out and out thefts. Those have been the two sort of low hanging fruit that they've gone after. And now we're starting to see changes, of course, with the insider trading case, the Coinbase case, and just last week that the hydrogen technology case, which is a case that involves a sort of wash trading, a sort of spoofing, but basically where a programmer was hired to pump and dump a certain amount of coin that was released by hydrogen, allegedly, although that programmer has now agreed to a settlement.

01:11:27:22 - 01:11:48:24
Daren Firestone
That's an interesting case. It's a little more complicated. And I think all of those things that you refer to, Cas, which I think, yeah, to some extent there's been a bind, I turn to them. I don't think that's going to happen anymore. I think the regulators are saying, hey, you know, there's a real problem here and we've addressed it in traditional financial markets, but now we have to bring that over to crypto.

01:11:48:29 - 01:12:17:09
Cynthia Cooper
We want to minimize regulators having to chase down fraudsters and criminals. Right. That's totally inefficient. We want smart, balanced policy that allows for transparency for some attestation or assurance over, you know, metrics that are really important to society and the public, while at the same time allowing room for innovation of new technologies.

01:12:17:21 - 01:12:40:03
Bennett Tomlin
Besides, these comparisons, I think, are valid. I think the more like direct comparison between like Jack and cryptocurrency or like the cryptocurrency researchers who are heavily invested in cryptocurrency or who even will do like some Angel or V.C. investing, we'll still publishing like vertical research reports and stuff sometimes, and you hear them talk. It reminds me a little bit of like Jack's brazenness.

01:12:40:11 - 01:13:06:09
Bennett Tomlin
Like where he was writing in emails that his upgrade of AT&T that he did was a business deal in his mind to get his kids into this preschool that the AT&T executive could. And that when The Wall Street Journal started reporting and some of Jack's conflicts of interest, he like said to New York magazine, the reality of the world is that analysts are becoming increasingly important in the banking of firms, not just for underwriting, but also for mergers and acquisitions.

01:13:06:15 - 01:13:33:07
Bennett Tomlin
It just is what it is. It's part of the business. He also said once, when challenged as to whether or not he could remain objective, his response was objective. Question Mark. The other word for it is uninformed. Like he embraced the conflict of interest and Cas and I have both experienced in crypto currency. There are certain researchers and certain people who believe that if you were not heavily invested, if you're not invested in these protocols, you're actually biased against them in some way.

01:13:33:07 - 01:13:46:14
Bennett Tomlin
And that the only way to truly be informed about these things is to have these massive investments. And so when I look at a case like Jack, I just that echoed so often across research done by analysts in this industry currently.

01:13:46:22 - 01:14:19:10
Cynthia Cooper
Yeah, I mean, that's a great point. And you just made me think about the conflicts of interests that existed with the public accounting firms back in the day, you know, with Enron and WorldCom, where Arthur Andersen was making the bulk of their money on consulting practice. And what happened was the external audit really became the law. SLATER A lot of these big firms started stifling their engagements with, you know, less experienced auditors doing less and less what's known as detailed substantive testing, where they would pull transactions and then look at the support.

01:14:19:22 - 01:14:40:21
Cynthia Cooper
So, for example Arthur Andersen, all about ten capital additions in the first half of the year and none in the second half based on their reliance of the company's internal controls. So these firms would heavily rely on internal controls in Andersen, for example, would come in to the audit committee meetings with what we called the red, yellow, green light report.

01:14:40:22 - 01:15:05:18
Cynthia Cooper
It was, you know, literally for every area within finance, we give it a green light. Controls are strong and based on our alliance of controls, then we're going to really our testing. So there are all these conflicts. They also shared too much with management. The methodologies of the firms really in many cases did not at that time allow them to root out some of these collusive frauds that we've seen.

01:15:05:19 - 01:15:28:19
Cynthia Cooper
So Andersen, for example, told management, Hey, we're coming in to test this particular area, which is where some of these fraudulent entries resided. And management quickly went in and moved them out, spread them across a multitude of fixed asset accounts, those smaller dollar entries, because they knew that Andersen did not test amounts below $50 million. The same thing happened in HealthSouth.

