MCI Takes Big Step Toward Exiting Bankruptcy - InformationWeek

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MCI Takes Big Step Toward Exiting Bankruptcy

A federal judge opened hearings on a plan to erase most of the scandal-plagued long-distance carrier's $41 billion debt.

NEW YORK (AP) -- The scandals still cloud MCI's reputation, but the company formerly known as WorldCom Inc. took a step toward clearing its financial name Monday as a bankruptcy court opened hearings on a plan to erase most of the long-distance carrier's $41 billion debt.

To accommodate the crowd expected for the final phase of the biggest bankruptcy case in U.S. history, Judge Arthur Gonzalez moved the proceedings from his usual courtroom to the biggest federal court in New York City.

The hearings, which MCI's lead attorney estimated could run two weeks, will serve as a forum for MCI to present evidence in favor of its proposed reorganization plan and for opponents to explain their objections.

Despite the recent angry exchanges over allegations that MCI has disguised its long-distance calls to avoid fees that local phone companies are paid to connect such calls, the company's accusers say they won't attempt to block the reorganization with those grievances.

The charges by rivals including AT&T Corp., SBC Communications Inc., and Verizon Communications Inc. are currently being investigated by federal prosecutors. MCI has been suspended from competing for government contracts pending the outcome of the probe, and the most verbal accuser of recent weeks, AT&T, filed a private fraud suit last week.

By contrast, the so-called confirmation hearings before Judge Gonzalez will likely focus on matters relating to the accounting scandal exposed last summer in which the company fabricated $11 billion worth of profits. Federal prosecutors have charged five executives; Oklahoma prosecutors have also charged former chief executive Bernard Ebbers.

The hearings were expected to deal with "what I would describe as traditional objections relating to people who think they should be getting more money than they're getting ... the same thing that happens in every bankruptcy case," said Alfredo Perez, MCI's lead attorney. "We have to prove that the plan is feasible. We have to prove creditors would receive more" under the reorganization plan than if the company were liquidated.

Perez said MCI planned to call about 12 witnesses in support of the reorganization plan, which would eliminate all but about $5 billion of the debts that WorldCom owed when it filed for Chapter 11 protection last summer.

The debt holders would be paid only a fraction of what they are owed in cash, though some would receive stock in the reorganized corporation.

WorldCom bondholders are slated to get 36 cents on the dollar. Owners of MCI debt that was issued before its acquisition by WorldCom would get 80 cents on the dollar, while holders of debt in Intermedia, another WorldCom acquisition, would be paid about 90 cents.

For now, there is no plan to call MCI chief executive Michael Capellas, who was hired to lead the company's turnaround, as a witness.

If all goes smoothly, Perez said, the judge might take a few weeks to request more information and consider the evidence presented before ruling. If the judge approves the plan, he could set a date for the reorganization to take effect in 30 to 90 days, Perez said.

Last week, both MCI and AT&T played down the significance the long-distance fees dispute would have on the bankruptcy hearings, though that didn't stop either side from trading a new round of barbs.

MCI asserted again that an extensive internal probe has turned up no wrongdoing.

"They are alleging that they have mountains of data showing that this is a systematic plan to engage in fraud. We don't have that information. If they have it, that's what we are looking for," said Stasia Kelly, MCI's new general counsel.

"We do think it's becoming clear to us that AT&T's true motivation here is to damage us in the marketplace rather than deal with what is nothing more than a commercial dispute," Kelly said. "In the normal course, in a normal environment, the allegations that AT&T is making against us would be the subject of a monthly reconciliation meeting that has been common to the industry for years."

In an E-mail response sent to reporters, AT&T spokesman Paul Kranhold was blunt.

"As to Ms. Kelly's claims that MCI has reached out to AT&T to try this as a normal business dispute, we have three words ... 'fraud. ain't. normal.'," he wrote. "We have provided the evidence, in detail--specific phone numbers, dates--laid it all out. MCI says they cannot figure it out. The truth is they don't want it figured out ... certainly not until they get out from under the protection of the bankruptcy court."

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