Infrastructure
News
3/4/2003
02:07 PM
Connect Directly
RSS
E-Mail
50%
50%

WorldCom Agrees To Pay $500 Million To Settle Fraud Charges

The fine would be the largest ever imposed by the SEC.

NEW YORK (AP) -- WorldCom Inc., the long-distance titan accused of falsifying its books by $11 billion in the biggest accounting scandal in U.S. history, agreed Monday to pay investors $500 million to settle civil fraud charges.

The fine would be by far the largest the Securities and Exchange Commission has ever imposed.

The settlement was presented to U.S. District Judge Jed Rakoff, who said he would not rule before June 11. The judge said he needs to learn "much more of the defendant's seemingly massive fraud," who would be affected by the settlement, and what internal controls WorldCom has put in place.

The settlement calls for WorldCom to put $500 million into a fund for investors who were victimized by the company's fraud, though the exact process has yet to be determined. WorldCom's collapse and bankruptcy wiped out nearly $180 billion in shareholder wealth.

Under the settlement, WorldCom neither admits nor denies the charges. The settlement actually calls for a $1.5 billion fine, but the amount would be reduced to $500 million as part of the company's Chapter 11 bankruptcy case.

Even so, such a fine would surpass the $150 million fine the SEC slapped on Citigroup's Salomon Smith Barney as part of an industrywide settlement of allegations that Wall Street firms warped their stock ratings to lure investment-banking business.

And it would dwarf the largest accounting fraud settlements to date: the $10 million fine the SEC levied on Xerox last year and the $7 million paid by now-fallen Arthur Andersen LLC in 2001 over its audit of Waste Management.

WorldCom is accused of falsifying balance sheets to hide expenses and inflate earnings. It has been in negotiations with the SEC for months, trying to reach a deal that would bolster its hopes of emerging from bankruptcy as early as September.

A group of former WorldCom employees 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 group's founder, Mitch Marcus, said the accounting scandals that brought down Enron Corp. and Arthur Andersen "pale in comparison" to "the degree of illegality" at WorldCom.

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 Enron scandal. WorldCom later raised the estimate to around $7 billion, then $9 billion and eventually $11 billion.

The SEC broadened the scope of its civil case in November to allege that WorldCom misled investors starting at least as early as 1999, much earlier than previously alleged. WorldCom executives agreed to submit to ethics training, and the duties of the company's court-appointed watchdog were expanded.

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

Ex-controller David Myers and former chief financial officer Scott Sullivan were arrested in August. Federal prosecutors say 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.

Myers pleaded guilty and is cooperating with prosecutors. Sullivan has denied any wrongdoing. He is free on $10 million bail. Three other WorldCom executives have pleaded guilty to federal charges.

Ousted WorldCom CEO Bernard Ebbers has not been charged. Last month, he failed to make his first payment of around $25 million on more than $400 million in loans that he owes the company.

WorldCom was among the fastest-growing and most aggressive players in the 1990s telecom and Internet boom. Since then, it has cut its work force to 55,000 from a peak of 80,000. It remains second only to AT&T Corp. in the long-distance market and is a major carrier of data over the Internet.

Earlier this year, WorldCom unveiled a restructuring plan that would change the company name to that of its long-distance unit, MCI, and move its headquarters from Clinton, Miss., to Ashburn, Va. It hired a new CEO and chairman, former Compaq Computer Corp. chief Michael Capellas, in November.

Comment  | 
Print  | 
More Insights
2014 Next-Gen WAN Survey
2014 Next-Gen WAN Survey
While 68% say demand for WAN bandwidth will increase, just 15% are in the process of bringing new services or more capacity online now. For 26%, cost is the problem. Enter vendors from Aryaka to Cisco to Pertino, all looking to use cloud to transform how IT delivers wide-area connectivity.
Register for InformationWeek Newsletters
White Papers
Current Issue
InformationWeek Tech Digest September 18, 2014
Enterprise social network success starts and ends with integration. Here's how to finally make collaboration click.
Flash Poll
Video
Slideshows
Twitter Feed
InformationWeek Radio
Archived InformationWeek Radio
The weekly wrap-up of the top stories from InformationWeek.com this week.
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.