Want CNET to notify you of price drops and the latest stories?

WorldCom files $500 million settlement

The company formerly known as WorldCom takes another step toward corporate normalcy by filing a $500 million settlement proposal hammered out with the SEC.

Paul Festa Staff Writer, CNET News.com
Paul Festa
covers browser development and Web standards.
Paul Festa
3 min read
The company formerly known as WorldCom took another step toward corporate normalcy with the filing of a $500 million settlement proposal hammered out with the federal government.

WorldCom, which recently changed its name to MCI, flew high as a major Internet backbone provider until last year when an accounting scandal of titanic proportions collapsed its stock price, put its executives in severe legal peril, forced the company into Chapter 11 bankruptcy protection, and led to a probe by the Securities and Exchange Commission.

Under the new stewardship of Michael Capellas, who assumed the CEO title at MCI in November, the company negotiated with the SEC the $500 million settlement, filed Monday with the U.S. District Court for the Southern District of New York.

The settlement, subject to approval of both that court and the bankruptcy court overseeing MCI's Chapter 11 proceedings, slaps the company with a $1.5 billion civil penalty. But because of its bankrupt status, the disgraced company will only have to pony up one-third of it.

"As a result of the company's pending bankruptcy case, the proposed settlement provides for satisfaction of the commission's judgment by WorldCom's payment, after review and approval of the terms of the settlement by the bankruptcy court, of $500,000,000," the SEC wrote in announcing the proposal.

Proceeds will go to "victims of the company's fraud," the commission said, subject to the court's approval.

The company said it will pay the civil penalty when it emerges from Chapter 11 protection, probably this fall. It added that the proposed settlement demonstrated progress toward its rehabilitation.

"This settlement recognizes our cooperation with the SEC's investigation, the company's acceptance of responsibility for its past accounting practices and the significant strides we have made in rebuilding MCI as a model of good corporate governance," Michael Salsbury, executive vice president and general counsel for the company, said in a statement. "This is an important milestone in our progress to emerge from Chapter 11 on schedule this fall."

The district court solicited written comments from anyone "with interest in the case" on or before June 6 and will issue a ruling on the proposal on or after June 11, when it meets with representatives from both the company and the commission.

MCI has acknowledged overstating its income by about $9 billion between 1999 and 2002. The SEC launched its case against the company on June 26 of last year.

On Monday, the company and the commission sounded starkly different notes in looking into the future. MCI stressed that the settlement "will resolve all claims by the SEC against the company for its past accounting practices." The SEC, by contrast, concluded its statement noting that "the commission's investigation into the fraud at WorldCom is continuing."

In related news, MCI confirmed Tuesday that it has won a U.S. government contract to build a wireless telephone network in Iraq. A company representative declined to give details on the type of wireless technology it will use or the size of the contract but said it is on track to switch on the network sometime in June.

A Defense Department official, however, said that the network will be built on GSM (Global System for Mobile Communications) technology--the standard in most of the world except the United States where CDMA (code division multiple access) dominates the airwaves.

"Not only is GSM more or less the standard over there, but we are trying to patch together a system that more or less already exists," said Lt. Col. Ken McClellan, who works in the Office of the Secretary of Defense. "We are trying to get the base network."

McClellan estimated that the contract is worth about $30 million and depends on the options exercised, such as the number of towers built and phones distributed.

"As currently envisioned, it is probably a minimum of 12 towers to get Baghdad going and up to 10,000 phones," said McClellan. "The phones are for U.S. government people who need to communicate with each other and for Iraqi officials who need to communicate with each other and with American officials."

The MCI representative said the company is also building a wireless telephone network in Afghanistan though that deal is not part of a U.S. government contract.

CNET News.com's Sandeep Junnarkar contributed to this report.