U.S. Securities and Exchange Commission
Litigation Release No. 18277 / August 7, 2003
Accounting and Auditing Enforcement Release No. 1834 / August 7, 2003
Securities and Exchange Commission v. WorldCom, Inc., Civil Action No. 02-CV-4963 (SDNY) (JSR)
The Honorable Arthur J. Gonzalez Approves Settlement of the SEC's Claim for a Civil Penalty Against WorldCom
The Securities and Exchange Commission announced that on August 6, 2003, the Honorable Arthur J. Gonzalez, United States Bankruptcy Judge, issued an Order approving the SEC's settlement with WorldCom, Inc. Judge Gonzalez is presiding over WorldCom's bankruptcy reorganization proceeding, which is pending in the Southern District of New York. (In re WorldCom, Inc., et al., Ch. 11 Case No. 02-13533 (Bankr. S.D.N.Y.)).
In a statement accompanying the Order approving the settlement, Judge Gonzalez found the WorldCom settlement "fair and reasonable," and overruled the objections to the settlement made by several of WorldCom's creditors.
The settlement was reached in the SEC's District Court litigation against WorldCom for violations of the federal securities laws, and had been previously approved by that court on July 7, 2003. The settlement provides that the SEC's civil penalty judgment of $2,250,000,000 against WorldCom shall be satisfied, in the event of the Bankruptcy Court's confirmation of a plan of reorganization, by WorldCom'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, on the effective date of the plan of reorganization. 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. Because WorldCom is in bankruptcy reorganization, the settlement was required to be reviewed and approved by both the District Court and the Bankruptcy Court. (Litigation Release No. 18219).
In the District Court litigation, the Commission 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, 2002, 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 the company. In addition, the judgment ordered WorldCom to undertake extensive reviews of its corporate governance and internal controls, as well as required the company 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. (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 September 26, 2002 (Litigation Release No. 17753); former WorldCom Director of General Accounting Buford "Buddy" Yates, Jr., on October 7, 2002 (Litigation Release No. 17771); and Betty L. Vinson and Troy M. Normand, former accountants in WorldCom's General Accounting Department, on October 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.