Judge OKs WorldCom Settlement
WorldCom Inc. on Monday won a judge’s approval of a record $750-million settlement to resolve Securities and Exchange Commission fraud allegations, overcoming complaints by competitors who sought a harsher penalty.
U.S. District Judge Jed Rakoff in Manhattan approved the payment to investors, who lost about $200 billion. The penalty is the largest ever in an accounting fraud case.
Rakoff rejected complaints by rivals who said the penalty, which was raised from $500 million last week, was inadequate.
The ruling moves WorldCom, the second-largest U.S. long-distance phone carrier, a step closer to completing the biggest bankruptcy reorganization ever. The company, which is changing its name to MCI, is seeking to exit creditor protection by October with most of its debt gone.
Ashburn, Va.-based WorldCom’s Chief Executive Michael Capellas, who was hired in December, called the decision a “significant milestone” in the company’s reorganization.
In his 14-page opinion, Rakoff said, “The court is aware of no large company accused of fraud that has so rapidly and so completely divorced itself from the misdeeds of the immediate past and undertaken such extraordinary steps to prevent such misdeeds in the future.”
The settlement, which still needs Bankruptcy Court approval, resolves a civil fraud suit the SEC filed when WorldCom first announced $3.85 billion of accounting irregularities in June 2002. The overstated results, dating to 1999, have since ballooned to $11 billion.
“In determining to enter into the settlement, the commission considered remedial acts promptly undertaken by WorldCom and cooperation afforded the commission staff,” the SEC said in a statement.
WorldCom’s biggest competitor disagreed.
“Today’s settlement is not proportionate and does not address the harms WorldCom inflicted on the telecommunications marketplace,” AT&T; Corp. spokeswoman Claudia Jones said.
Capellas’ restructuring plan would cut debt to $5 billion from the $41 billion WorldCom had when it filed for bankruptcy protection a year ago.
Also on Monday, WorldCom lowered its forecast for sales this year by $200 million, citing “intense pricing competition.” The company said it expects sales of $24.5 billion, down from an earlier forecast for $24.7 billion, and reduced revenue forecasts for next year and 2005.
The $750-million penalty is one-third of the $2.25 billion that WorldCom agreed to pay, reflecting the discount that creditors are receiving on their claims in Bankruptcy Court. The $500 million in cash and $250 million in new company stock will be paid to investors when the company exits Chapter 11 protection.
WorldCom rivals, including the largest U.S. long-distance carrier AT&T; and Verizon Communications Inc., as well as organized labor had sent Rakoff more than 200 letters on the settlement in the weeks leading to his decision.
The judge said AT&T; and Verizon were seeking to push WorldCom out of business. Rakoff said he refused to order what would amount to the firm’s liquidation because that would penalize its 50,000 innocent employees and remove a major competitor from the market.
