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An 11-member committee of unsecured creditors in the WorldCom bankruptcy has lost its bid for reimbursement of legal fees arising out of an investigation by the Securities and Exchange Commission into potential insider trading related to the bankruptcy. Oral arguments Tuesday did not reveal which companies the SEC is investigating in the matter. Daniel Golden of Akin Gump Strauss Hauer & Feld, arguing on behalf of the committee, asked Bankruptcy Judge Arthur Gonzalez of the Southern District of New York on Tuesday to reimburse committee members for organizing and handing over documents requested by the SEC in accordance with the reorganization plan that brought WorldCom out of bankruptcy. The total costs, Golden said, could reach into the hundreds of thousands of dollars. In July 2002, WorldCom filed for bankruptcy reorganization. The $104 billion bankruptcy was the largest in the nation’s history. The telecommunications giant emerged as MCI this spring, having shed $35 billion in debt. MCI was the long-distance arm that merged with WorldCom in 1998. The reorganization plan, which has the effect of a contract between the debtor and creditors, required MCI to reimburse committee members for legal fees arising out of “threatened or commenced” lawsuits targeting the members for actions they conducted while serving on the committee. After 20 minutes of arguments Tuesday, Judge Gonzalez, who also administers the Enron bankruptcy, agreed with MCI’s lawyer, Marcia Goldstein of Weil, Gotshal & Manges, and ruled that the relevant provisions in the reorganization plan did not cover the SEC investigation. Both Golden and Goldstein told the court that the SEC’s investigation did not center on any of the committee’s members but involved a third party. Neal Jacobson, an SEC attorney, told the court that the commission has not targeted any party at this point and is merely conducting a fact-finding inquiry. The SEC “has no idea” where the investigation may lead,” Jacobson said. Gonzalez ruled that the creditors’ committee had every opportunity to negotiate terms in the reorganization plan to cover such a contingency and did not. The committee was represented by sophisticated counsel who should have foreseen the scenario, the judge said. Golden responded that the scenario was “on nobody’s radar screen” and that the “spirit” of the plan compelled MCI to compensate the committee members. The parties agreed to the reorganization plan in October 2003. It went into effect in April, three months before the SEC began sending out subpoenas requesting information. PLAIN LANGUAGE In applying basic rules of contractual interpretation, Judge Gonzalez held that the “plain and unambiguous” language of the reorganization plan excluded reimbursement. He also pointed to a “screening wall” created by the committee soon after it was consummated. The wall allowed the trading arms of the committee members to trade in MCI’s securities — namely stocks and bonds — without violating insider trading laws as long as non-public information learned through the bankruptcy proceedings was not passed along to the trading units of the members. Banks including ABN Amro and Deutsche Bank, as well as corporate giant AOL Time-Warner, belong to the committee, which originally included 15 members. Goldstein said after the hearing that screening walls are typical for large bankruptcies. The bankruptcies involving Enron and Global Crossing included similar provisions. Judge Gonzalez held that by requesting a screening wall and potentially trading in MCI’s securities, the committee members should have conceived that an SEC inquiry was possible at a later date and, therefore, included reimbursement of expenses arising out of that investigation into the reorganization plan. The judge also cast aside Golden’s warning that a ruling in opposition to the creditors’ committee would have a “chilling effect” on the willingness of creditors to join committees in future bankruptcies. Creditors’ committees play an essential role in administering the innumerable claims that arise in large bankruptcies and allow debtors to emerge from bankruptcy quickly.

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