WorldCom Inc won a judge's approval of a record US$750 million settlement to resolve US Securities and Exchange Commission (SEC) fraud allegations, overcoming complaints by competitors who sought a harsher penalty.
US District Judge Jed Rakoff in Manhattan today approved the payment to investors, who lost about US$200 billion in WorldCom's collapse. The penalty is the largest-ever in an accounting-fraud case.
Rakoff rejected complaints by rivals who said the penalty, which was raised from US$500 million last week, is inadequate punishment. The ruling moves WorldCom, the second-largest US long-distance phone carrier, a step closer to completing the biggest bankruptcy reorganization ever. WorldCom is seeking to exit creditor protection by October with most of its debt gone.
"If you want to emerge as a solid business organization, putting your disputes with people like enforcement authorities behind you is essential," said Martin Weinstein, a former federal prosecutor and now a partner at Washington law firm Foley & Lardner. "The eye-for-an-eye concept for something this large just isn't viable."
Ashburn, Virginia-based WorldCom's chief executive officer Michael Capellas, who was hired in December, called the decision a "significant milestone" in the company's reorganization.
"The court is aware of no large company accused of fraud that has so rapidly and so completely divorced itself from the misdeeds of the immediate past and undertaken such extraordinary steps to prevent such misdeeds in the future," Rakoff said in his 14-page opinion.
The settlement, which still needs bankruptcy court approval, resolves a civil fraud suit the SEC filed when WorldCom first announced US$3.85 billion of accounting irregularities in June of last year.
The overstated results, dating to 1999, have since ballooned to US$11 billion.
"In determining to enter into the settlement, the Commission considered remedial acts promptly undertaken by WorldCom and cooperation afforded the commission staff," the SEC said in a statement.
WorldCom's biggest competitor disagreed.
"Today's settlement is not proportionate and does not address the harms WorldCom inflicted on the telecommunications marketplace," Claudia Jones, a spokeswoman for rival AT&T Corp, said in a statement. "It enables WorldCom to benefit from its egregious misconduct, and emerge from the bankruptcy process at a competitive advantage over those who have maintained an ethical standard of business conduct and followed the law."
Capellas's restructuring plan would cut debt to US$5 billion from the US$41 billion WorldCom had when it filed for bankruptcy protection a year ago.
The US$750 million penalty represents one-third of the US$2.25 billion that WorldCom agreed to pay, reflecting the discount that creditors are receiving on their claims in bankruptcy court. The US$500 million in cash and US$250 million in new company stock will be paid to investors when the company exits Chapter 11 protection.
Capellas has said that will occur by October.
WorldCom rivals, including the largest US long-distance carrier AT&T and Verizon Communications Inc, as well as organized labor had sent Rakoff more than 200 letters on the settlement in the weeks leading to his decision.
The judge said AT&T and Verizon were seeking to push WorldCom out of business. Rakoff said he refused to order what would amount to the company's liquidation because that would penalize its 50,000 innocent employees and remove a major competitor from the market.