01:15:29:00 - 01:15:59:03
Cynthia Cooper
HealthSouth made hundreds of thousands of entries, capitalizing operating expenses. But instead of making a few larger entities like WorldCom, they made them below $4,000 because knew that the external audit didn't test below that threshold. So too much sharing of information with the client. Consulting as a conflict. Andersen, actually in their work papers, documented that WorldCom was a high risk client, but they didn't change their audit procedures based on that.

01:15:59:11 - 01:16:20:25
Cynthia Cooper
And They identified capitalization of operating expense as a potential fraud threat in their work papers. They were required to ask about these on top those close entries, so management would close the books, and then they would make these fraudulent entries on top. And instead of going into the accounting system and pulling out these entries, they could have done that.

01:16:21:03 - 01:16:42:07
Cynthia Cooper
They asked management whether there were any of the own type entries. Of course, management said no, and they documented that in their working papers. So we're in a totally different today than we were 20 years ago in terms of audit quality, I think, and the firms making sure that they are testing smarter, not harder. And with technology, you can go in and pull out.

01:16:42:07 - 01:17:03:09
Cynthia Cooper
Like Cas, we talked about around dollar amounts. I mean, they're all types of odd entries that you can go in and easily pull out. However, I will say that independence is an area that I have been reading a lot about lately, and there's a big push with the firms that, you know, say they need to beef up their independence because they are building their consulting practices back up.

01:17:03:15 - 01:17:12:02
Bennett Tomlin
Yeah. Francine McKenna talked about that recently when she was on the show about how that was initially stopped and has gradually become more and more common.

01:17:12:02 - 01:17:38:10
Cas Piancey
Again, I agree with him because I have friends who consulted at KPMG. I think he was going become a lawyer, like his job profile did not match up with what he was doing over at an auditing firm. And yet he was like, This is an important job for me. This is a good stepping stone for me. And I was just like, Oh wow, that's not what you would think in Auditing Firm would be pushing.

01:17:38:11 - 01:17:39:20
Cas Piancey
But yeah, here we are.

01:17:40:05 - 01:17:59:18
Cynthia Cooper
So I mean, and we now have the PCAOB, which is basically, you know, auditing the auditors, so to speak, and they issue all the accounting standards back in the days of WorldCom and Enron, the public accounting firms were self-regulated, and that didn't work very well. So self-regulation, I mean, we see time and time again it doesn't work well.

01:17:59:18 - 01:18:03:08
Cynthia Cooper
You need some smart, balanced regulation and oversight.

01:18:03:19 - 01:18:29:08
Cas Piancey
Yeah, they won't like hearing that. Our listeners have one of the moments that is very defining for me from your book was reading about the two auditors who had inserted all of this prepaid capacity stuff into the books and kind of helped this fraud continue. What stuck out for me about that was that they were making the exact opposite decision that you were making, despite being in sort of a similar position.

01:18:29:16 - 01:18:36:28
Cas Piancey
And I just wonder how you reflect on that, why you made those decisions and what you think about when you think about what Betty and Troy were doing.

01:18:37:07 - 01:19:09:25
Cynthia Cooper
So Betty and Troy were two mid-level managers who worked at WorldCom, and they had worked in the accounting department. If you go back in time to the third quarter of 2000, they were asked to go in and close the books and records, as they normally did every quarter. But in this particular quarter, one thing had changed. Suddenly, Lycos expense, which was the largest single expense item on the income statement, it represented amounts that WorldCom paid to third parties to all telecom fiber.

01:19:10:09 - 01:19:29:19
Cynthia Cooper
It had jumped up dramatically and was out of line with the company's revenues. And so Betty and Troy took the results to their boss, who went to the comptroller. The comptroller walks into the CFO's office and the CFO says, there's no way these numbers are right. You guys have made some kind of an error. You know, go back, close the books, find your error.

01:19:30:00 - 01:19:49:21
Cynthia Cooper
So they go back and forth and Betty and Troy go through the closed process. Again, I can't find this error in the books. And at this point, there were something like five days away from having to release earnings. And so the pressure was really starting to build. And the CFO told the comptroller, Look, here's what I need you to do.

01:19:50:01 - 01:20:17:16
Cynthia Cooper
He said, I want you to go back and find what's known in accounting as some excess liability and quote, cookie jar reserves and draw down on those reserves so that you can reduce this expense. So that line costs expense as a percent of revenue stays flat at 42% consistent with what it spent in the prior quarters. So that when Arthur Andersen comes in and looks at key ratios quarter over quarter looks to be in line with their expectations.

