WorldCom Fined $500 Million in Settlement
story.news.yahoo.com
Mon May 19, 6:52 PM ET
By Jeremy Pelofsky and Dane Hamilton
WASHINGTON/NEW YORK (Reuters) - WorldCom Inc. (Other OTC:WCOEQ - news) agreed on Monday to pay a record $500 million fine to settle charges stemming from one of the biggest accounting fraud cases in U.S. history.
Under the tentative deal reached between WorldCom and the Securities and Exchange Commission (news - web sites), the No. 2 U.S. long-distance telephone and data services company would pay the penalty and the funds would then be doled out to victims of the roughly $11 billion accounting fraud.
But U.S. District Judge Jed Rakoff held off approving the settlement at a hearing in New York and told lawyers for the SEC, WorldCom and creditors that he had "an inadequate basis" to approve the fine at this time.
He requested reports from WorldCom's special investigative committee on the accounting fraud and what corporate governance and management changes the company has made in light of the scandal in which WorldCom improperly recorded expenses so it could meet Wall Street expectations.
"All this must precede a determination of monetary damages," Rakoff said. He set another hearing for June 11.
Resolving the SEC charges would remove a big legal cloud over WorldCom, which filed for bankruptcy in July after being rocked by the accounting scandal and amassing some $41 billion in debt. The Ashburn, Virginia company also faces lawsuits from shareholders whose stock has become worthless.
"This is an important milestone in our progress to emerge from Chapter 11 on schedule this fall," WorldCom General Counsel Michael Salsbury said in a statement.
The fine was originally set at $1.5 billion, but it was cut to $500 million because the company is in bankruptcy. WorldCom plans to change its name back to MCI after it emerges from bankruptcy protection.
NO ADMISSION OF GUILT
WorldCom admitted that it had improperly recorded almost $4 billion in expenses as capital spending in June 2002 and the SEC immediately filed fraud charges against the company. That number eventually ballooned to about $11 billion.
The SEC and WorldCom reached a partial settlement of the fraud charges last November, but left for another day deciding the size of the penalty. The company neither admitted nor denied wrongdoing in the settlement filed on Monday.
WorldCom did agree not to violate securities laws in the future and train its officers to avoid doing so. It also would be barred from seeking insurance coverage for the penalty.
Also on Monday, WorldCom's bankruptcy lawyers said the company expects to present to a U.S. Bankruptcy Court judge in August a plan of reorganization, which will make distressed bond buyer MatlinPatterson Global Opportunities Partners LP. new company's largest shareholder with a 17 percent stake.
In a separate ruling, another federal judge refused to dismiss class-action litigation against WorldCom former Chief Executive Bernie Ebbers and other former company directors.
The size of the SEC penalty would eclipse the $400 million Citigroup (NYSE:C - news) investment banking unit agreed to pay last month as part a $1.4 billion settlement with Wall Street firms over biased analyst research.
Previously, Xerox Corp. (NYSE:XRX - news) had paid the largest fine assessed on a non-broker/dealer, $10 million, also for accounting problems.
"An enormous fine is justified since the accounting entries were made over an extended period of time and were of an egregious and indefensible nature," said Christopher Bebel, a partner with Shepherd Smith & Bebel PC in Houston.
"However, the executives who orchestrated the scheme are gone and the shareholders have been wiped out, so this burden falls on the creditors," said Bebel, a former prosecutor.
Federal prosecutors and securities regulators have also filed fraud charges against WorldCom's former Chief Financial Officer, Scott Sullivan, who has denied wrongdoing. Ebbers is under investigation, but has not been charged.
WorldCom has weathered the high-profile scandal and bankruptcy, including winning new government contracts such as a recent one to build a wireless network in Iraq (news - web sites). It also has sold some non-core assets.
WorldCom had about $3.3 billion in cash on hand at the end of March. It hopes to emerge from bankruptcy with as little as $3.5 billion to $4.5 billion of debt. (With additional reporting by Jessica Hall in Philadelphia and Ilaina Jonas and Gail Appleson in New York) |
