WorldCom agrees $500m payment to settle fraud
WorldCom Inc has agreed to pay investors a record $500m (€428.5m) to settle civil fraud charges over its $11bn (€9.42bn)-dollar accounting scandal, which was the biggest in US corporate history.
The fine would be by far the largest the Securities and Exchange Commission has ever imposed in connection with a financial fraud, SEC lawyer Peter Bresnan said.
WorldCom, a bankrupt telecommunications titan that wants to be renamed MCI, is accused of falsifying balance sheets to hide expenses and inflate earnings. Under the settlement, WorldCom neither admits nor denies the charges.
Lawyers for the two sides presented the proposed settlement to US District Judge Jed Rakoff in New York City, who said he would consider the deal and would not rule before June 11.
Judge Rakoff said he needs to learn “much more of the defendant’s seemingly massive fraud”, who would be affected by the settlement and what internal controls WorldCom has put in place.
The settlement actually calls for WorldCom to be fined $1.51bn (€1.29bn), an amount that would be reduced to $500m (€428.5m) as part of the company’s bankruptcy case, in which many creditors have to settle for less money than they are really owed.
Even so, the figure would dwarf the $10m (€8.57m) fine the SEC levied on Xerox Corp in 2002 to settle accounting charges and the $7m (€5.99m) paid by Arthur Andersen in June 2001 over its audit of Waste Management.
“The company is pleased to have reached this stage. We believe that the proposed settlement is beneficial to the public,” WorldCom lawyer Paul Curnin said.
The SEC and WorldCom had been negotiating the settlement for months, and the deal would be an important development for WorldCom’s hopes of emerging from bankruptcy as early as September.
“It was only last summer that we were wondering whether they would even survive,” telecom analyst Jeff Kagan noted.
“Now with the settlement at hand, they can put this chapter behind them.”
A group of former WorldCom employees that is critical of the company denounced the accord as a “slap on the wrist.”
The figure is equivalent to “about one week of revenue - an insignificant amount by any standard,” said the group, BoycottMCI.com.
The group’s founder, Mitch Marcus, said the accounting scandals that destroyed Enron and Arthur Andersen ”pale in comparison” to “the degree of illegality” at WorldCom.
The SEC sued WorldCom last June, just a day after the company disclosed $4bn (€3.42bn) in financial misstatements, shocking a market already buffeted by the revelations of accounting violations at Enron.
Since then, WorldCom has widened the hole in its books to around $7bn (€5.99bn), then $9bn (€7.74bn) and eventually $11bn (€9.42bn).
The SEC determined that WorldCom had misled investors starting at least as early as 1999.
The SEC and WorldCom reached a partial settlement in late November in which the company agreed to a permanent injunction barring it from future violations of securities laws. In addition, WorldCom executives agreed to submit to ethics training, and the duties of the company’s court-appointed watchdog were expanded.
While the agency has pursued civil charges against WorldCom and several former top executives, the Justice Department has been conducting a criminal investigation and has charged several former executives.
WorldCom’s ex-controller, David Myers, and its former chief financial officer, Scott Sullivan, were arrested last August. Prosecutors alleged that the two directed employees to conceal more than $3.8bn (€3.26bn) in expenses in financial reports, causing WorldCom earnings to be overstated by $5bn (€4.28bn).
Myers pleaded guilty in federal court in Manhattan in September and is co-operating with prosecutors in the criminal probe. Sullivan – the nation’s highest-paid CFO in 1997, earning $19m (€16.28m) – has denied any wrongdoing. He is free on $10m (€8.57m) bail.
Three other WorldCom executives have pleaded guilty to similar federal charges.
Ousted WorldCom CEO Bernard Ebbers, who has not been charged, last month failed to make his first payment of around $25m (€21.42m) on more than $400m (€342.8m) in loans that he owes the company.
WorldCom was among the fastest-growing and most aggressive players in the late 1990s telecom and internet boom. After being hurt by the wider telecom industry slump and ravaged by its own accounting scandal and bankruptcy, WorldCom cut its workforce to 55,000 from a peak of 80,000.
It remains second only to AT&T Corp in the long-distance market and is a major carrier of data over the internet.
