Court approval Monday of a $750 million fine against WorldCom removes the last obstacle in the company’s plan to emerge from bankruptcy.
U.S. District Judge Jed S. Rakoff approved the settlement that will give shareholders and bondholders who invested in the formerly Clinton based company $500 million in cash and $250 million in stock when the company now called MCI emerges from bankruptcy later this year.
By approving the fine, Rakoff derailed efforts that had been mounted by competitors and activist groups to destroy WorldCom. Those competitors include AT&T and Verizon. Activist groups include the Gray Panthers and the Communications Workers of America labor union.
The groups had asked Rakoff to levy a multibillion-dollar fine, a sum that would have killed the company’s chances of surviving bankruptcy.
In his ruling, Rakoff acknowledged his acceptance of the fine would be criticized by “professed pundits and ideologues for whom anything less than a corporate death penalty constitutes an ‘outrage.’ ”
But he added that 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.”
Groups opposed to WorldCom’s reorganization plans responded as Rakoff predicted by criticizing the size of the fine.
Will Thomas, a former WorldCom employee who serves as director of the Gray Panthers corporate governance project, said in a news release, “The new arrangement offers 8 cents a share to all those ripped-off investors. It’s simply another sweetheart deal arranged for MCI/WorldCom in the federal government’s ongoing campaign to keep the company afloat at all costs.”
The $750 million fine is the result of a settlement with the Securities and Exchange Commission, the federal agency that sued WorldCom for inflating its earnings by more than $9 billion between 1999 and 2002.
Revelations of the fraud led to WorldCom’s Chapter 11 bankruptcy filing and 22,000 job cuts. The bankruptcy filing effectively destroyed the value of the company’s 3 billion shares of stock. WorldCom will cancel those shares when it emerges from bankruptcy as MCI later this year.
Earlier this year, WorldCom and the SEC had agreed upon the $500 million cash fine, but Rakoff refused to accept that settlement, saying he was unsure it was adequate punishment for the company’s misdeeds.
When Rakoff failed to accept the settlement in May, WorldCom’s foes stepped up their efforts to derail the firm’s reorganization plans. Within days of Rakoff’s delay in accepting the settlement, AT&T and Verizon issued statements urging massive fines that would have crippled WorldCom.
According to the Washington Post, Verizon began paying a lobbying group that funneled money the Gray Panthers used to buy full-page ads in major newspapers blasting the settlement talks.
Rakoff criticized those efforts, saying AT&T’s and Verizon’s “self interest blinds them to the broader range of public policies that such a settlement implicates.”
He added that arguments WorldCom will have a competitive advantage over its rivals when it emerges from bankruptcy are not valid as those arguments apply to all Chapter 11 bankruptcy cases.
“Any suggestion that companies as large and well-positioned as Verizon and AT&T will not be able to compete effectively with the new WorldCom/MCI lacks credence,” Rakoff said in his ruling. “Verizon, indeed, already enjoys a competitive advantage on its own by virtue of its status under (Federal Communications Commission) rules as a de facto local monopoly.”
Jacob Frenkel, a former senior counsel with the SEC’s enforcement division and former federal prosecutor now with the Atlanta law firm of Smith, Gambrell & Russell, praised Rakoff’s treatment of the case.
“I think what the judge did was absolutely appropriate. Judges have been too passive in approving settlements between prosecutors and parties,” Frenkel said. By simply waiting and holding hearings, Rakoff was able to increase the amount investors will receive by 50 percent, Frenkel said.
MCI President, Chairman and Chief Executive Officer Michael Capellas said in a news release that Rakoff has recognized MCI’s efforts to be a model of corporate responsibility.
“(Monday’s) approved SEC settlement marks a significant milestone in the company’s emergence from Chapter 11 protection, which remains on track for later this fall,” Capellas said in the prepared statement.
WorldCom has the support of 90 percent of its creditors for its plan to emerge from bankruptcy as MCI later this year. Bankruptcy experts have said that overwhelming support for the firm’s plan nearly guarantees its emergence this fall.