Victims of WorldCom’s massive fraud could get $250 million of the company’s new stock on top of $500 million in cash when it emerges from bankruptcy protection, according to a beefed-up settlement with federal regulators announced Wednesday.
The proposal needs the approval of a judge overseeing the Securities and Exchange Commission’s fraud case against the company, now called MCI, as well as a bankruptcy court judge. But it could help many investors who would have been wiped out by MCI’s Chapter 11 reorganization.
The SEC and MCI, with support from major creditors, boosted the settlement after comments by Judge Jed Rakoff. At a hearing last month, he asked if it might make sense to add stock to the original deal, announced in May, so investors could share in any future MCI stock gains.
The proposed penalty stems from MCI accounting misdeeds that have topped $9 billion and could reach $11 billion when its auditors finish their work. Before Wednesday, it already was the largest penalty proposed by the SEC against a company that’s not a broker-dealer.
The settlement is somewhat novel because common shareholders rarely recover much, if any, of their losses in a bankruptcy case.
MCI, the USA’s No. 2 long-distance phone company, once had a stock market value of about $180 billion. But investors’ shares will be worthless when the company emerges from bankruptcy protection, expected this fall. It would create new shares after leaving bankruptcy court. Those are the shares eligible victims would get.
The new settlement could set the tone for other future SEC settlements, says Scott Wendelin, CEO of Prospect Financial Advisors. ”But it’s a very nominal amount of money compared to the overall losses that shareholders have incurred.”
The new proposal would give eligible shareholders and bondholders both cash and stock.
The extra compensation ”would allow victims of the fraud to share in the potential upside” after MCI emerges from Chapter 11, the SEC said in a statement. Agency officials declined further comment.
In a statement, MCI Chief Financial Officer Bob Blakely said the additional restitution would let victims ”participate in the future success of the company.” He said that MCI’s cooperation with the SEC is part of its ”commitment to regaining trust and creating a new future for our company.”
Four former MCI managers have pleaded guilty to fraud charges. Former CFO Scott Sullivan, accused of masterminding the scheme, awaits trial.
The fraud disclosure pushed MCI to file the largest bankruptcy case in history. Its reorganization plan, submitted in April, has the support of 90% of its creditors.