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U.S. Bankruptcy Judge Arthur Gonzalez on Wednesday approved a $750 million settlement between WorldCom Inc. and the Securities and Exchange Commission that resolves a historic civil fraud suit and breaks new ground in bankruptcy law. Technically, WorldCom’s penalty totals $2.25 billion, though the telecommunications company will end up paying only $500 million in cash and providing $250 million in equity after its reorganization. The fine, approved at a hearing late Wednesday, Aug. 6, is the SEC’s largest ever against a public company and is the first to make use of provisions in the Sarbanes-Oxley Act allowing the government to distribute proceeds to victimized shareholders and bondholders. Such a move would upend the absolute priority of bankruptcy claims by giving recoveries to shareholders before creditors are compensated in full. “Today’s ruling represents a key milestone as MCI moves toward emergence from Chapter 11 protection,” said WorldCom’s general counsel Stasia Kelly in a prepared statement. “It represents additional validation of all the positive steps the company has taken over the past year to both put its house in order and establish itself as a leader in good corporate governance.” During the hearing, Gonzalez also approved a supplement to WorldCom’s disclosure statement that outlines recent allegations and investigations regarding WorldCom’s operations, and includes the company’s responses. Last week, AT&T Corp. grabbed headlines with a court filing stating that law enforcement officers had alerted it to issues with WorldCom’s call routing practices. The company charged that WorldCom, which now does business as MCI, disguised calls to reduce its costs and routed government voice traffic through Canada, allegedly raising security concerns. The U.S. Attorney for the Southern District of New York issued the company a subpoena and opened an investigation into the matter. Also, the government’s General Services Administration has proposed debarring WorldCom from new federal contracts because of weaknesses in its accounting controls and other issues. The GSA gave the company 30 days to appeal. Without a request from any of the parties, Gonzalez convened a hearing to address the matter last week. The judge required WorldCom to file the disclosure statement supplement and moved the confirmation hearing for the company’s reorganization plan from August 25 to September 8. Confirmation promises to be a heated and extended affair. Gonzalez announced at the Wednesday hearing that he had reserved a larger courtroom in the U.S. District Court for the Southern District of New York for two weeks to accommodate the crowd. Aside from AT&T’s allegations, the company will face objections from creditor groups who oppose substantive consolidation of the WorldCom holding company with the MCI operating subsidiary. A group of investors holding trade claims against MCI and another group with subordinated MCI notes have been frequent and vocal critics of the company since the reorganization plan was filed. Under the proposed reorganization plan, the trade creditors receive about 36 cents on the dollar for their claims and the subordinated noteholders receive nothing. Both groups argue that they should be paid in full, since WorldCom’s most valuable assets reside at MCI. However, a group of MCI senior noteholders endorses the plan, which pays them 80 cents on the dollar. “Disclosure is only disclosure. They’ve still got a whole confirmation hearing,” said Ed Weisfelner of Brown Rudnick Berlack Israels, counsel to the group holding trade claims, who objected to the SEC settlement and the disclosure statement supplement. “We still believe that they’ll never satisfy their burden of proof at confirmation.” The dissenting trade claim holders and subordinated noteholders, as well as the indenture trustee for subordinated MCI notes, objected to the size of the settlement and other matters. In accordance with the bankruptcy code, the dissenting parties argued, shareholders should not get compensation unless creditors are fully paid. The objectors also claimed that because the fraud occurred at WorldCom, creditors at MCI should not be penalized. WorldCom’s counsel maintained that given the risk of battling the SEC in court and the uncertainty introduced by Sarbanes-Oxley, the settlement was fair and reasonable. Marcia Goldstein of Weil Gotshal & Manges LLP, representing the company, said at a Tuesday hearing that the “motivating factor” for WorldCom was that the case would be “a highly complex matter to bring before the district court.” WorldCom and its unsecured creditors committee took part in the negotiations with the SEC. Peter Bresnan, a lawyer for the commission, said at the Tuesday hearing that the government tried to ensure that the penalty was large enough to deter future fraud but did not excessively penalize creditors who were already victimized by WorldCom’s fraud. �Copyright 2003, The Deal, LLC. All rights reserved.

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