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Southern District of New York Judge Jed Rakoff said he needs more information before deciding whether to approve a record $500 million settlement of the fraud case brought by the Securities and Exchange Commission against WorldCom Inc. The public record, he said, “affords an inadequate basis to evaluate, let alone approve at this time, any settlement of a matter of such size, complexity and public importance.” A hearing on the settlement will be held on June 11, Judge Rakoff said, to give the court time to review an upcoming report of the Examiner in Bankruptcy and the report of a special investigative committee formed by WorldCom after last year’s revelations of a massive accounting fraud at the nation’s number two long-distance service provider. Peter Bresnan, deputy chief litigation counsel for the SEC, told Rakoff that the proposed $500 million figure is at least 50 times larger than the biggest penalty the commission has ever assessed against a pubic company. It was an amount justified, he said, by the fact that “WorldCom engaged in the largest financial fraud in history.” The actual number called for in the settlement is $1.5 billion, with the $500 million figure a recognition that the company’s general, unsecured creditors are expected to receive about 33 cents on the dollar when it emerges from a bankruptcy proceeding before Southern District Judge Arthur Gonzalez later this year. Paul Curnin of Simpson Thacher & Bartlett, who represents WorldCom, told the court that “the company is pleased to reach this stage,” and that he believes the settlement “benefits the public.” The announcement came 14 months after the SEC made a broad-ranging request for documents from the telecommunications giant. Since then, WorldCom Chief Executive Officer Bernie Ebbers was forced to resign as details emerged about how the company manipulated its balance sheet and lied in statements to regulators. Ultimately, the company owned up to $11 billion in hidden costs and other irregularities that were designed to strengthen the balance sheet and support the company’s stock price. Scores of investor suits were filed against WorldCom — the bulk of which are now before Southern District Judge Denise Cote — and the U.S. Attorney’s Office has indicted several top executives, including former Chief Financial Officer Scott Sullivan. Ebbers has not been charged criminally. The SEC filed its civil suit in June, and the company filed for bankruptcy in July. Judge Rakoff has used his oversight of the SEC litigation to insist on a series of changes at the company. The judge has weighed in on the fairness of a pay package for new CEO Michael Capellas, issued an order requiring a corporate monitor to restrain expenditures for legal and other professional fees, and insisted on tougher guidelines to ensure the integrity of corporate governance. Rakoff alluded to the corporate oversight issue yesterday, saying “adequate implementation of substantial changes in corporate governance and internal controls must precede the determination of the monetary penalty.” Another concern was compliance with the Sarbanes-Oxley Act of 2002. Section 308(a) of Sarbanes-Oxley contains the so-called “Fair Fund” provision for compensating victims of corporate malfeasance. “Finally, and perhaps most importantly,” the judge said, “the Court needs to have complete information not only as to whom the settlement will benefit but also whom it will not, as well as the rationales for such choices as have been made.” The settlement is also subject to the approval of Bankruptcy Judge Gonzalez. Bresnan said that the chief beneficiaries of the settlement would be WorldCom shareholders and bondholders. The announcement of the settlement came after a decision by Judge Cote on Friday denying motions to dismiss the investor litigation. Cote followed her Friday bench ruling with an 80-page opinion yesterday saying the plaintiffs had alleged sufficient facts to allow the case to proceed. In addition to charging securities fraud against Ebbers, Sullivan, WorldCom directors and others, the investor suits accused CitiGroup, the parent of Salomon Smith Barney, and Jack Grubman, former top telecommunications analyst at Salomon, with maintaining an unscrupulous “quid pro quo” relationship with Ebbers and WorldCom to win investment banking business. In her opinion yesterday, Cote said, “The complaint describes strong circumstantial evidence that Ebbers knew that WorldCom was manipulating its books.” She also rejected claims by the Salomon Smith Barney defendants that the complaint failed to sufficiently allege they had “participated” in the WorldCom fraud. The judge said the complaint merely seeks to hold Salomon and others “liable for their own alleged misrepresentations and omissions.” “Whether they created or directed the fraud within WorldCom is beside the point,” she said. Meanwhile, Judge Gonzalez has denied the request of two creditor groups to appoint a Chapter 11 trustee to serve as a fiduciary for WorldCom’s MCI Group subsidiary. The ruling, laid out in a 25-page decision issued late Friday, addresses the most contentious dispute among claim holders in the telecom’s mammoth bankruptcy filing. Two groups of investors holding claims against the debtors’ MCI subsidiary had asked the judge to appoint a limited-purpose Chapter 11 trustee for the unit. The creditors, who have attacked WorldCom’s efforts to substantively consolidate the estates of MCI and WorldCom, allege that there is no fiduciary looking out for MCI and its creditors.

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