Bankruptcy News

SEC Files Supplement to Proposed Worldcom Penalty Settlement; Proposal Subject to District and Bankruptcy Court Review and Approval

The Securities and Exchange Commission today filed documents modifying the proposed settlement of its claim for a civil penalty in its civil action against WorldCom Inc. in federal district court in the Southern District of New York. The filings supplement the relief provisions in the proposed settlement previously filed in that action on May 19, 2003, which required WorldCom to pay a civil penalty judgment in the amount of $1,510,000,000. That proposed settlement further provided that, as a result of the company's pending bankruptcy case, the Commission's judgment would be satisfied by WorldCom's payment, after review and approval of the terms of the settlement by the Bankruptcy Court, of $500,000,000.

Following the parties' agreement on the terms of the proposed settlement, and after an initial hearing before the District Court and in light of issues raised by the District Court Judge, WorldCom and the SEC mutually agreed to supplement to the terms of the proposed settlement. The modifications to the proposed settlement filed today  to which the Official Committee of Unsecured Creditors of WorldCom have consented  provide 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 $500,000,000 in cash and by its transfer of common stock in the reorganized company having a value of $250,000,000 to a distribution agent to be appointed by the District Court. The supplemental relief, if approved, would allow victims of the fraud to share in the potential upside of owning WorldCom common stock when it emerges from bankruptcy. All other material terms of the proposed settlement remain the same. The proposed settlement is subject to review and approval of the District Court hearing the Commission's action against WorldCom and the Bankruptcy Court handling WorldCom's bankruptcy case (which is also in the Southern District of New York).

Under the terms of the proposed 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 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 November 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 November 26, 2002 judgment explicitly left open the determination of monetary penalties to be imposed on WorldCom.

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 September 26, 2002 former WorldCom Director of General Accounting Buford "Buddy" Yates, Jr., on October 7, 2002 and Betty L. Vinson and Troy M. Normand, former accountants in the WorldCom's General Accounting Department, on October 10, 2002 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?
	Chapter 13 bankruptcy law is frequently referred to as a “wage earner” chapter Although it is available to individuals with regular income from any source, not just wages. Once the court confirms the plan, it is the responsibility of the debtor to make the plan succeed. The debtor must make regular payments to the trustee, which will require adjustment to living on a fixed budget for a prolonged period.