01:20:17:24 - 01:20:36:14
Cynthia Cooper
And when the Wall Street analysts like Jeff Grubman and others look at ratios, everything will look to be in line with what they are expecting. See? And he said we'll find this error next quarter, but this is what we need to do for now. So the executives at the top of the company don't know how to go into the system and actually physically kick some accounting entries.

01:20:36:27 - 01:21:00:07
Cynthia Cooper
And this is the point at which the inner circle had to grow. Well, Betty and Troy aren't very comfortable with what they're being asked to do. And so I mean, you've got the CFO who is highly respected, three levels above them and rank asking them to make these entries. He's telling them that there's an error. Since we don't have any students here, then you and Cass can be the pretend students.

01:21:00:08 - 01:21:03:13
Cynthia Cooper
What would you advise them to do?

01:21:03:26 - 01:21:06:22
Cas Piancey
Probably talk to a lawyer.

01:21:06:27 - 01:21:37:26
Bennett Tomlin
I mean, it's challenging because, like, my understanding is the cookie jar part they did it first is like a legitimate accounting practices. I understand, right? Especially when you're going by acquisition and you're trying to combine together all these books. It's not uncommon to end up with some of these weird little leftover amounts. Pulling those down seems like it might have been a questionable but reasonable decision there as it goes on and you start to get asked to book more and more, you want to offer the advice, you should say no to those things.

01:21:37:26 - 01:21:50:28
Bennett Tomlin
But like as you've talked about here, there's a lot of pressures. And these individuals and and the people have to make these decisions as they're doing it. And so it's kind of like hard sitting here in the outside to say that like someone should have stopped it, you know.

01:21:51:09 - 01:22:13:17
Cynthia Cooper
So what they ended up doing was requesting a meeting with the CFO. So they go to his office and they sit on the couch across from him and he really praises their work. You guys are doing a fantastic job. Thank you so much for your hard work and. He uses this analogy of an aircraft carrier, so he knows that they're thinking about leaving the company and he says, Imagine this is an aircraft carrier.

01:22:13:26 - 01:22:27:18
Cynthia Cooper
Help me to get all of the planes safely. Once we get all the planes landed safely, then if you want to leave, you can leave. So I always ask, what do you think he meant by landing the plane safely? I'm asking my pretend students. That's you guys.

01:22:27:29 - 01:22:40:25
Bennett Tomlin
I think the good faith explanation is that they're supposed to take it as we're trying to figure out what this problem was. And so help us figure out what problem is. Get this set right and then it's everything's solved.

01:22:40:25 - 01:22:46:15
Cas Piancey
I want to butt in and say it sounds like he is referring to you. Don't wake up and say, I'm going to be a criminal.

01:22:46:22 - 01:23:04:13
Cynthia Cooper
I think he was appealing to their loyalty. He really does believe there's an error initially. But Troy looks at him after he says all this and says, Hey, I'm not going to jail for anybody. So the CFO says, well, nobody's going to jail. You know, if anybody's going to get in trouble, then me, you're just you're just like doing what I'm asking you to do.

01:23:04:13 - 01:23:05:19
Cynthia Cooper
You're just following orders.

01:23:05:29 - 01:23:17:24
Cas Piancey
That would be like an ultimate red flag for me. We're all taught about the Nuremberg trials in history class, so you know that just following orders is not actually an excuse that anyone can use for criminal behavior.

01:23:17:24 - 01:23:20:01
Cynthia Cooper
So does that hold up in federal court?

01:23:20:02 - 01:23:45:09
Daren Firestone
Daren, if there is a theme to this conversation, in my mind, it is the power of social and financial pressure and that if you are a whistleblower, you have to be willing to stand up to that pressure. Nobody wants the party to end. If I'm a prosecutor, I'm going to go a lot easier on somebody who's basically been told either do what they say or you lose your job.

01:23:45:22 - 01:23:51:15
Daren Firestone
Maybe they still have to, as we say in the business, eat a charge, but that charge is going to be a lot less serious.

01:23:51:23 - 01:24:16:05
Cas Piancey
It's a lot easier for you to bring charges against that person, knowing that they're going to then flip against all of the people that you really want to get to. So it's like that's a tough position to be in because I suspect you would get charged with something because they know that if you don't want to get actual prison time, you're just going to talk and there's no reason for you not to at that point, because these people are not doing anything for you and your career is over at that company.

