WorldCom took another major step in its effort to emerge from bankruptcy protection, striking a deal with federal regulators to accept continued oversight while avoiding other punitive measures such as heavy fines.
The Securities and Exchange Commission decided, at least for now, not to impose harsh penalties on WorldCom, saying the company has made strides in cleaning up corporate fraud. So far, WorldCom has admitted to $9 billion in improper accounting in the past few years.
Under the agreement, the court may seek a civil penalty at a later date.
The No. 2 U.S. long-distance carrier consented to the permanent injunction without admitting or denying the SEC’s allegations that it overstated its revenue as early as the first quarter of 1999. It also agreed not to violate securities laws in the future.
The pact, signed by U.S. District Judge Jed Rakoff in New York, also orders WorldCom to hire an independent consultant to perform an extensive review of its internal accounting policies and corporate governance practices. It further stipulates that WorldCom must educate its senior officers about securities-law violations.
Some industry rivals and other critics demanded that the SEC take a harder stance, but regulators feared that such a move could retard the company’s effort to regain its financial health or even put it out of business.
In a worst-case scenario, such a heavy hand could have endangered thousands of jobs, disrupted a crucial swath of the nation’s communications backbone and hurt the U.S. economy. Few analysts expected regulators to take such a risk, especially since WorldCom cooperated closely with their investigation.
“This settlement is a significant milestone in WorldCom’s restructuring efforts,” said John Sidgmore, the company’s outgoing chief executive. “Our agreement with the SEC provides additional assurance that WorldCom’s plan to emerge from bankruptcy remains on schedule.”
The deal struck Tuesday also reaffirmed the role of corporate monitor Richard Breeden, whose duties may be expanded by the court. Breeden, a former SEC chairman, is preparing a report to determine whether WorldCom has established appropriate safeguards to prevent future wrongdoing.
Last June, Clinton, Miss. based WorldCom stunned investors and regulators by acknowledging $4 billion in accounting errors. A month later, the company filed for Chapter 11 bankruptcy protection. Since then, it’s discovered even more errors.
For the most part, the improper accounting revolved around efforts by senior executives to inflate profit figures by treating ordinary business expenses as long-term investments.
Federal investigators have arrested several former top executives and are still looking into whether ex-Chief Executive Officer Bernard Ebbers played a role in the financial cover-up. Ebbers resigned last April.
Earlier this month, Worldcom hired Hewlett-Packard President Michael Capellas to replace Sidgmore and lead its turnaround. Capellas is also the former CEO of Compaq, which was acquired by H-P.