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Critics Say WorldCom Got Off Too Easy

Record $500 million fine is called too small

May 21, 2003 | AP

A proposed $500 million fraud settlement negotiated between WorldCom Inc. and federal regulators could help the telecommunications company clear a major hurdle on its path out of bankruptcy. And some parties feel the proposal is insufficient given the massive fraud perpetrated by the company.

Former U.S. Attorney General William P. Barr, now general counsel for Verizon Communications Inc., which is both a WorldCom creditor and competitor, said the Securities and Exchange Commission negotiated an insufficient settlement that, if approved by a federal judge, will give the company an unfair advantage upon emergence from Chapter 11 protection.

"The SEC is serving almost as a cheerleader for MCI to come out of bankruptcy with the fruits of its crime and the competitive advantages of a thief," Barr said.

WorldCom is seeking to carry out of bankruptcy billions of dollars in losses that result from the company's true accounting of its revenues.

For tax purposes, that would significantly reduce the company's tax burden.

Barr said the SEC should have required WorldCom to relinquish its claim to those tax losses as part of any settlement.

SBC Communications Inc. spokesman Dave Pacholczyk called the fine "a pittance compared to the significant financial harm to investors and to the economy."

If approved, WorldCom would put $500 million in a fund to benefit investors who were victimized by the company's accounting misdeeds, in which it overstated revenue by $11 billion, prompting its descent into bankruptcy in July.

On the one hand, the $500 million fine is by far the largest ever imposed by the SEC for accounting fraud the previous high was $10 million imposed in 2002 against Xerox.

On the other hand, 3 billion shares of WorldCom stock which was once worth $180 billion have been rendered worthless. The procedures for distributing the $500 million have not been established, but even if all the money goes to shareholders, it provides only 17 cents for each outstanding share.

Even if the settlement receives judicial approval, Ajamie warned that investors are still pursuing their own lawsuits against the company.

"What the government hasn't done, us private lawyers will finish," Ajamie said.

Barr said that before WorldCom is allowed to reorganize, it should be required to give up any potential benefits it derived from criminal activity. He said the $500 million settlement falls woefully short of that.

As part of its restructuring, WorldCom moved its headquarters from Jackson, Miss., to Ashburn, Va., last month and is seeking to change its name to MCI.

WorldCom spokeswoman Julie Moore would not comment beyond the statement the company issued Monday, in which general counsel Michael H. Salsbury said:

"[The settlement recognizes] the company's acceptance of responsibility for its past accounting practices, and the significant strides we have made in rebuilding MCI as a model of good corporate governance."

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