RealTime IT News

Worldcom Inches Toward History with SEC Fine

MCI, formerly known as WorldCom, is awaiting a judge's blessing on a settlement that could include the largest fine ever issued by the Securities and Exchange Commission over charges of fraudulent accounting practices against the bankrupt carrier.

According to the SEC, a settlement filed in federal district court in New York Monday would include a $500 million fine as part of a $1.5 billion penalty in order to settle fraud charges that followed the collapse of the telecom and Internet data carrier company in bankruptcy. If approved, the fine, reduced to $500 million through the bankruptcy process, would rank as among the largest, if not the largest imposed by the commission.

The SEC has charged that WorldCom misled investors by overstating its income by close to $11 billion from at least as early as 1999 through the first quarter of 2002.

But the federal judge overseeing the case indicated that the final approval of the settlement won't come until after all the parties involved in the case have submitted comments by early June, followed by another hearing on June 11th. An SEC spokesman said the regulatory body had requested the hearing.

Under the terms of the proposed settlement, the funds paid by WorldCom would be "distributed to victims of the company's fraud," under the "Fair Funds for Investors" section of the Sarbanes-Oxley Act of 2002, which mandates new penalties regarding fraud charges over accounting issues.

The SEC said the proposed settlement is subject to the approval of both the federal district court hearing the SEC's action against WorldCom, as well as a federal bankruptcy court handling WorldCom's bankruptcy case.

But even if the judge signs off on the deal, and Worldcom settles with the SEC and pays a huge fine, its troubles won't end, according to one analyst.

"The core problem is a business issue. They still carry the dominate share of Internet traffic, but there are open questions about who will pay for quality of service. The volume of data traffic that Worldcom carries does not equal revenue, and that's still a problem,' said Bill Whyman, president of The Precursor Group, the Washington, D.C.-based research firm specializing in telecommunications.

"More bits doesn't mean more money, so having a fat pipe and carrying a lot of data isn't necessarily a winning formula," said Whyman.

Some expect the fine could be greater than last months record payment of $400 million by Citigroup Inc. for its part in securities violations fraud.

Based on reports, the possible agreement could allow WorldCom CEO Michael Capellas to engineer the company's bid to come out of the largest U.S. bankruptcy by October.

As part of any deal with the government, WorldCom, the largest Internet backbone provider and the second-largest long-distance company in the U.S., is not expected to admit or deny guilt.

But the size of the fine could impact Worldcom's already troubled financial situation. News of the fine comes on the heels of disclosure on May 16 that former Worldcom CEO Bernard Ebbers last month missed the first payment on a $408.2 million loan he received from the company.

Worldcom and Ebbers are expected to be vilified by the SEC, after the company initially said it concealed $3.9 billion in expenses, which allowed it to report profits, when in fact the company was losing money.

Whyman said that he and his colleague Scott Cleland see consolidation coming in the telecom sector, with the Bells taking over the top long distance companies: AT&T , Worldcom, now renamed MCI, and Sprint . Verizon , BellSouth and SBC Communications are the most likely companies to try to takeover the financially languishing long distance giants.

"The question is which of the telcos will push data and Internet applications in the enterprise," said Whyman, adding Worldcom's Internet backbone would be an attractive component on any potential takeover transaction.