Banks seek freeze on WorldCom funds

Twenty-five plaintiff banks hope to secure some of the $2.5 billion they lent to WorldCom so the company won't be able to spend the money. But they need a judge's OK first.

Banks suing WorldCom over $2.5 billion in loans told a federal judge on Wednesday they hoped to reach a deal later in the day that would set aside some of the money to prevent the telecom company from spending it.

U.S. District Judge Jed Rakoff instructed the parties to return in the afternoon to report if an agreement had been reached. However, the judge told them that he was not giving any assurances he would approve any deal. Rakoff said he was concerned that an agreement might give the 25 plaintiff banks a superior position to other creditors if Clinton, Miss.-based WorldCom files for bankruptcy.

Voicing a similar concern, lawyers representing WorldCom bondholders told the judge they would file a petition to intervene in the litigation. A bankruptcy filing by WorldCom, which has $104 billion in assets, would eclipse the Chapter 11 filing by collapsed energy trader Enron as the nation's largest insolvency.

Although Wednesday's hearing had been set to discuss scheduling matters, Louis Kimmelman, a lawyer representing the banks, told the judge the parties were close to reaching a partial resolution.

"The process is very well advanced," he explained to Rakoff, adding that it was taking time to get all 25 banks to approve the deal. He said if an agreement cannot be reached the banks plan to seek a restraining order to preserve the funds.

Addressing Rakoff's concerns for other creditors if WorldCom files for bankruptcy, Joseph Allerhand, a lawyer representing the company, said a deal would not involve the entire loan.

"The cash the company received is not sitting on a table at WorldCom untouched," he said.

The banks have alleged in their suit that the telecommunications company fraudulently obtained the loan by misrepresenting its financial health at the time it was secured. Consequently, the banks want to restrict WorldCom's use of the funds. WorldCom, the nation's second-largest long-distance provider, disclosed it misreported $3.85 billion in expenses just six weeks after obtaining the loan.

The suit was originally filed in New York state court last week but was moved to federal court on Tuesday. WorldCom had asked for the change, saying that federal court was the proper jurisdiction because the parties are located in different states.

Judge Rakoff is also presiding over a civil suit by the Securities and Exchange Commission (SEC) alleging WorldCom committed accounting fraud. Earlier this month he appointed a monitor to make sure WorldCom did not destroy documents or make unwarranted payments to its executives or employees.

The SEC has alleged that WorldCom hid expenses to artificially inflate earnings to meet Wall Street expectations.

WorldCom is also being investigated by the Justice Department for possible criminal wrongdoings. Federal prosecutors in Manhattan are coordinating the probe .

Story Copyright  © 2002 Reuters Limited.  All rights reserved.

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