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WorldCom reaches partial settlement with watchdog

New York, Nov. 27: WorldCom, the troubled long-distance carrier, struck an agreement with the Securities and Exchange Commission on Tuesday to settle the civil fraud suit against the company in a way that may allow it to avoid paying fines.

US district judge Jed S. Rakoff in Manhattan, who is overseeing the case, approved the deal Tuesday, calling it “a model of what should be attempted in a case of this sort”.

The settlement says that the SEC may request that the judge approve a fine in the future, whether or not the company violates the terms of the agreement. The commission described the settlement as “partial” because of that possibility.

The deal, which took the form of a permanent injunction and a consent decree, requires WorldCom to refrain from breaking securities laws.

The commission sued the company on June 26, a day after WorldCom announced that it had mis-stated its financial results by $ 3.8 billion—an amount that after subsequent disclosures now exceeds $ 9 billion. WorldCom filed for Chapter 11 bankruptcy protection on July 21, and has said it hopes to emerge from bankruptcy by next summer.

“The requirements of this agreement are squarely in line with steps we are already taking to restore public confidence in WorldCom,” John W. Sidgmore, WorldCom’s chief executive, said in a statement.

A WorldCom spokesman declined further comment.

Under Tuesday’s deal, Rakoff will continue to oversee the company’s behaviour, largely through Richard C. Breeden, WorldCom’s court-appointed monitor, who has been keeper of the company’s purse strings. As a result of the settlement, Breeden will now also review a plan for overhauling WorldCom’s corporate governance structure that is being drafted by a special committee of the company’s board. The committee is expected to complete the plan by early next year.

Some WorldCom critics said Tuesday that the settlement deal was too lenient.

“When you’re talking about the biggest bankruptcy in history you’d think the SEC would be a little more thorough,” said Tom Schatz, president of Citizens Against Government Waste, a public interest group in Washington. “What kind of example would this set if WorldCom is never fined for its actions'”

A spokesman for the SEC declined to comment on Tuesday but the commission said in a statement that its “investigation into matters related to WorldCom’s financial fraud is continuing”.

The SEC sued WorldCom for fraud in June, one day after the company first disclosed its financial mis-statements. The company said that it had improperly accounted for billions of dollars in costs, a move that artificially inflated the company’s reported cash flow.

Within two months, WorldCom increased its estimate of the financial mis-statements to about $ 7.2 billion.

Three weeks ago, the company said that it inflated its earnings by an additional $ 2 billion—raising the total amount of the accounting manipulation to more than $ 9 billion.

As WorldCom made that new disclosure this month, the SEC filed additional charges against it. The agency accused WorldCom of engaging in fraud in the offering of securities to the public, and of maintaining false books and records in violation of federal securities laws. Both of those charges related directly to the company’s having misled investors by reporting false profits.

While Tuesday’s partial settlement largely clears one legal hurdle for WorldCom, some of the company’s executives remain in legal jeopardy. Although WorldCom itself appears unlikely to be indicted by federal prosecutors, the US attorney’s office in Manhattan has been investigating the role of individual WorldCom employees in the company’s financial manoeuvres.

Scott D. Sullivan, formerly WorldCom’s chief financial officer and one of the most respected financial executives in the telecommunications industry, was arrested on August 1 and has been indicted on criminal fraud charges. He has pleaded innocent.

Other WorldCom executives, however, have pleaded guilty to charges relating to WorldCom’s collapse and have agreed to testify against Sullivan. Those executives include David F. Myers, the former controller, and Buford Yates Jr., the former accounting director.

Other former WorldCom financial executives, including Betty L. Vinson and Troy M. Normand, are also co-operating with prosecutors. Bernard J. Ebbers, WorldCom’s former chief executive, has not been indicted.

WorldCom’s partial settlement Tuesday follows the resolution of a separate issue: selection of a new chairman and chief executive for the company. WorldCom announced this month that Michael D. Capellas, the former president of Hewlett-Packard and chief executive of Compaq Computer, had agreed to take the top jobs in early December.

WorldCom had been searching for a new chief executive since the summer, when the board asked Sidgmore, who has had that job since April, to step aside. Sidgmore is returning to the role of vice-chairman that he played before Ebbers resigned in April.

Even with the SEC fraud suit largely behind WorldCom, Capellas still faces major challenges. First among them may be to help the company continue to draft a plan for emerging from bankruptcy protection next year.

The company’s creditors are set to become its major stockholders if WorldCom is able to emerge from bankruptcy. But various factions of WorldCom’s bondholders are still trying to figure out how they should divide the stock.

The bondholders include holders of $ 25.5 billion in WorldCom bonds; holders of about $ 3.3 billion in bonds from MCI Communications, which WorldCom acquired in 1998; and holders of about $ 1.2 billion in bonds issued by Intermedia, a smaller communications carrier that WorldCom acquired in 2001.

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