The SEC charged that WorldCom, now doing business under the less-tarnished brand name MCI, 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.
In tackling the charge the SEC for the first time made use of new legislation that allows the government to use the proceeds of company fines to compensate affected shareholders. Until now the Government has been the beneficiary of such fines, and shareholders have been the last in line for funds from a bankrupt company.
Even so, investors are unhappy with the terms of the deal approved by the Bankruptcy Court late on Wednesday.
The settlement calls for a fine on the company to the tune of $2.25 billion - to be satisfied by a $500 million cash payment and $250 million in common stock to shareholders and bondholders upon emergence from bankruptcy. Coupled with the 7th July approval of the settlement by the US District Court, this ruling resolves all claims by the SEC against the company for its past accounting practices.
According to Stasia Kelly, MCI general counsel:
"Today's ruling represents a key milestone as MCI moves toward emergence from Chapter 11 [bankruptcy] protection. 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. We look forward now to completing our confirmation hearing and emerging from Chapter 11 protection."
But investors are not so positive. They regard the fine as insignificant when compared to the mountainous $11 billion fraud committed by WorldCom executives.
When details of the settlement were announced, Tom Schatz, President of government watchdog Citizens Against Government Waste said:
"It is disappointing that the company that commits the greatest fraud in American history, $11 billion, leading to a loss of $180 billion to the retirement accounts and savings of thousands of people receives only a slap on the wrist."
Investors and campaigners hope that new allegations against the telco will scupper its reorganisation plans, due to be heard on 8th September.
The new allegations relate to claims by AT&T Corp that WorldCom improperly rerouted telephone calls and hid the origin of the calls, to avoid paying fees to rival carriers. In a filing to the US Bankruptcy Court two weeks ago, AT&T put forward evidence to support its claims against the bankrupt WorldCom, and has asked for permission to seek damages.
WorldCom has denied the allegations, saying that it was carrying out legitimate 'least cost routing' - where the company uses the most efficient network available to route calls.
The US Federal Communications Commission is carrying out its own investigation into the matter, but the allegations have already had consequences for the bankrupt company. Two weeks ago the General Services Administration (GSA), which organises government contracts, proposed a debarment of the telco from competing for new government contracts.
The GSA has taken this step on the grounds that the company "lacks the necessary internal controls and business ethics".
MCI has 30 days in which to appeal.