01:24:16:05 - 01:24:16:16
Cas Piancey
So.

01:24:16:26 - 01:24:28:23
Daren Firestone
That's right. No one wants to be in that position where they have to decide, okay, I might get probation if I just play along. Right. You want to nip it in the bud? You want to be like Cynthia.

01:24:29:13 - 01:24:53:00
Cynthia Cooper
You know, I mean, I like the point that Cass made the different within the Justice Department follow different protocols. Betty and Troy, they were very close to obtaining immunity. Originally, a division of the Justice Department within Mississippi was going to handle this case. But when the Southern District of New York got the case, you know, it was a different story.

01:24:53:12 - 01:25:06:21
Cynthia Cooper
To your point, sometimes people will plead guilty and then they cooperate with the prosecutors in the case. So, Betty and Troy, they wrote their resignation letters. And I think it's worth reading.

01:25:06:21 - 01:25:09:23
Daren Firestone
I'll engage my acting background here. Yes.

01:25:10:07 - 01:25:12:07
Cynthia Cooper
He's his childhood acting background.

01:25:12:07 - 01:25:42:21
Daren Firestone
Dear buddy, this letter is to serve as notice of my resignation from WorldCom effective today. The actions proposed regarding quarter close entries as this action, if needed, I can assist with any transition issues that may arise. My income situation is such that I request we work out an equitable arrangement regarding some sort of salary and benefits continuation until I can obtain other employment, because I feel that upper management has forced my decision surrounding my resignation.

01:25:42:21 - 01:25:46:02
Daren Firestone
This is not the course of action that I prefer but feel I must take.

01:25:46:23 - 01:25:50:05
Cynthia Cooper
So is there anything that jumps out to you guys about her letter.

01:25:50:18 - 01:26:09:25
Cas Piancey
For a resignation Letter? It sure is a little blackmail and asking for a lot. I don't know. It seemed really strange to me to be like, Yeah, so I'm going to just keep getting a paycheck from you guys, but I am resigning and I guess I can help with some stuff, but I don't have my employment stuff worked out yet, so let's just keep paying me right?

01:26:10:04 - 01:26:15:07
Cas Piancey
It just kind of sounds like I know what's up. So you guys are going to keep paying me, right? And that's what it sounds like to me.

01:26:15:10 - 01:26:42:26
Cynthia Cooper
That usually jumps out at people. And the fact that also she she didn't want to leave her job. Right. She felt pressured. Leave her job. You mentioned the Nuremberg trials, but with the Milgram study, each time the person answered the question incorrectly, they were instructed to hit a button and deliver an electric shock, increasing the voltage each time to the point where if this were real, the person behind the panel would be dead and a very high percent of people would continue to deliver that shock.

01:26:43:09 - 01:27:03:03
Cynthia Cooper
As long as there was an authority figure pressuring them, saying, you know, you've got to continue with the study. It just illustrates how easy it is for us to. Give in to pressure and how important it is for all of us to prepare ourselves before we're sitting at the crossroads across from someone who's pressuring us to do something that we're not comfortable with.

01:27:03:13 - 01:27:23:20
Cynthia Cooper
Keep in mind that just because something's legal doesn't mean it's ethical. Those are not always aligned. So in the back of, my book, Alice Ten Steps that we Can take to make sure we recognize these dilemmas, because sometimes I don't think we even recognize them until we're looking at them in the rearview mirror and then stop, step back, take a breath.

01:27:24:00 - 01:27:50:06
Cynthia Cooper
Don't allow ourselves to be intimidated and make the right choices. We all have the power of choice. You can give it away, but nobody can take it from you. As I wrote this book and as I speak to audiences across the country, I wrote the book in present tense. The reason I did that is because I wanted people to feel as if they were there with me and my team, as if they were there with Betty and Troy, as if they were there with.

01:27:50:06 - 01:28:18:08
Cynthia Cooper
The board with general counsel. And think about, you know, those choices that they might have made and how those choices would have impacted, you know, not only their lives, but obviously the lives of a lot of other people. So I think the more that we bring ethics to the forefront of our thinking, the more we actually talk and have conversations like what we're doing here today, the more likely we are, I think, to to make the right choices and to empower the next generation to make the right choices as well.

