Critics slam WorldCom bankruptcy plan

Critics of telecommunications giant WorldCom (now renamed MCI) blasted its bankruptcy reorganization plan during a U.S. Senate committee hearing Tuesday, saying the plan in place neglects to punish the company for its past accounting fraud and puts competitors at a disadvantage in the marketplace.

While critics, including Verizon, called for the U.S. government to strip WorldCom of its “ill-gotten gains,” defenders of the troubled carrier say the company has been punished enough. They told the Senate Judiciary Committee that any attempts to further punish the company for accounting fraud disclosed in mid-2002 would only hurt MCI’s creditors and remaining employees, not the handful of corporate executives who allegedly overstated the old WorldCom’s financial statements by $11 billion.

“Nothing that MCI’s opponents suggest would hurt the already departed and already disgraced senior management of WorldCom, who were ousted and replaced after the fraud was discovered,” said Nicholas Katzenbach, a recent addition to the MCI board of directors. “The draconian punishment advocated by MCI’s opponents would, at best, be a futile gesture — and, at worst, would inflict further pain on the innocent.”

Katzenbach and Dick Thornburgh, the court-appointed WorldCom bankruptcy examiner, largely blamed former CEO Bernard Ebbers and former CFO Scott Sullivan for the accounting problems. Thornburgh is scheduled to issue a final report on WorldCom’s troubles by September, he said. Ebbers resigned from WorldCom in April last year, two months before the company said it would restate its financial results for 2001 and the first half of 2002.

Katzenbach and Marcia Goldstein, the bankruptcy lawyer for MCI, accused Verizon and other competitors of asking that MCI be broken up and sold. “Let’s be clear — Verizon’s proposed punishment, which … would be a breakup or forced sale of MCI, is only for its own benefit, so that it can bid for MCI’s business at a distressed value and eliminate it as a competitor,” Goldstein said.

But William Barr, executive vice president and general counsel at Verizon, denied that Verizon wants MCI sold off. “We don’t care what the result ultimately is in bankruptcy, as long as the government recognizes as well its enforcement responsibility, and MCI is not able to use its ill-gotten gains for a decisive advantage in the marketplace,” he said. “… We have no problem with the creditors getting paid money for their losses, but what is wrong here is for the creditors to waltz in as if they’re the only ones hurt by this.”

On Tuesday morning, The Wall Street Journal reported that Verizon has agreed to drop its court battle against MCI’s bankruptcy plan in exchange for a $60 million settlement from MCI. Barr vowed to continue to fight in the political arena, the Journal reported.

Barr argued at the hearing that WorldCom, by painting an overly rosy financial picture, was able to win business by low-balling bids on government and other contracts. Competitors, bound by actual costs of doing business, had to lay off workers in order to compete, he said.

Barr called MCI’s settlement with the U.S. Securities and Exchange Commission (SEC), a civil penalty of $500 million in cash and $250 million in stock, the “most shameful episode I’ve witnessed in 25 years in Washington, D.C.”

“The SEC’s settlement with MCI does not live up to the most basic obligation of our justice system — to ensure that crime does not pay,” Barr added.

Katzenbach questioned what “ill-gotten gains” were left at MCI. The money the company borrowed from creditors would be the only gains from the fraud, he said, and the bankruptcy plan takes steps to pay back those creditors.

“I don’t see any pot of gold anywhere that isn’t before the bankruptcy court,” he said. “I cannot see how punishing innocent people who were not involved in the fraud in any way serves the interest of justice.”

The Judiciary Committee’s hearing, on whether U.S. corporate bankruptcy laws need to be reformed after the WorldCom case, turned into a debate over the MCI/WorldCom bankruptcy and punishments.

Morton Bahr, president of the Communications Workers of America, said the bankruptcy plan will allow MCI to shed more than $27 billion in debt and emerge with about $5.5 billion in debt, less than most of its competitors. “WorldCom’s bankruptcy was not the result of honest business mistakes or unforeseen economic conditions,” Bahr said. “Rather, it was the product of persistent, pervasive, and massive corporate fraud.”

Bahr called the SEC settlement with MCI “paltry,” and he blamed MCI for layoffs at its competitors. “Absent meaningful penalties, WorldCom is positioned to emerge from bankruptcy with the best balance sheet in the business,” he added. “Employees at companies that played by the rules will once again be victims of aggressive cost-cutting, setting off another destabilizing cycle of job loss throughout the industry.”

Sen. Richard Durbin (D-Ill.) questioned why the U.S. government continues to award contracts to MCI after the fraud scandal. “Eleven billion dollars in accounting fraud … and what was the net result for MCI/WorldCom?” he asked. “It appears that they’ve done quite well. It appears that their approach is, ‘everyone has a bad day.'”

Katzenbach stressed that MCI has cooperated with government authorities investigating the fraud and has remained a consistent supplier of telecommunications services to the U.S. government. No one left at MCI profited from the fraud, he said, and pulling government contracts would hurt those remaining at the company. “You’re saying that there’s some big bonanza that someone got here?” he asked. “Who? I don’t know anybody who got it.”

Durbin asked what penalties Katzenbach would recommend for MCI. “Do you think any price should be paid by MCI/WorldCom for the largest corporate fraud in the world, or it’s just business as usual?” he asked. “Isn’t that sending a message that corporate misconduct of historic proportion is not even a factor in terms of how you’re treated by our government?”

Katzenbach repeated his argument that MCI has cleaned house of anyone involved in the fraud. “The way you put it is somehow you can punish MCI/WorldCom, without punishing all these other people,” he said. “That’s what you’re saying: ‘I can do that in some way which doesn’t punish the employees, doesn’t punish the stockholders, doesn’t punish the creditors, doesn’t punish the new management, doesn’t punish the customers.'”