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Attorneys for WorldCom Inc. and the Securities and Exchange Commission told a federal judge Wednesday that objections to a $500 million settlement of the SEC’s fraud suit against the telecommunications company are meritless. Urging Southern District of New York Judge Jed Rakoff to approve the largest settlement in the SEC’s history, Peter Bresnan, the commission’s deputy litigation counsel, said that the realities of the bankruptcy code and the company’s current assets made the pursuit of a stiffer penalty impractical. “Even if we got a claim for $10 billion, we would have to take that judgment to the bankruptcy court, establish we have a claim, and [establish] that that claim would be allowed and be given priority,” Bresnan said. “We, of necessity, must have a claim satisfied in bankruptcy or it would be dischargeable.” Bresnan added that the company’s “going concern value” is currently between $12 billion and $15 billion, but its liquidation value is only $4 billion. And under the bankruptcy code, he said, the mass of WorldCom shareholders and bondholders now in civil litigation over the collapse of the company before Southern District Judge Denise Cote will receive virtually nothing. Bresnan and Paul Curnin of Simpson Thacher & Bartlett, who represents WorldCom, had presented Judge Rakoff with the settlement figure last month, but the judge said he wanted more time to study the matter, including who would benefit or be harmed by the settlement and the “rationale” for the amount. Since that hearing, the judge has received 23 formal submissions, including one from members of Congress, asking him to reject the terms. He also received “several hundred letters” from current and former shareholders as well as company employees, urging him to do everything from lowering the penalty to increasing it so much as to ensure the company is forced into liquidation. Among those who advocated the latter course were WorldCom competitors AT&T and Verizon. “They are saying that the company is getting an unfair competitive advantage with the benefits of dischargeability and the fact that, before the company went into bankruptcy, it was able to obtain assets by means of its fraud,” the judge said. Curnin answered that “there are some for whom no amount is large enough as long as WorldCom survives. They have a problem with the way the bankruptcy laws work.” And Curnin argued that as the enforcer of the nation’s securities laws, the SEC is entitled to a good measure of deference in determining the appropriate amount of the settlement. “Liquidation will hurt everyone,” Curnin added. “Including the 55,000 employees the company has.” One concern that Judge Rakoff had last month was answered by the parties as they presented him with proposals concerning corporate governance and internal controls. Bresnan sought, and the company agreed, to an order that requires WorldCom to adopt every recommendation for corporate governance reform made by court-appointed monitor Richard Breedon. The company would be forced to appeal directly to the judge to modify or change any recommendation it believes is too costly or onerous. Second, Bresnan and Curnin said the company agreed to public disclosure of an accounting firm’s letter addressing weaknesses in the company’s internal controls. The firm, KPMG, will conduct a test audit of those controls in early 2004, one year ahead of the 2005 deadline for corporate audits required by the Sarbanes-Oxley Act of 2002. Rakoff did not rule on whether he would approve the settlement.

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