Bankruptcy News

The Honorable Jed Rakoff Approves Settlement of SEC'S Claim for a Civil Penalty Against Worldcom

In its Opinion and Order, the Court concluded that "the proposed settlement is not only fair and reasonable but as good an outcome as anyone could reasonably expect in these difficult circumstances." The Court noted that the civil penalty to be paid by WorldCom, would be "75 times greater than any prior such penalty." The Court wrote that "the Court is satisfied that the Commission has carefully reviewed all relevant considerations and has arrived at a penalty that, while taking adequate account of the magnitude of the fraud and the need for punishment and deterrence, fairly and reasonably reflects the realities of this complex situation."

In its Opinion and Order, the Court stated that the Court will enter the Final Judgment as to Monetary Relief in the form submitted by the parties. That Final Judgment provides that WorldCom is liable for a civil penalty in the amount of $2,25 billion. The Final Judgment also provides that in the event of confirmation of a plan of reorganization of WorldCom by the Bankruptcy Court, WorldCom's obligations under the Commission's judgment shall be deemed to be satisfied by the company's payment of $500 million in cash and by its transfer of common stock in the reorganized company having a value of $250 million to a distribution agent to be appointed by the District Court. Under the terms of the settlement, the funds paid and the common stock transferred by WorldCom to satisfy the Commission's judgment will be distributed to victims of the company's fraud, pursuant to Section 308 (Fair Funds For Investors) of the Sarbanes-Oxley Act of 2002. The proposed settlement remains subject to review and approval of the United States Bankruptcy Court for the Southern District of New York.

The Commission has alleged that WorldCom misled investors by overstating its income from at least as early as 1999 through the first quarter of 2002, as a result of undisclosed and improper accounting. (Litigation Release No. 17829.)

The Commission filed its case against WorldCom on June 26, 2002, the day after WorldCom announced that it intended to restate its financial results for five quarters-all quarters in 2001 and the first quarter of 2002. (Litigation Release No. 17588). The Commission also sought the appointment of a corporate monitor for WorldCom, and on July 3, U.S. District Judge Jed S. Rakoff appointed former SEC Chairman Richard Breeden to that position.

On Nov. 26, 2002, the Commission obtained a judgment against WorldCom through which the Commission obtained the full injunctive relief it sought against WorldCom. In addition, the judgment ordered WorldCom to undertake extensive reviews of its corporate governance and internal controls, as well as required the WorldCom to establish a training and education program for WorldCom officers and employees to minimize the possibility of future violations of the federal securities laws. The Nov. 26, 2002 judgment explicitly left open the determination of monetary penalties to be imposed on WorldCom. (Litigation Release No. 17866).

Since the Commission filed its action against WorldCom, the company has made a series of announcements expanding its anticipated financial restatement due to the fraud, both in dollar amount and in time. In addition, the Commission has brought civil actions against four former employees of WorldCom. The Commission filed civil actions against former WorldCom Controller David F. Myers on Sept. 26, 2002 (Litigation Release No. 17753); former WorldCom Director of General Accounting Buford "Buddy" Yates, Jr., on Oct. 7, 2002 (Litigation Release No. 17771); and Betty L. Vinson and Troy M. Normand, former accountants in the WorldCom's General Accounting Department, on Oct. 10, 2002 (Litigation Release No. 17783). All of these actions are pending.

In determining to enter into the settlement, the Commission considered remedial acts promptly undertaken by WorldCom and cooperation afforded the Commission staff.

The Commission acknowledges the assistance and cooperation of the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation.

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	Did You Know?
	Special purpose entities in bankruptcy can be used A business, usually a special-purpose entity, established to perform limited functions and to have one or a few primary creditors. This type of entity is sometimes established to protect lenders on large, complex projects, when the lender is to be paid solely or almost exclusively out of the money generated when the project becomes operational.