Though critics have scorned the $750 million settlement reached by MCI
(formerly WorldCom) and the U.S. Securities and Exchange Commission (SEC)
as a sweetheart deal in the face of the company’s $11 billion accounting
scandal, a federal judge Monday approved the deal.
The settlement calls for a civil penalty of $2.25 billion, which will be
satisfied by a $500 million cash payment and $250 million in common stock
to shareholders and bondholders upon the company’s emergence from Chapter
11 bankruptcy protection. The $250 million in stock was added to the
settlement last week in response to critics of the original $500 million
In an order issued Monday, U.S. District Judge Jed Rakoff called the $750
million settlement “fair and reasonable.” The $11 billion accounting
scandal originally drew a $1.5 billion fine. The fine, to be distributed
among WorldCom’s victims, was reduced in light of the company’s bankruptcy proceeding. The company’s bankruptcy, filed in July 2002, is the
largest filing in U.S. history, listing $107 billion of assets, dwarfing
Enron’s $63 billion filing in 2001.
“The court is aware of no large company accused of fraud that has 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 ruling.
Michael D. Capellas, hired
to take the reins of the troubled company as chairman and CEO in November
2002, added, “We have made significant strides in rebuilding our company
and we believe today’s ruling is a positive reflection of the hard work and
dedication of MCI’s 55,000 employees, the loyalty of our customers and the
support of our creditors. We have committed to being a role model of
corporate governance and the significant changes we have already
implemented are a testament to that commitment.”
He also said, “Today’s approved SEC settlement marks a significant
milestone in the company’s emergence from Chapter 11 protection, which
remains on track for later this fall.”
But some critics are displeased with the settlement, calling it anything
“Judge Rakoff’s unfortunate decision to ratify the SEC-MCI/WorldCom
settlement comes on the heels of MCI/WorldCom’s de facto admission of
guilt — $250 million in new company stock to those who lost $176 billion,
including pensioners and 401(k) holders,” Will Thomas, director of the
Corporate Accountability Project of the Gray Panthers, said in a statement
following the ruling. “The new arrangement offers eight cents a share to
all those ripped-off investors. It’s simply another sweetheart deal
arranged for MCI/WorldCom in the federal government’s ongoing campaign to
keep the company afloat at all costs.”
Thomas also said that the campaign against MCI will continue.
“We’re disappointed by Judge Rakoff’s decision, but we’re far from
discouraged,” he said. “The campaign to hold MCI/WorldCom accountable for
its $11 billion fraud is far from over. Congress is now questioning the
failure of the General Services Administration to debar MCI/WorldCom from
federal contracting; we know there is hope that retirees, taxpayers, and
investors will see the company held to account for its epic fraud. Senators
Collins, Hatch, and Santorum deserve much praise and credit for their
leadership on this issue. The American people were promised that Washington
was serious about cleaning up the fraud in corporate boardrooms. The Gray
Panthers want results. We won’t stop in our efforts to see that
MCI/WorldCom is barred from federal contracting and off the gravy train.”
In June 2002, the SEC filed charges against MCI (then known as WorldCom) and its executives, alleging the firm had cooked the books to meet Wall Street expectations and goose its stock price. The SEC said at the time that the fraud pumped up WorldCom’s earnings by $3 billion in 2001 and $797 million in the first quarter of 2002.
The SEC’s fraud charges, filed in a civil suit in a Manhattan federal court, came just a day after WorldCom’s bombshell admission that it had overstated its cash flow by $3.8 billion over five quarters. The SEC had already begun an investigation into the company’s accounting in February 2002.
WorldCom followed up by filing for Chapter 11 bankruptcy protection in July, making it the largest bankruptcy reorganization in U.S. history. The SEC expanded its investigation in November 2002, when WorldCom warned it would restate $9 billion in revenue.