WorldCom Agrees to Settle Charges
WorldCom Inc. has agreed to pay investors a record $500 million to settle civil fraud charges over its $11-billion accounting scandal, which was the biggest in U.S. corporate history, lawyers for the company and the federal government announced Monday.
The fine would be by far the largest the Securities and Exchange Commission has ever imposed.
The ailing telecommunications titan, which wants to be renamed MCI, is accused of falsifying balance sheets to hide expenses and inflate earnings. Under the settlement, WorldCom neither admits nor denies the charges.
Attorneys for the two sides presented the proposed settlement to U.S. District Judge Jed S. Rakoff in Manhattan, who said he would consider the deal and would not rule before June 11.
Rakoff said he needs to learn “much more of the defendant’s seemingly massive fraud,” who would be affected by the settlement and what internal controls WorldCom has put in place.
The settlement actually calls for WorldCom to be fined $1.51 billion, an amount that would be reduced to $500 million as part of the company’s bankruptcy case, in which many creditors have to settle for less money than they are owed.
Even so, the $500 million would surpass the $150-million fine the SEC slapped on Citigroup Inc.’s Salomon Smith Barney unit as part of an industrywide settlement of allegations that Wall Street firms warped their stock ratings to lure investment-banking business.
The WorldCom penalty also would dwarf the largest accounting fraud settlements to date, the $10-million fine the SEC levied on Xerox Corp. in 2002 and the $7 million paid by now-fallen accounting giant Arthur Andersen in 2001 over its audit of Waste Management Inc.
The SEC and WorldCom had been negotiating the settlement for months, and the deal would be an important development for WorldCom’s hopes of emerging from bankruptcy as early as September.
The proposed settlement calls for WorldCom to put $500 million into a fund for investors who were hurt by the company’s accounting irregularities, though the exact process has yet to be determined. WorldCom’s collapse and bankruptcy filing wiped out nearly $180 billion in shareholder wealth.
A group of former WorldCom employees that is critical of the company denounced the accord as a “slap on the wrist.” The $500 million is equivalent to “about one week of revenue ... an insignificant amount by any standard,” said the group, BoycottMCI.com.
The group’s founder, Mitch Marcus, said the accounting scandals at Enron Corp. and Arthur Andersen “pale in comparison” with “the degree of illegality” at WorldCom.
The SEC sued WorldCom last June, just a day after the company disclosed $4 billion in financial misstatements, shocking a market already buffeted by the revelations of accounting violations at Enron.
Since then, WorldCom has widened the hole in its books to about $7 billion, then $9 billion and eventually $11 billion. The SEC determined that WorldCom had misled investors starting at least as early as 1999.