01:28:19:01 - 01:28:42:25
Daren Firestone
It is very important that prosecutors remember that they are human beings and that the people they're dealing with are human beings and that we're all fallible. You know, I've been in situations as a prosecutor where I've got someone who's what you call a subject where you're like, is this person someone we might charge at Target or is this person more of a witness?

01:28:43:07 - 01:29:07:27
Daren Firestone
Because we know that they were involved, but how involved were they? And then you to that point where you say, okay, well, they were very involved, but they were clearly not as powerful as the people above them. And so should you charge them and? It's a real judgment call. So I'm not surprised when Cynthia says, you know, you had a disagreement between different officers in the DOJ about how to you go about this situation.

01:29:08:10 - 01:29:16:09
Daren Firestone
Ultimately LEE There is prosecutorial discretion and you just want to make sure or you hope that the prosecutors have humanity in making those decisions.

01:29:16:24 - 01:29:38:03
Cynthia Cooper
Cass I can tell you, for me personally, this has been by far the most difficult thing that I've been through in my lifetime. And just as the author of The Whistleblower said, there was a period of time where I began to suffer from, you know, some pretty severe depression. There was nothing to celebrate here. I lost over £30.

01:29:38:03 - 01:29:56:18
Cynthia Cooper
It was difficult sometimes just to get out of bed and put one foot in front of the other. And I can remember my dad sitting at the foot of my bed one night reading and rereading the 23rd Psalm. Obviously, none of us want to find ourselves in this position. You know, people we care about, people we love. Family members are pulled into it, right?

01:29:57:01 - 01:30:13:29
Cynthia Cooper
So many people are pulled into it. But I think what helped me personally to weather the storm and move forward, I was blessed to have, you know, a great team that stood by me. My was a huge source of support. My parents that made a big difference because a lot of people don't have that.

01:30:14:11 - 01:30:46:15
Bennett Tomlin
We all do have those moments where we have to make those choices. It is good for corporations to have a speak up culture where people feel like they can come to their superiors and their executives and describe the problems to them of to law enforcement or regulators. What kind of things make it possible for a company to have that kind of culture, for people to feel like they can discuss these kind of problems in their workplace and make these kind of changes without having to whistleblower, without having to go through all of those experiences?

01:30:46:15 - 01:31:19:26
Cynthia Cooper
Yeah, that's a great question. So when you have these entrepreneurial fast growth companies like what we see in the crypto space, we saw it in dot com telecom. The founders are often the ones who set that tone at the top. The culture permeates throughout the organization. And so having a code of conduct as important, defining the that are important to the organization, making sure everybody understands what the purpose of the company is, that you have a purpose that's bigger than profits if you see something that you're not comfortable with.

01:31:20:10 - 01:31:37:26
Cynthia Cooper
We want you to speak up. We want you to come to us having a chief compliance officer, for example, letting people know, here's we want you to do we want to hear from you and then making sure that you follow up on it and that you get back to the person. Protecting the person's anonymity is important. If at all possible.

01:31:38:00 - 01:32:15:10
Cynthia Cooper
So all of these different things work in an ecosystem together to make sure that companies have this transparent, speak up culture and then sending out surveys. I think ethical surveys are really important to touch every employee in your organization, either one on one or through small group roundtable discussions or through ethics questionnaires. And think about it with a lot of these big scandals, if a compliance officer or someone had sent out an ethics questionnaire, it's likely because lots of people knew about some of these things that someone would have said, Hey, well, yeah, there's this thing I'm uncomfortable with.

01:32:15:23 - 01:32:25:20
Cynthia Cooper
So making for executives, making sure you get out. You talk to people at all levels, not just at the top, and that you ask them the right questions. Is there anything that you're not comfortable with?

01:32:25:28 - 01:32:55:15
Cas Piancey
Honestly think it's quite important that people listen to this and take away the right lessons from it? I don't think I would be interested in fraud. How auditing works, how all of this stuff works. If I hadn't read your book and I was 29 or something when I read your book. So like the idea that it can't be taught is silly to me, but there's two competing narratives there where it's like on one hand you want to believe that you could teach something like morals and ethics to people and it would change them.

01:32:55:23 - 01:33:08:13
Cas Piancey
But On the other, we have the golden age of fraud and we have money over being correct, money over being ethical. How do you see that playing out in the next few years? Assume you're optimistic. I don't know if I am.

