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WorldCom Agrees to $500 Million Settlement in Fraud Case

The settlement would be the largest ever imposed by the Securities and Exchange Commission on a company that is not a brokerage firm, according to news reports.

“The settlement actually calls for WorldCom to be fined $1.51 billion, an amount that would be reduced to $500 million as part of the company’s Chapter 11 bankruptcy case,” the Associated Press reported.

The agreement was criticized as a “slap on the wrist” by a group of former employees who are urging a boycott of the troubled company, the Associated Press reported. The group, BoycottMCI.com called the $500 million “an insignificant amount by any standard, and said it was equal to about “about one week” of the company’s normal revenue.

In July of 2002, the company filed the largest bankruptcy claim in history after it allegedly used fraudulent bookkeeping and accounting practices to hide expenses and inflate its value by around $11 billion. The SEC sued WorldCom last June, alleging fraud and deception.

The U.S. Justice Department is conducting a separate criminal investigation. Several former WorldCom executives have pleaded guilty to criminal charges.

The settlement must still be approved by U.S. District Judge Jed S. Rakoff, who said he would need time to consider the ramifications of the deal.

The settlement “would depart significantly from past cases of this type by setting up a fund for shareholders who were defrauded by the company. Another fund will be set up for creditors of the company, which has been operating under Chapter 11 bankruptcy protection since last summer,” The New York Times reported.

“Normally, most of the money recovered in such cases goes either to the government in the form of a penalty or to the debt holders, who have priority over shareholders in Chapter 11 proceedings,” wrote Times reporter Stephen Labaton.

WorldCom reportedly hopes to emerge from bankruptcy in the fall and change its name to MCI in order to distance itself from the accounting scandal. WorldCom originally bought MCI in 1997.

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