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WorldCom Seen Near Settlement With SEC

Nov 5, 2002 | The Boston Globe

WorldCom Inc. appears close to a deal with the Securities and Exchange Commission to settle fraud charges facing the bankrupt company, according to a published report.

People involved in the negotiations told The New York Times that the SEC would ask a federal judge to dismiss the charges but that the company would have to agree to a permanent injunction barring it from violating securities laws and pay millions of dollars in fines.

The parties presented their plan to US District Court Judge Jed S. Rakoff last night, and they hope to announce a deal in a week or two.

If the deal is approved, it would mean that WorldCom itself may be able to avoid further federal legal action, but its executives would still face federal suits. And both the company and its executives will have to continue to deal with shareholder and other private actions.

The news of the deal came hours after bankruptcy court-appointed monitor Richard Thornburgh, a former US attorney general, issued a report sharply critical of WorldCom management and its independent auditors.

In his report, Thornburgh said WorldCom took ''extraordinary and illegal steps'' to paint a rosy picture of its deteriorating finances, and the extent of the fraud will likely go beyond the $7.68 billion previously disclosed.

The report also criticized WorldCom's board for letting former chief executive Bernard Ebbers leverage his company stock for more than $1 billion in personal and business loans. That greatly exceeds the $400 million in personal loans Ebbers was already disclosed to have been granted.

Thornburgh said he had significant information that WorldCom employees created false internal financial reports to conceal their fraud. His report excluded details of the accounting manipulations, it said, because the company is the subject of civil and criminal proceedings.

''Our investigation strongly suggests that WorldCom personnel responded to changing business conditions and earnings pressures by taking extraordinary and illegal steps to mask the discrepancy between the financial reality at the company and Wall Street's expectations,'' Thornburgh said in his report.

As to where to place the blame, Thornburgh concluded: ''There were numerous failures, inadequacies and breakdowns in the multilayered system designed to protect the integrity of the financial reporting system at WorldCom, including the board of directors, the audit committee, the company's system of internal controls and the independent auditors.''

WorldCom, which filed for bankruptcy protection in July after revealing accounting irregularities, said in response to the report that it is doubling its internal audit department staff, creating two new operational chief financial officer positions, and hiring a new corporate controller.

Thornburgh said the huge loans to Ebbers put the interests of the company's shareholders at risk, since if he had been forced to sell the stock he used as collateral, that ''might have precipitated a rapid downward spiral in the company's share price.''

Ebbers' attorney, Reid Weingarten, said yesterday that he could not comment on Thornburgh's report because he had not reviewed it. Ebbers has an unlisted phone number and could not be reached.

Thornburgh said his findings were preliminary and no recommendations were made.

Thornburgh's report also said WorldCom auditor Arthur Andersen deemed WorldCom a maximum risk client but didn't use appropriate audit procedures for such a company. An Andersen spokesman did not return a call for comment.

The report also said the relationship between WorldCom and its primary investment banker, Salomon Smith Barney, was problematic. In particular, it cited evidence that a former Salomon analyst, Jack Grubman, told WorldCom in advance what questions he would ask in conference calls between securities analysts and WorldCom management.

Salomon said in a statement, ''In light of ongoing discussions with the various regulators, we are declining to comment.''

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