01:33:08:22 - 01:33:42:01
Daren Firestone
Humans are deeply flawed. I think the question becomes what are the systems that are built up around us to try to mitigate the damage from those flaws globally? We're going through a lot of changes. There's a decline in the of nations to some degree as some nations start to close themselves off. I'm not particularly optimistic in this country right now because I can see the effects of isolationism in our politics.

01:33:42:13 - 01:34:17:11
Daren Firestone
When you have a more isolationist set top down strongman outlook, often the systems that are meant to constrain greed, to constrain lies, they start to give way to the pressure of power. I think unless we really push back against that ethic, we're going to see things get worse, not better. Although the flipside of that is that I think in the crypto world there is this reaction to the top down totalitarian society.

01:34:17:11 - 01:34:42:05
Daren Firestone
I've heard Bennett say in the past, Look, for better or for worse, anonymity allows people to resist censorship. I think we can certainly think of countries where censorship is at a point where it needs to be resisted. Here in the United States, I'd like to think we're not there. I mean, look, I was in the government. I have a lot of criticisms, but I don't have a huge mistrust.

01:34:42:09 - 01:35:01:21
Daren Firestone
Most I know work in the government are there for the right reasons, trying to do the right thing. I think we need to sort of have some perspective here in the US and say, you know what, some of these systems are in place to constrain our flaws and we need to support them. And if we don't, it's only going to get worse.

01:35:02:12 - 01:35:21:13
Cynthia Cooper
Yeah, this isn't the first golden era of fraud, you know, it's simply history repeating itself, Warren Buffett says. I think it's something like takes ten years to build a reputation and 10 minutes to lose it. And when you think about that, you'll do things differently. These rashes are frauds, you know, they tend to kind of come in cycles.

01:35:21:25 - 01:35:51:01
Cynthia Cooper
We are seeing massive change and innovation like we've never seen before. I mean, think about the history of the world since human beings have been here and we're, you know, hundreds of years of history compressed into a year, I mean, rapid change and technological development. And when you have that and you have lots of money flowing in and, you know, no regulations, no police officer on the beat, right, you're going to have fraud.

01:35:51:01 - 01:36:23:26
Cynthia Cooper
That's just of it. I think that regulation and oversight will catch up. I think it's, you know, necessary. I wish we would be more proactive. I am very actually optimistic and hopeful. I think that shows like exactly what you guys are doing. We need all people to come to the table. We need to have more civil discourse. There are people out there listening that are on all different sides of these issues and we need to come to the table, have civil discourse, and see if there is common ground that we can find and keeping an open mind there.

01:36:23:26 - 01:36:30:26
Bennett Tomlin
And could you talk a little bit about why you decided to start crypto whistle blower dot com and what you hope it accomplishes.

01:36:31:02 - 01:36:50:11
Daren Firestone
So part of this is is serendipitous my crypto journey is some people like to say begins when I first heard about crypto I don't know how many years ago seven years ago, eight years ago I thought wow, that sounds like a really good way to cheat on your taxes. And I was somewhat dismissive of it. I said, I don't want to have anything to do with it.

01:36:50:11 - 01:37:13:23
Daren Firestone
I don't want to invest in it. And it was about a year and a half ago. Somebody came to me, referred me a case of a whistle blower who is in the crypto industry. It's a major case. You definitely know what it is. Unfortunately, it's not public yet my client's involvement, but it will be hopefully fairly soon. I took the case not really knowing a lot about crypto, having those same impressions and deciding this is really interesting.

01:37:13:23 - 01:37:35:22
Daren Firestone
And I had sort of had two reactions. One is, Hey, this is a really big case. And two, wow, there is so much fraud in crypto. And as I learned more, I felt that it reinforced my impression and I guess the number three cryptos. Interesting. Nobody really knows where it's going. I think anybody who says they have the answers is a little too sure of themselves.

01:37:36:05 - 01:37:59:11
Daren Firestone
I want to be a part of this. So I started thinking about ways doing it. I bought the domain name crypto whistleblower dot com Since I started working with a number of whistleblowers in the crypto industry to help bring them forward to the right government agencies, to help them, you know, tell their stories and hopefully help them reap rewards while protecting their their other interests, whether that's keeping them anonymous or otherwise.

