WorldCom Inc. cleared a major legal hurdle Wednesday when a bankruptcy judge approved a $750 million settlement of civil fraud charges made by the Securities and Exchange Commission on investors’ behalf.
U.S. Bankruptcy Judge Arthur Gonzalez ruled that the landmark settlement was “fair and reasonable and in the best interest of (WorldCom.)” In approving the deal, Gonzalez did not refer to new allegations of fraud raised recently by some of WorldCom’s competitors.
Under terms of the deal, WorldCom will pay $500 million in cash to eligible stock and bond holders who were victimized by the company’s massive accounting fraud. In addition, fraud victims will receive $250 million worth of stock in the reorganized company, should it emerge from bankruptcy. Ordinarily, investors are last in line to be paid in a bankruptcy case and receive little or nothing.
The settlement has already received the approval of U.S. District Court Judge Jed Rakoff, who presided over the SEC’s civil case against WorldCom. Under pressure from Rakoff, WorldCom agreed to improve on the original proposal of a $500 million cash payment with the additional stock payment.
The payments must be made as a condition of the company emerging from bankruptcy. Gonzalez is now set to begin a hearing on the company’s reorganization plan on Sept. 8, putting it on track to exit bankruptcy this fall.
“On the plan’s effective day, we will get the money and the stock and hopefully distribute it shortly thereafter,” said Peter Bresnan, the SEC’s deputy chief litigation counsel. The settlement money will actually go to a court-appointed distribution agent, who will make payments to eligible victims.
Under the guidelines of the deal, shareholders and creditors who acquired WorldCom stock during the three-year period when the fraud took place and held it through June 25, 2002 — the day the company revealed its accounting problems — will be eligible for payment from the settlement.
The ability to pay victims from the settlement penalty was made possible by last year’s Sarbanes-Oxley Act; previously, those payments went to the U.S. Treasury.
The penalty is the largest ever paid by a non-Wall Street firm but is a fraction of the billions in paper wealth lost by shareholders.
WorldCom General Counsel Stasia Kelly said the settlement acknowledges efforts by the company to correct problems that led to its massive fraud.
“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,” Kelly said in a statement.