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In a strongly worded order, Southern District of New York Judge Jed Rakoff, has barred telecommunications giant MCI from making additional payments to the law, accounting and consulting firms guiding it through bankruptcy that have not already been approved through the budgeting system set up by the court. The judge ordered MCI and any firms under question to file affidavits explaining why his budgeting procedure was not followed and justifying the expenses by 5 p.m. today. After spending 21 months in bankruptcy, WorldCom emerged from Chapter 11 protection in April under a new moniker, MCI, its long-distance arm that merged with WorldCom in 1998. The $104 billion bankruptcy was the largest in the nation’s history and MCI pulled through having shed $35 billion in debt. MCI’s former CEO Bernard Ebbers was indicted for securities fraud and is expected to go on trial in the Southern District next year for overstating WorldCom’s profits by $11 billion. MCI has already spent $800 million, much of it to various firms, in emerging from bankruptcy, according to a company representative. Since then, firms have billed hundreds of millions more. More than a dozen law firms, including lead debtor’s counsel, Weil, Gotshal & Manges led by Marcia Goldstein, and several more accounting firms, investment banks, and others worked in resuscitating MCI. Judge Rakoff had established an unusual budgeting process in which the firms were required to submit quarterly budgets to MCI’s corporate monitor, Richard Breeden, to assure savings for the company. Normally, a bankruptcy judge, in this case Judge Arthur Gonzalez, oversees payments for fees and expenses. In MCI’s case, the district and bankruptcy courts in the Southern District jointly administered the process. Breeden ended the review process on June 30, 2004, because the company emerged from bankruptcy. Problems arose when several firms — which Rakoff declined to name — submitted payment requests that exceeded their quarterly budgets or had never received budgetary approval from Breeden. Others may have also received payments in excess of their submitted budget, the judge said. The total amount that Rakoff is questioning exceeds $25 million. “Effective immediately,” the judge said, “the company and each of its employees is barred, upon pain of contempt, from making any further payment whatever for any services or fees within the scope of the Budgeting Order that were not previously approved by the Corporate Monitor.” Rakoff also called on Breeden to recoup any wrongly made payments. Rakoff did not name the firms or specific charges he found objectionable. An MCI spokesman said the company would comply with the judge’s demand to explain the bills but declined to offer details. LARGE FEE REQUESTS As an example of the large fees that have been requested during the course of this bankruptcy proceeding, KPMG has requested $115 million in fees and expenses from the period between October 2003 through July 2004 for auditing MCI’s books and records dating back several years. Accounting firm Deloitte & Touche and Deloitte Consulting also requested $75 million in fees and expenses for the same billing period. These filings exceeded most of the fees requested by other firms during the final billing cycle. It is not known whether Rakoff is questioning any of these particular filings. This is not the first time the judge has shown dismay at the bills racked up in this bankruptcy. In conjunction with bankruptcy Judge Gonzalez, Rakoff set up a budgeting procedure to better monitor the mounting costs as far back as March 2003, just eight months into the 21-month long reorganization. “[I]t is increasingly obvious that the fees and expenditures being incurred by various parties, committees, examiners and the like in connection with the parallel bankruptcy proceedings are of a sufficient magnitude to warrant the attention of the Corporate Monitor of this Court,” Rakoff wrote at the time. “Moreover, a debtor in the position of the company may not be able to effectively challenge such expenditures, and … experience in similar cases suggests that the various professionals involved may not vigorously challenge each other’s compensation or may simply not have an adequate overview of the overall case so as to be able to identify work being done by other professionals.” The judge explained that the bankruptcy court reviewed billings after the services were rendered. He wanted a mechanism to scrutinize fees up front. The process required each of MCI’s bankruptcy-related consultants to submit a budget four times a year “for all reasonably foreseeable work during the ensuing calendar quarter” to Breeden for review. The quarterly submission, according to Rakoff’s March 2003 order, acted as a cap, but the process allowed firms to seek modifications for excesses arising from unforeseen circumstances. Rakoff’s budgeting mechanism worked alongside the fee review process taking place before Gonzalez. A month after Rakoff’s March 2003 decision, Gonzalez formed a committee to review fees and expenses. An in-house attorney from MCI, an Assistant U.S. Trustee, and a representative of the unsecured creditors comprised the committee. Earlier this year, this fee review committee recommended that the court reduce payments for fees and expenses by $7.2 million for the second billing cycle dating back to 2002 and early 2003. It recommended that Weil Gotshal’s $6.65 million request for work completed be reduced by $566,000. It also recommended a $340,000 reduction for Piper Rudnick out of $5.6 million billed for the same time period, and a $510,000 reduction for Jenner & Block out of $3.8 million it had charged. Simpson Thacher faced a reduction of $280,000 for the $2 million it had billed. The largest recommended reduction came with KPMG. The committee suggested a $5 million decrease on $21 million billed by the accounting giant during the cycle. Gonzalez issued an order in March 2004 in which he made the final determinations for this interim period. Weil Gotshal and Jenner & Block received most of what they had asked for in fees and expenses. Piper Rudnick and Simpson Thacher received amounts closer to the recommendations made by the review committee.

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