01:37:59:11 - 01:38:29:13
Daren Firestone
And I find it extremely rewarding, extremely entertaining. Fraud always makes for good stories, as my partner Bob likes to say, we like cases that have high amusement value. All of these cases have high amusement value, but they also have high impact value. Whistleblowers are part of the solution. If you think about the Panama and the impact that the Panama Papers have had on the world in a number of countries, it is testament to the power of whistleblowing.

01:38:29:29 - 01:38:39:01
Daren Firestone
It's never the full story is never the end of the story. But so often when people like Cynthia come forward, change happens. That's why I started the website.

01:38:39:06 - 01:39:04:20
Cynthia Cooper
I hope that society will change their perspective on whistleblowers and who whistleblowers are, because I think that they play a critical role in protecting all of us. Protecting us. I mean, we see that, right, with a lot of these cases and protecting societies and saving lives. And I admire what what you're doing and what you guys are doing as well to try and fight fraud in the industry.

01:39:05:00 - 01:39:22:02
Cas Piancey
I think Bennett and I largely started this to reflect on something, but also to share what we feel like we've learned along this incredibly weird journey. And I'm happy to hear that you're going to be starting your own podcast, Defining Moments with Cynthia Cooper. Can you tell us more about.

01:39:22:02 - 01:39:55:15
Cynthia Cooper
That Defining moments with Cynthia Cooper? I have already interviewed Francis Horgan, the Facebook whistleblower Sherron Watkins of Enron talked to the founder of the Association of Fraud Examiners and the president, the CFA. They represent over 100,000 fraud examiners all over the world and have some other guests, exciting guests lined up and hoping that cast that you and Bennett will come on to the show and that we can continue this conversation because it's it's so important.

01:39:55:15 - 01:40:13:29
Cynthia Cooper
And and I know it's not always easy to to share and do what you're doing. And I'm sure you guys, you know, received some resistance. But it's important, right? It's important. And I've seen from watching your podcast that you put a lot of research and thought into your podcast. So thank you.

01:40:14:06 - 01:40:30:15
Cas Piancey
I mean, it's very kind coming from you. So yeah, it's been an unreal experience to get to talk to you. Cynthia and Daren, thank you. Thank you so much for coming on to talk about the work that you do. I yeah, this is a I'm dumbfounded that you guys were willing to do this with us.

01:40:31:05 - 01:40:45:27
Bennett Tomlin
This is by far our longest recording. So much ground and I deeply appreciate both of you being willing to take this time to talk about these things with us today. I think we've covered a lot of really valuable things, and I'm really appreciative that you guys were willing to sit and do this.

01:40:46:02 - 01:40:47:11
Cynthia Cooper
Thank you so much.

01:40:47:18 - 01:40:57:27
Daren Firestone
We are deeply appreciative of you and thank you for taking so much time. You've got a lot ahead of you if people want to get in touch with us. Cynthia, I know you're LinkedIn page, right?

01:40:58:03 - 01:41:02:14
Cynthia Cooper
Sure. I'm on LinkedIn or C Cooper at Cooper Group LLC dot com.

01:41:02:17 - 01:41:15:01
Daren Firestone
I'm also on LinkedIn and crypto whistleblower. Com. If you want to email me my emails there, I can send you some tips on what makes for a successful crypto whistleblower case. Please reach out.

4 responses to “Episode 115 – The Whistleblower Who Exposed WorldCom (feat. Cynthia Cooper and Daren Firestone)”

LFM Partner Daren Firestone Interviewed Along With WorldCom Whistleblower Cynthia Cooper | Levy Firestone Muse LLP says:

May 26, 2023 at 4:41 pm

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August 29, 2023 at 10:16 am

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Episode 139 – It’s so over: Sam Bankman-Fried testifies (feat. Sam Kessler) – Crypto Critics' Corner says:

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Episode 142 – Sam Bankman-Fried Sent Himself to Prison (feat. Elizabeth Lopatto) – Crypto Critics' Corner says:

November 10, 2023 at 10:42 am

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Episode 115 – The Whistleblower Who Exposed WorldCom (feat. Cynthia Cooper and Daren Firestone)

The Whistleblower Who Exposed WorldCom (feat. Cynthia Cooper & Daren Firestone) – Crypto Critics' Corner

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