Court okays WorldCom settlement

PHILADELPHIA: U.S. District Judge Jed Rakoff in New York gave the green light to WorldCom's settlement with the Securities and Exchange Commission, which calls for the company to pay $500 million in cash and $250 million in new stock in the reorganized company.

This judgement would clear another hurdle for the beleaguered telecommunications company's emergence from bankruptcy.

The payout will be distributed to bondholders and shareholders who lost more than $200 billion in the company's downfall, which was triggered by its $11 billion accounting scandal. WorldCom agreed to sweeten the payout with stock after Rakoff raised questions about the settlement.

"The proposed settlement is not only fair and reasonable but as good an outcome as anyone could reasonably expect in these difficult circumstances," Rakoff said in his order.

Spokespeople for WorldCom, which plans to change its name back to MCI, could not immediately be reached for comment.

The monetary fine was initially set at $1.5 billion, and later increased to $2.25 billion to reflect the revised settlement, but WorldCom will only pay $750 million because it is in bankruptcy. The settlement still must be approved by the bankruptcy court.

Several rivals, such as AT&T Corp. and Verizon Communications Inc., had argued that the settlement and bankruptcy reorganization process would allow WorldCom to escape too easily and slash its $41 billion debt load to a fraction of that amount. The court, however, rebuffed the rivals' arguments that WorldCom should be liquidated.

Despite "whatever advantages in debt reduction WorldCom will realize ... any suggestion that companies as large and well-positioned as Verizon and AT&T will not be able to compete effectively with the new WorldCom/MCI lacks credence," the judge said in his order.

WorldCom, based in Ashburn, Virginia, previously agreed with the SEC not to violate securities laws in the future, and has made several moves to distance itself from the accounting scandal and its past management team. It overhauled its board of directors, hired new a new chairman and chief financial officer, and installed more stringent procedures in its accounting department.

"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 order.

Later this month, a court-appointed monitor is scheduled to release a report with other recommendations to strengthen WorldCom's corporate governance.

Resolving the SEC charges would remove a big legal cloud over WorldCom, but the company still faces lawsuits from shareholders whose stock has become worthless.

The size of the SEC penalty would eclipse the $400 million that Citigroup's Salomon Smith Barney investment banking unit agreed to pay earlier this year as part a $1.4 billion settlement with Wall Street firms over biased analyst research.

© Reuters