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The largest penalty ever assessed against a U.S. company by the Securities and Exchange Commission received the green light on Monday, as U.S. District Judge Jed S. Rakoff of the Southern District of New York agreed that telecommunications giant WorldCom Inc. should pay $750 million. Judge Rakoff approved the settlement after it was revised concerning both the amount of the penalty and measures designed to ensure that WorldCom was on its way toward becoming “a good corporate citizen” in the wake of the multibillion-dollar accounting fraud that shredded its stock price and plunged it into bankruptcy last summer. The judge said the $750 million penalty, which still must be approved by Southern District Bankruptcy Judge Arthur Gonzalez, takes into “adequate account” the “magnitude of the fraud and the need for punishment and deterrence.” And it “fairly and reasonably reflects the realities of this complex situation,” he said. Judge Rakoff approved the settlement and fine over the objections of some of WorldCom’s competitors, who argued it was rewarding bad behavior by allowing the company to emerge from bankruptcy still holding acquisitions it made with an artificially high stock price. But the judge said that “to kill the company” would “unfairly penalize its 50,000 innocent employees, remove a major competitor from a market that involves significant barriers to entry,” and negate the measures the company has taken to guarantee corporate responsibility and oversight. “The Court is aware of no large company accused of fraud that has so rapidly and so completely divorced itself from the misdeeds of the immediate past and undertaken such extraordinary steps to prevent such misdeeds in the future,” Judge Rakoff said. He acknowledged the settlement would be criticized by shareholders “unfamiliar with the severe limits imposed on their recovery by the bankruptcy laws, those competitors whose own self-interest blinds them to the broader range of public policies that such a settlement implicates, and those professed pundits and idealogues for whom anything less than corporate death penalty constitutes an ‘outrage.’ “ Since the company first announced it had improperly shifted the cost of leasing telephone lines from other vendors to its capital accounts, a measure designed to maintain a high price for its stock, the amount by which the company’s income was overstated has grown to $11 billion. The balance sheet, the judge noted, was overstated by more than $75 billion and the shareholders lost as much as $200 billion. Several top executives have been indicted and have pleaded guilty. Former Chief Financial Officer Scott Sullivan is awaiting trial in connection with the fraud, and former Chief Executive Officer Bernie Ebbers is under investigation. The fraud also triggered a host of civil suits, the bulk of which have been consolidated before Southern District Judge Denise Cote. The size of the penalty to be paid by WorldCom was the last issue for Judge Rakoff to consider as he was urged to approve the settlement by SEC Deputy Litigation Counsel Peter Bresnan and WorldCom attorney Paul Curnin of Simpson Thacher & Bartlett. Judge Rakoff’s remaining concerns were addressed at a June hearing, when Bresnan and Curnin told the court that WorldCom had agreed to adopt every recommendation for corporate governance reform made by court-appointed monitor Richard Breedon. Under the terms of the settlement, the company would be forced to appeal directly to the judge to modify or change any recommendation it believes is too costly or onerous. In a second measure, WorldCom agreed to public disclosure of a letter written by the accounting firm KPMG addressing weaknesses in WorldCom’s internal controls. The lawyers said 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.

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