A federal court yesterday approved a settlement of securities-fraud charges against WorldCom Inc. that imposes stringent government controls but doesn’t fine the struggling telecommunications giant for its unprecedented $9 billion accounting scam.
The settlement with the Securities and Exchange Commission, approved by the U.S. District Court in New York, is designed to ensure the company never again deceives investors.
WorldCom’s announcement of the massive scheme in June devastated stockholders, set off a worldwide market slide and led the company into the largest bankruptcy filing in history.
The SEC’s decision not to immediately impose fines follows the agency’s practice of giving companies a second chance and increases WorldCom’s chances of emerging from bankruptcy. Saying the agreement is “partial,” the SEC reserved the right for it or the court to impose fines in the future. Officials said fines are likely if the company violates the agreement.
Meanwhile, the Justice Department continues to seek fines and jail terms for former WorldCom Chief Financial Officer Scott Sullivan in a separate criminal-fraud case. Mr. Sullivan says he is innocent. Four of his deputies have pleaded guilty to their roles in the accounting scam and are cooperating with the government.
U.S. District Judge Jed Rakoff, who is handling the WorldCom cases, called the settlement “a model” for such a complex corporate-fraud case involving a pillar of the telecommunications sector. WorldCom carries half the world’s Internet traffic and owns MCI, the second-largest U.S. long-distance telephone service.
“The company has made laudable progress in moving towards a much more positive position and a correction of past mistakes,” the judge said at a hearing approving the settlement yesterday.
WorldCom admitted to the accounting “misstatements,” unprecedented in size, in a series of announcements since June, but it did not admit guilt to the fraud charges as part of the settlement yesterday. Its last announcement earlier this month widened the scheme from an initial $4 billion to $9 billion.
“The requirements of this agreement are squarely in line with steps we are already taking to restore public confidence in WorldCom,” said John W. Sidgmore, WorldCom’s president and chief executive officer, noting that the agreement improves the company’s chances of resolving its $41 billion in debts.
“Our agreement with the SEC provides additional assurance that WorldCom’s plan to emerge from bankruptcy remains on schedule,” he said.
The accounting ruse, which the SEC said began in 1999 and continued until the spring, involved portraying the company’s payments to other carriers to lease networks as capital expenses. While the move violated basic accounting rules, it effectively hid the expenses from investors and made the company’s revenues and earnings look higher, in line with Wall Street expectations.
The settlement keeps a tight rein on WorldCom’s financial activities under the eye of a court-appointed monitor, former SEC Chairman Richard Breeden, as well as by an outside consultant to be picked and hired by the company.
The agreement sparked immediate criticism.
“It is inconceivable that a company could conduct itself in such a manner and not be fined,” said Tom Schatz, president of Citizens Against Government Waste.
“Through the criminal actions of WorldCom executives, thousands of investors lost millions of dollars, and thousands of employees were laid off. Now the SEC might only provide the company with a slap on the wrist.”