Judge OKs WorldCom Settlement With SECNov 27, 2002 | Bloomberg News
A federal judge approved a settlement between WorldCom and federal regulators yesterday that may help the phone company avoid fines as it tries to emerge from bankruptcy protection.
The agreement with the Securities and Exchange Commission is "a model of what should be attempted in a case of this sort," said U.S. District Judge Jed Rakoff. "The company has made laudable progress in moving toward a much more positive position and a correction of past mistakes."
Clinton, Miss.-based WorldCom has admitted misstating more than $9 billion in expenses and reserves and has been negotiating with the SEC for months. The pact requires the nation's second-largest long-distance phone company to hire an independent consultant to review its accounting and to allow a court-appointed monitor to review its governance.
WorldCom officers and accounting employees must undergo new training.
Rakoff will determine next year how much to fine WorldCom. Court monitor Richard Breeden said the fine might be in the hundreds of millions of dollars, or nothing at all if the company transforms itself and Rakoff concludes financial penalties would serve no purpose.
That would contrast with the punishment meted out to former Enron auditor Arthur Andersen, which gave up its license to audit companies after a criminal conviction in June.
"The requirements of this agreement are squarely in line with steps we are already taking to restore public confidence in WorldCom," John Sidgmore, WorldCom's president and chief executive officer, said in a statement.
"Our agreement with the SEC provides additional assurance that WorldCom's plan to emerge from bankruptcy remains on schedule.
Peter Bresnan, the commission's lead lawyer in the case, said the fraud uncovered at WorldCom was the biggest in SEC history.
The oversight of the company's corporate governance and accounting policies mandated by the settlement are designed to ensure that WorldCom "make meaningful changes," he said.
Breeden said he expected WorldCom's board members to step down so the company can start anew.
"From the beginning, WorldCom demonstrated a determined attitude to cooperate with all the investigations and begin transforming itself," Breeden said.
The threat of a fine "is a wonderful way of making certain that WorldCom follows through with its obligation and turns over a new leaf," said Christopher Bebel, a former SEC lawyer and federal prosecutor.
WorldCom misled investors from as early as 1999 through the first quarter of 2002, the SEC said in an amended complaint. As part of the settlement, Breeden has "jurisdiction for all purposes, including the imposition of further equitable relief and sanctions," the SEC said.
WorldCom did not admit or deny the commission's allegations of securities fraud. The settlement requires WorldCom's Special Investigative Committee, a panel created by the board of directors, to submit a report to Breeden on internal controls. He'll review it and make his own recommendations.
WorldCom will be barred under the terms of the settlement from arguing it didn't violate securities law, according to the SEC, and that "the allegations of the complaint will be accepted as true by the court."
Citizens Against Government Waste, a Washington public-interest group, criticized the proposed settlement as too lenient.
"Through the criminal actions of WorldCom executives, thousands of investors lost millions of dollars, and thousands of employees were laid off," said Tom Schatz, the group's president. "Now the SEC might only provide the company with a slap on the wrist."
WorldCom, parent of the MCI long-distance phone service, sought Chapter 11 protection July 21 in the largest bankruptcy in U.S. history, listing $107 billion in assets and $41 billion in debts.
WorldCom operates about a quarter of the capacity on the 20 largest U.S. Internet routes, according to Washington-based TeleGeography.