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Judge Approves $750 Million MCI Settlement

Jul 8, 2003 | Boston Globe

Bankrupt telecommunications giant MCI won approval from a federal judge in New York for a $750 million settlement of civil charges that it committed $11 billion in accounting fraud, a ruling that cleared the way for the company to shed billions in debt and become a revitalized competitor.

US District Court Judge Jed Rakoff acknowledged in a 14-page decision that ''undoubtedly the settlement will be criticized'' by wiped-out investors and ''those professed pundits and ideologues for whom anything less than a corporate death penalty constitutes an `outrage.' '' But Rakoff said the penalty for the company, formerly known as WorldCom, was historic, the largest ever imposed in a US accounting fraud case. A harsher penalty that shut down the carrier, Rakoff ruled, ''would unfairly penalize its 50,000 employees, remove a major competitor from a market that involves significant barriers to entry, and set at naught the company's extraordinary efforts to become a model corporate citizen.''

The settlement includes the $500 million cash distribution to bondholders proposed by MCI and the Securities and Exchange Commission in May. It would add $250 million in stock to be distributed to senior bondholders and nothing for former stockholders. MCI, which was valued at more than $175 billion at its peak in 1999, was forced into bankruptcy reorganization under Chapter 11 last July by revelations of massive accounting fraud.

Competitors including AT&T Corp. and Verizon Communications Inc. had pushed for much stiffer penalties or a breakup of MCI, arguing that the scope of its wrongdoing was so vast and the damage to the battered telecom sector so severe that a $750 million settlement would amount to a ruling that crime pays. Verizon spokesman Eric Rabe said in an interview yesterday: ''The point is that these guys committed the gravest corporate fraud in history.

''They make Enron look like pikers by comparison,'' he said, alluding to the failed Houston energy giant, ''and they're not only being allowed to continue the corporation under very favorable circumstances, but they're being treated like they didn't do anything all that bad.''

He said the company should be liquidated, a sanction that would not entail massive job loss because ''the part of WorldCom that's a legitimate business would be taken over by somebody.''

AT&T spokeswoman Claudia B. Jones said: ''WorldCom's fraudulent activities cost its shareholders more than $180 billion, cost creditors tens of billions more, and did untold harm to the telecom industry. Today's settlement is largely a cosmetic change designed to enable WorldCom to benefit from its egregious misconduct, escape from fairly compensating its innocent victims, and emerge from bankruptcy at a competitive advantage over those who have maintained an ethical standard of business conduct and followed the law.''

But MCI chief executive Michael Capellas, who took over in December with a mandate to clean up the books, hailed the judge's decision as ''a significant milestone'' toward the company's planned emergence from Chapter 11 by October. By then Capellas estimates its debt will be cut from $41 billion to about $5 billion, far below levels of rivals such as AT&T, Verizon, and Sprint Corp. Owners of stock would get nothing, but MCI creditors would own the new company, with senior bondholders getting a package of stock and new debt worth about 36 cents on the dollar of the principal of the bonds they owned before the company filed for protection.

''We have committed to being a role model of corporate governance and the significant changes we have already implemented are a testament to that commitment,'' Capellas said in a statement.

Rakoff agreed in his ruling, stating: ''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 SEC had urged Rakoff to approve the settlement, contending that investors rarely are made whole in bankruptcy proceedings anyway. The SEC is continuing to aid a separate federal criminal probe targeting former WorldCom chief financial officer Scott D. Sullivan, who has pleaded not guilty to securities fraud. Four lesser WorldCom executives who have pleaded guilty to fraud charges are cooperating with the probe.

Several members of the US Senate, including Edward M. Kennedy, Democrat of Massachusetts, have been pushing to have MCI disqualified from holding and winning US government telecom contracts, which now amount to more than $700 million a year.

Senator Susan M. Collins, a Maine Republican and chairwoman of the Governmental Affairs Committee, has launched an investigation of why the General Services Administration, which oversees MCI contracts with 75 US agencies, has not moved more quickly to suspend or disqualify MCI as a government contractor in light of its fraud and bankruptcy. GSA officials have said they are considering such a move.

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