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WorldCom Fine Is Approved By Judge

$750 million to settle accounting fraud case

Jul 8, 2003

A federal judge approved a $750-million settlement between federal regulators and WorldCom Inc. on Monday, saying a substantially heavier fine for a corporate accounting fraud scandal would unfairly penalize the company's 50,000 employees.

Although the fine in the $11-billion case was $250 million higher than proposed originally, U.S. District Judge Jed Rakoff of Manhattan said that driving the telecommunications company out of business was not the goal. He said that WorldCom, through a court-appointed monitor, attempted to overhaul its corporate culture and agreed to continued monitoring to prevent similar fraud from recurring.

The judge obtained from the company's new Chief Executive Officer Michael Capellas a sworn ethics pledge, requiring greater openness than current SEC rules.

"The court is satisfied that the steps already taken have gone a very long way toward making the company a good corporate citizen," the judge wrote.

"This is not to say the sins of the past can be forgotten or wholly forgiven," Rakoff said. "Those frauds were still colossal and must be punished."

The Securities and Exchange Commission and the company proposed a $500-million fine initially, but agreed to increase that amount after hearing complaints that WorldCom would emerge from bankruptcy too easily.

The new figure adds $250 million worth of stock in the new incarnation of the telecommunications company, now operating as MCI.

If the company does not make it out of bankruptcy court and is liquidated, the penalty would remain $500 million.

"The proposed settlement is not only fair and reasonable but as good an outcome as anyone could reasonably expect in these difficult circumstances," Rakoff said in a 14-page decision.

WorldCom's problems came to light last year, and the company filed for bankruptcy in July 2002, citing massive accounting irregularities.

The scheme involved falsifying ledgers to record billions of dollars in operating expenses as capital expenses, allowing the company to claim a profit when it was in fact losing money.

Since then, some shareholders have called for the so-called death penalty against the firm punishment so severe that it must be liquidated.

"Undoubtedly the settlement will be criticized" by some shareholders, the judge said, "and those professed pundits and ideologues for whom anything less than a corporate death penalty constitutes an 'outrage.' "

The judge noted that two competitors, Verizon and AT&T, urged regulators to seek the liquidation of the company.

Rakoff said to kill the company "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."

A spokesman for the SEC had no immediate comment.

A call to WorldCom was not immediately returned.

Several former executives have already pleaded guilty to conspiracy and securities fraud in connection with the collapse of the company.

Former Chief Financial Officer Scott Sullivan, the highest corporate official charged, has pleaded not guilty and is awaiting trial.

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