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Besieged telecommunications giant WorldCom Inc. on Wednesday agreed to refrain from selling the stock of any of its domestic units for 80 days in return for some breathing room to operate. Southern District of New York Judge Jed S. Rakoff approved a stipulation between WorldCom and 25 banks and other institutions that charge in a lawsuit that the company drew down a $2.65 billion line of credit in May while company officials were aware that a major accounting fraud scandal was about to break. The agreement prevents WorldCom from dissipating assets that the banks claim should be considered part of a constructive trust unaffected by a potential Chapter 11 bankruptcy filing by the company. Under the agreement, WorldCom gets temporary reprieve from a bid by the banks to have its cash assets frozen. But attorneys for WorldCom said Wednesday they were confident that they could defeat the banks’ attempt to win a ruling that the one-year credit facility established in 2000 should be considered a constructive trust. And Wednesday’s agreement, at the insistence of Rakoff, made it clear that the preservation of the assets should in no way advance that constructive trust claim at the expense of other creditors seeking to preserve their interests in a bankruptcy proceeding. Addressing Rakoff on the first day the case was removed to the Southern District from New York County Supreme Court, WorldCom lawyer Joseph Allerhand of Weil, Gotshal & Manges said the constructive trust claim was merely a way for the banks to establish some kind of priority should the company file for bankruptcy, which he said was “a very real alternative.” Allerhand said that in any event he was confident that WorldCom would defeat the claim. “The cash the company received is not sitting on a table at WorldCom today,” Allerhand said. “So the practical reality is that you cannot impose a preliminary injunction in thin air.” The attorney for the banks, Louis B. Kimmelman of O’Melveny & Myers, said the banks’ action “to impose a constructive trust on specific property which plaintiffs contend was wrongfully obtained” by the company makes it “essential that the res or the property is preserved … “ Arguing for the stipulation, “designed to restrain the transfer or lease of that property,” Kimmelman also expressed confidence that the loans, while unsecured, would be ruled to be held in trust by the company. “That property is properly ours,” Kimmelman said. “It will not be properly WorldCom’s.” Rakoff, however, refused to freeze the company’s cash, opting instead for an agreement that prevented the company from selling off its assets. The line of credit was established by the institutions on June 8, 2001, and gave WorldCom the option of borrowing $2.65 billion as long as the money was repaid within a year. But Rakoff wanted to know how the banks’ claim on the money would fare in bankruptcy against the claims of other creditors, as well as the holders of almost $30 billion in company debt. “I wonder if a court should hesitate in entering anything that gives a creditor a preferred position,” he said, adding that he wanted to avoid “even a hint” of preference for one creditor over another. The banks’ lawsuit, removed without objection to federal court, charges that on May 15, “barely six weeks before disclosing a massive accounting fraud,” company officials told the banks that WorldCom “intended to draw down the entire $2.65 billion in a single borrowing.” Intervening Wednesday in the banks’ lawsuit to protect their interests were attorneys for an ad hoc committee of bondholders, as well as such groups as the New York State Retirement Fund, which claims $300 million in damages and is seeking to be the lead plaintiff in shareholder class actions filed against the company in the Southern District. Before approving the stipulation, Rakoff also consulted with the Securities and Exchange Commission, which has brought civil fraud charges against the company. The U.S. Department of Justice has also launched an investigation into the company’s accounting practices. Under the terms of the stipulation, discovery in the banks’ lawsuit is stayed for 70 days to give what Allerhand’s co-counsel, Marsha Goldstein, termed “breathing room” to operate.

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