- The Washington Times - Monday, May 19, 2003

NEW YORK (AP) — WorldCom Inc. has agreed to pay investors a record $500 million to settle civil fraud charges over its $11 billion accounting scandal, which was the biggest in U.S. corporate history, attorneys for the company and the federal government announced yesterday.

The fine would be by far the largest the Securities and Exchange Commission has ever imposed in connection with a financial fraud, SEC lawyer Peter Bresnan said. WorldCom, a bankrupt telecommunications titan that wants to be renamed MCI, is accused of falsifying balance sheets to hide expenses and inflate earnings.

Attorneys for the two sides presented the proposed settlement to U.S. District Judge Jed S. Rakoff in Manhattan, who said he would consider the deal and would not rule before June 11.

Judge Rakoff said he needs to learn “much more of the defendant’s seemingly massive fraud,” as well as who would be affected by the settlement and what internal controls WorldCom has put in place.

The settlement actually calls for WorldCom to be fined $1.51 billion, an amount that would be reduced to $500 million as part of the company’s bankruptcy case, in which many creditors have to settle for less money than they are really owed.

Even so, the $500 million would dwarf the $10 million fine the SEC levied on Xerox Corp. in 2002 to settle accounting charges, the largest to that time, as well as the $7 million paid by now-fallen Arthur Andersen LLC in June 2001 over its audit of Waste Management.

The SEC and WorldCom had been negotiating the settlement for months, and the deal would be an important development for WorldCom’s hopes of emerging from bankruptcy as early as September.

“It was only last summer that we were wondering whether they would even survive,” telecommunications analyst Jeff Kagan noted in a written commentary yesterday. “Now with the settlement at hand, they can put this chapter behind them.”

A group of former WorldCom employees that is critical of the company denounced the accord as a “slap on the wrist.” The $500 million is equivalent to “about one week of revenue … an insignificant amount by any standard,” said the group, BoycottMCI.com.

The SEC sued WorldCom last June, just a day after the company disclosed $4 billion in financial misstatements, shocking a market already buffeted by the revelations of accounting violations at Enron.

Since then, WorldCom has widened the hole in its books to around $7 billion, then $9 billion and eventually $11 billion. The SEC determined that WorldCom had misled investors starting at least as early as 1999.

The SEC and WorldCom reached a partial settlement in late November, in which the company agreed to a permanent injunction barring it from future violations of securities laws. In addition, WorldCom executives agreed to submit to ethics training, and the duties of the company’s court-appointed watchdog were expanded.

While the agency has pursued civil charges against WorldCom and several former top executives, the Justice Department has been conducting a criminal investigation and has charged several former executives.

WorldCom’s ex-controller David Myers and its former chief financial officer Scott Sullivan were arrested in August. Prosecutors claimed the two directed employees to conceal more than $3.8 billion in expenses in financial reports, causing WorldCom earnings to be overstated by $5 billion.

Mr. Myers pleaded guilty in federal court in Manhattan in September and is cooperating with prosecutors in the criminal probe. Mr. Sullivan — the nation’s highest-paid CFO in 1997, earning $19 million — has denied any wrongdoing. He is free on $10 million bail.

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