Litigation Release No. 17866 / November 26, 2002
Accounting and Auditing Enforcement Release No. 1678 / November 26, 2002
In SEC v. WorldCom, Court Imposes Full Injunctive Relief, Orders Extensive Reviews of Corporate Governance Systems and Internal Accounting Controls, and Orders Training and Education Program to Minimize Future Violations
Appropriateness of Civil Penalties To Be Decided by the Court At a Later Date
Securities and Exchange Commission v. WorldCom, Inc., Civil Action No. 02 CV 4963 (JSR)
The Securities and Exchange Commission announced that a judgment of permanent injunction was entered today in its pending civil enforcement action against WorldCom, Inc. This judgment settles part, but not all, of the Commission's action against WorldCom.
The judgment, signed by U.S. District Judge Jed S. Rakoff of the Southern District of New York: (1) imposes the full injunctive relief sought by the Commission, (2) orders an extensive review of the company's corporate governance systems, policies, plans, and practices, (3) orders an extensive review of the company's internal accounting control structure and policies, (4) orders that WorldCom provide reasonable training and education to certain officers and employees to minimize the possibility of future violations of the federal securities laws, and (5) provides that civil money penalties, if any, will be decided by the Court at a later date. The court reaffirmed the role of its appointed Corporate Monitor and retained jurisdiction for all purposes, including the imposition of further equitable relief and sanctions as may be determined following a hearing. WorldCom consented, without admitting or denying the allegations in the Commission's complaint, to the entry of the judgment.
The Commission's investigation into matters related to WorldCom's financial fraud is continuing.
The Commission's amended complaint alleges that WorldCom misled investors from at least as early as 1999 through the first quarter of 2002, and further states that the company has acknowledged that during that period, as a result of undisclosed and improper accounting, WorldCom materially overstated the income it reported on its financial statements by approximately $9 billion.
The judgment entered today enjoins WorldCom from violating the antifraud provisions of the federal securities laws (specifically, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Exchange Act Rule 10b-5), the reporting provisions (Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 thereunder), and the books and records and internal controls provisions (Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act).
The judgment further orders that the report currently being prepared by WorldCom's Special Investigative Committee be transmitted to the Corporate Monitor, Richard Breeden, upon its completion, and that Mr. Breeden shall then review the adequacy and effectiveness of WorldCom's corporate governance systems, policies, plans, and practices. This review will include but is not limited to inquiries into (1) whether WorldCom is complying with recognized standards of "best practices" with respect to corporate governance; (2) whether WorldCom has sufficient policies and safeguards in place (a) to ensure that WorldCom's Board of Directors and all committees of WorldCom's Board of Directors (including without limitation the audit committee and the compensation committee) have appropriate powers, structure, composition, and resources and (b) to prevent self-dealing by management; (3) whether WorldCom has an adequate and appropriate code of ethics and business conduct, and related compliance mechanisms; and (4) whether WorldCom has appropriate safeguards in place to prevent further violations of the federal securities laws. Following his receipt of the report of the Special Investigative Committee, the Corporate Monitor shall submit to WorldCom's Board of Directors, the Court and the Commission a report setting forth his recommendations with respect to the corporate governance issues he has reviewed. Within 60 days of the receipt of the report of the Corporate Monitor with respect to corporate governance, WorldCom's Board of Directors shall report to the Court and the Commission with respect to the decisions and actions taken as a result of each of the recommendations made by the Corporate Monitor.
The judgment further orders that WorldCom shall retain a qualified consultant, acceptable to the Commission, to perform a review of the effectiveness of WorldCom's material internal accounting control structure and policies, including those related to line costs, reserves, and capital expenditures, as well as the effectiveness and propriety of WorldCom's processes, practices and policies for ensuring that the Company's financial data is accurately reported in its public financial statements. The consultant must, within 30 days, develop a proposal for the review that is acceptable to the Commission. Any disagreements about the proposal will be resolved by the Corporate Monitor. Within 120 days after approval of the proposal, the consultant shall complete its review and submit to WorldCom's Board of Directors, the Court and the Commission, a report fully documenting the findings of its review and making specific recommendations. Within 60 days of the submission of the report, WorldCom's Board of Directors shall report to the Court and Commission with respect to the decisions and actions taken as a result of each of the recommendations made by the consultant.
The judgment further orders that WorldCom shall provide reasonable training and education to certain of its officers and employees to minimize the possibility of future violations of the federal securities laws. Completion of such training shall be mandatory for WorldCom officers and employees involved in its corporate level accounting and financial reporting functions; for those officers and employees involved in financial reporting at WorldCom's major divisions and subsidiaries (including, specifically, those officers and employees responsible for closing the books in their area of responsibility at the end of a quarterly or annual reporting period); and for senior operational officers at WorldCom's corporate, divisional and subsidiary levels. Such training and education shall include, at a minimum, components covering the following subjects: the obligations imposed by the federal securities laws; proper internal accounting controls and procedures; recognizing indications of non-GAAP (generally accepted accounting principles) accounting practices or fraud most relevant to WorldCom's business endeavors; and the obligations incumbent upon, and the responses expected of, WorldCom officers and employees upon learning of illegal or potentially illegal acts concerning the company's accounting and financial reporting. WorldCom shall consult with the Commission in designing its training and education program, and shall submit to the Commission a detailed proposal within 60 days after entry of this judgment, which describes the content and implementation of the training and education program, in a form that is acceptable to the Commission. WorldCom shall commence providing initial training and education sessions within 60 days thereafter, and shall continue to provide such training and education on an annual basis, for a minimum period of three years after entry of this judgment.
The judgment further provides that the amount of the civil penalty, if any, to be paid by WorldCom shall be determined by the Court in light of all the relevant facts and circumstances, following a hearing. At that hearing, the issues will be limited to determining the appropriateness and amount of any such civil penalty, WorldCom will be precluded from arguing that it did not violate the federal securities laws as alleged in the Commission's amended complaint, and the allegations of the complaint will be accepted as true by the Court.
The Commission filed its initial complaint 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 filed an amended complaint against WorldCom on November 5. (Litigation Release No. 17829.) The Commission's second enforcement action in this matter was filed against former WorldCom Controller David F. Myers on September 26. (Litigation Release No. 17753.) The Commission's third enforcement action was filed against former WorldCom Director of General Accounting Buford "Buddy" Yates, Jr., on October 7. (Litigation Release No. 17771.) The Commission's fourth enforcement action was filed against former WorldCom accounting managers Betty L. Vinson and Troy M. Normand on October 10. (Litigation Release No. 17783.) On November 14, Judge Rakoff entered judgments against Myers and Yates that imposed injunctive relief and officer and director bars and provided that further relief will be decided at a later date. (Litigation Release No. 17842.)
The Commission acknowledges the assistance and cooperation of the U.S. Attorney's Offices for the Southern District of New York and the Southern District of Mississippi, and the Federal Bureau of Investigation.