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WorldCom Director Urged To Leave

Sep 13, 2002 | The Washington Post

A court-appointed monitor has recommended that a member of WorldCom Inc.'s board of directors repay the company at least $1.4 million for his personal use of a corporate jet and to give up his seat on the board.

Richard C. Breeden, a former chairman of the Securities and Exchange Commission, made the recommendation to the WorldCom board earlier this week. Breeden argued in a Sept. 6 memo that director Stiles A. Kellett Jr. failed to disclose an unusual arrangement that allowed him to lease a WorldCom corporate jet for $1 a month plus operating expenses.

Breeden told WorldCom's board this week that the true value of the lease was between $1.4 million and $3.4 million. Although Breeden's discussion with the board had been reported, details of the memo had not been disclosed. Breeden declined to comment.

Whether Kellett steps down, Breeden's efforts to oust a board member demonstrate that he intends to take an exceptionally active role, according to several bankruptcy and fraud experts, as well as individuals directly involved with the company.

"This kind of role is highly unusual," said Randal C. Picker, a professor of law at the University of Chicago. "I can't tell you of another situation like this."

Breeden was appointed by U.S. District Judge Jed S. Rakoff, who is presiding over the fraud case the SEC brought against WorldCom. In June, the SEC charged WorldCom with defrauding investors after the company revealed it had improperly accounted for $3.9 billion in expenses. The company has since announced that it has found a total of $7.7 billion in improper accounting.

One person involved with WorldCom said Breeden has in effect become Rakoff's surrogate within the company. In addition to attending board meetings, he is reviewing contracts the company enters into.

During a hearing last month, Rakoff raised questions about the revelations that Kellett had an agreement to lease the jet at favorable rates during the same period that Bernard J. Ebbers, founder and former chairman of WorldCom, was securing huge loans from the company.

"Why is this gentleman still on the board?" Rakoff asked about Kellett. Less than two weeks later, Breeden recommended to WorldCom's board that it seek Kellett's resignation.

At the heart of Breeden's case against Kellett is that the aircraft lease was not disclosed to other board members, and that it was put in place during a period when Kellett's compensation committee approved hundreds of millions of dollars in loans and $8 million in salary to Ebbers.

"During the terms of the lease, the committee approved actual payments of more than $415 million," Breeden wrote in his memo to the board. "Since there is no plausible explanation for the gift to Kellett, it is reasonable to surmise that Ebbers gave the plane to Kellett either as a reward for his compensation, including the loans, or as a secret inducement for further compensation."

Ebbers was forced out of the company in April after he failed to make good on his promise to put up personal collateral for the loans.

Kellett played a key role in approving the loans and formulating Ebbers's severance package, which would pay the former chief executive $7.5 million over five years. Breeden is also seeking to have the severance package revoked, arguing that Kellett benefited from the aircraft lease during the period the severance package was formulated.

The board declined during its meeting earlier this week to ask for Kellett's resignation and instead gave him until Oct. 3. to respond to Breeden's accusations. Stuart Pierson, an attorney for Kellett, rebutted Breeden's claims yesterday.

"Breeden's facts are wrong, his conclusions are wrong, his recommendations are wrong," Pierson said.

He said other board members were involved in discussions about Ebbers's loans and severance package, and they also approved the deals. He also took issue with Breeden's estimate of the value of the lease, calling it too high, and he noted that Kellett paid $400 for each hour the plane was in flight, in addition to the $1 per month. He also paid for the cost of fuel, insurance, maintenance and the crew. The lease also required that Kellett allow other employees to use the plane.

In his memo, Breeden said other employees used the jet on only five occasions. He said that the operating costs had to be paid by Kellett because the company was not licensed to provide charter services.

It is not clear whether Kellett can be forced to resign. Sources close to Kellett say he cannot be forced out without a shareholder vote. But some legal experts disagreed, saying Rakoff could force Kellett to step down.

Other sources say that Kellett may be reluctant to step down in part because it could make him a target of shareholder lawsuits claiming he personally participated in the alleged fraud at the company. In addition, Kellett could lose the directors' liability insurance provided by WorldCom, according to Cynthia L. Richson, director of corporate governance for the State of Wisconsin Investment Board.

Breeden estimates that the plane itself, a Falcon 20F-5, was worth approximately $7 million during the life of the lease, although its value has diminished between 15 and 30 precent since the lease began in June of last year. There is an offer to buy the plane for $5.8 million, according to Breeden's memo to the board.

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