MCI, formerly WorldCom Inc, agreed on Monday to pay a record US$500 million to shareholders to settle US Securities and Exchange Commission charges that the telephone company overstated profits by US$11 billion.
The SEC and WorldCom submitted the plan to US District Court Judge Jed Rakoff in New York who said he won't rule on the accord until at least June 11.
The SEC said it reduced the fine from US$1.51 billion as part of WorldCom's bankruptcy proceedings. WorldCom will pay when it emerges from Chapter 11 later this year.
The penalty, the largest imposed by the SEC against a company for accounting fraud, represents a new tack in the commission's enforcement efforts, lawyers said.
Traditionally the SEC has kept penalties low to avoid taxing shareholders. New laws enable the SEC to return the fines to shareholders who lost more than US$100 billion when WorldCom filed for the biggest US bankruptcy last July.
"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.
Chief executive Michael Capellas is seeking to resolve the SEC litigation and guide WorldCom out of bankruptcy by October.
The size of the fine would enable SEC Chairman William Donaldson to show the commission is being tougher on companies, lawyers said.
"Donaldson is looking to put a new face on the SEC, to show that it is more aggressive and more enforcement oriented," said David Gourevitch, a partner at Stueve Helder Siegel in New York and a former enforcement lawyer at the commission.
A partial deal approved by Rakoff in November didn't determine whether a fine would be levied. Lawyers for the SEC and WorldCom said they hadn't expected Rakoff's approval on Monday.
The settlement, involving non tax-deductible payments, takes advantage of a provision in last year's Sarbanes-Oxley corporate governance law allowing the SEC to give back money paid as fines to victims of securities fraud instead of to the US Treasury.
"Since it's novel and since the amount is huge, the court wants to satisfy itself that the approach is appropriate and in the public interest," said Stephen Crimmins, a former SEC official now with Pepper Hamilton in Washington.
Rakoff said he will discuss "where the case should go" at the June 11 hearing.
The two sides and other parties should file papers to outline their case by June 6, Rakoff said.
"The court and the public need to know much more of the details of the defendant's seemingly massive fraud," Rakoff wrote in a three-page order.
The court also needs to be informed of the governance and internal control changes WorldCom has made, he said..
Rakoff said he had only skim-med the proposed pact so far.
WorldCom, the No. 2 US long-distance telephone company behind AT&T Corp., was charged by the SEC last June after the company said it hid US$3.85 billion in expenses over five quarters.
The tally has since risen to about US$11 billion since 1999.