WorldCom Inc may pay a record fine to settle Securities and Exchange Commission (SEC) charges that the telephone company overstated profits by US$11 billion, according to people familiar with the matter.
The settlement, which must be approved by US District Court Judge Jed Rakoff, will likely exceed the US$400 million Citigroup Inc agreed to pay last month, the people said. An accord may be presented to Rakoff as soon as today, they said.
An agreement would allow WorldCom chief executive officer Michael Capellas to steer the company out of the largest US bankruptcy by October. The size of the fine will help SEC Chairman William Donaldson show that the commission has toughened its stance against companies that commit fraud.
"Corporations need to be held accountable for fraud, and the only way you can do that is to have a huge fine," said Richard Tilton, a Manhattan bankruptcy attorney and chief executive officer of Greenacre Asset Advisors LLC. "The idea is to make the claim so significant as to send a clear message that corporate fraud will be punished severely."
The Wall Street Journal earlier reported the talks.
Spokespeople for WorldCom, Brad Burns and Claire Hassett, didn't return calls or e-mails seeking comment. An SEC official declined to comment.
WorldCom, the second-largest US long-distance telephone company, won't admit or deny guilt as part of the agreement, the people said.
WorldCom is changing its name to MCI to help distance the company from the accounting scandal and bankruptcy. It also is moving its headquarters to Ashburn, Virginia, from Clinton, Mississippi.
The agreement in part reverses a preliminary deal forged in November, two weeks before Capellas joined the company. Under that pact, WorldCom could have avoided a fine if it complied with court-approved financial controls. WorldCom is required to hire an independent consultant to review its accounting and allow a court appointed monitor to review the company's governance.
A final decision on penalties was delayed until this year.
Citigroup last month agreed to its fine as part of a US$1.4 billion penalty levied against Wall Street firms for violating securities laws. Before that agreement last month, Xerox Corp's US$10 million settlement with the SEC over US$2 billion of inflated earnings was the largest ever paid.
The SEC needed to demand a large fine from WorldCom given the size of the accounting misstatements, lawyers said. This may help revive the commission's image as it faces calls from lawmakers to be tougher on corporate wrongdoing after the accounting scandals at WorldCom, Enron Corp, and Tyco International Ltd.
"The pressure on the SEC is enormous," said David Becker, a former SEC general counsel now with Cleary Gottlieb Steen & Hamilton in Washington. "The world wants to see that they are tough."
The fine may add more financial strain to WorldCom, which disclosed Friday that former CEO Bernard Ebbers last month missed the first payment on a US$408.2 million loan he received from the company. Investor anger over the loan contributed to his ouster last month.