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Roughly one month before the confirmation hearing for WorldCom Inc.’s reorganization plan, AT&T Corp. launched fresh allegations of fraud against the bankrupt telecom on Monday. While Motorola Inc., Bank of America N.A., Wells Fargo Bank N.A., The New Jersey Turnpike Authority and a number of other creditors filed objections to the plan before the Monday deadline, the charges leveled by AT&T, one of WorldCom’s fiercest competitors as well as a claimant, stood out. The long-distance carrier alleged that WorldCom orchestrated a complex plan to route some domestic traffic through Canadian carriers and back into the U.S. on AT&T’s lines, so that AT&T would have to terminate calls in rural areas where access charges are often higher and incur steep access fees. AT&T’s filing states that the alleged practice, dubbed the “Canadian Gateway Project,” allowed WorldCom to reduce its own costs and raise AT&T’s. It further asserted that WorldCom took advantage of the cost disparity to poach some of its lucrative corporate clients, citing a defection by Wells Fargo. The telecom said it received information about the practice from law enforcement officials and “other sources outside the company,” and that it had only verified the information with tests within the last two weeks. Looking beyond competitive issues, AT&T charged that some of the calls diverted to Canada were from officials of the State Department, a member of Congress and other government officers. “It’s an explosive filing,” said Dana Frix, co-chair of the Telecommunications Practice at Chadbourne & Parke. “It is the kind of filing that looks like it’s seeking to have an impact outside of bankruptcy courtroom itself, perhaps in front of Congress.” The lawyer, who said he had no way of telling how strong AT&T’s charges are, noted that there was little information in the filing about how the company was able to trace the paths of calls before they were routed back to the U.S. WorldCom, which now does business as MCI, had made strides in removing the taint of its previous wrongdoing in the year since it filed for bankruptcy protection. U.S. District Judge Jed Rakoff, who oversaw the Securities and Exchange Commission’s civil fraud suit against WorldCom, approved a $750 million settlement to resolve the government’s securities-related charges against the company. In hearings the judge and lawyers for the SEC lauded WorldCom’s progress in revamping its corporate governance. The debtor reiterated its commitment to probity in a press release on Monday. “Today the company met with the U.S. Attorney’s Office to gain an understanding of the nature of their inquiry. We committed to them our full cooperation in their efforts,” WorldCom chairman and chief executive officer Michael Capellas said in a statement. “As I have said all along, we will do the right thing,” he said, noting that the company was conducting an internal review. “We have a zero-tolerance policy, and if any wrongdoing is discovered you can be certain that we will take appropriate action swiftly.” AT&T said it intends to file a racketeering and fraud case against WorldCom if Gonzalez permits. The relief it seeks regarding the reorganization plan, however, is comparatively limited. The pleadings request that the court amend the reorganization plan so that the company can pursue its claims against WorldCom, rather than quash the plan outright. “They’re basically saying, ‘Protect our rights. Modify the plan so that we’re not injured,’” said Rick Tilton of restructuring firm Greenacre Asset Advisors. Depending on the amount and validity of AT&T’s claims, he said, the allegations could still disrupt WorldCom’s reorganization. “There could be issues about the adequacy of the disclosure statement, maybe broader issues for the SEC settlement, the issuance of new common stock and whether it should be permitted to trade,” he said. “There may be broader issues for the bankruptcy judge about whether the case should be confirmed with continuing allegations of fraud.” AT&T said it could not quantify the exact damages in its filing, though it did state they would be “at least in the tens of millions of dollars.” Gonzalez is set to consider WorldCom’s settlement with the SEC on Aug. 5 and will commence the confirmation hearing for the largest Chapter 11 reorganization in history on Aug. 25. Copyright �2003 TDD, LLC. All rights reserved.

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