MCI, the former WorldCom, agreed today to settle accusations of fraud by the Securities and Exchange Commission by paying a $500 million penalty that will ultimately be given to investors. It gets them out of jail . . ah, bankrupcy . . oh, both.

The penalty was the largest ever sought by the commission, and the agreement resolves the biggest fraud case ever filed by the agency. If it is approved by a federal judge in Manhattan, it will also remove one of the last significant obstacles to MCI’s emerging from the largest Chapter 11 bankruptcy ever filed.

The agreement would represent an important departure from previous bankruptcy law. Structured under a new provision of federal law that allows the government to divert penalties destined for the Treasury to investors instead, it would permit shareholders to jump ahead of creditors and receive significant compensation. The claims of shareholders in bankruptcy are typically wiped out in favor of those filed by creditors.

Judge Jed S. Rakoff of Federal District Court in Manhattan, who is overseeing the fraud case, said today that because of the “size, complexity and public importance” of the case, he needed time to study the agreement and he set a hearing for June 11.
They said that the agreement was an important development in the government’s investigation of white-collar corruption, which has expanded significantly over the last year after the wave of earnings restatements and corporate scandals.

“This is a historic proposed resolution, and we look forward to addressing the issues raised by the court at an appropriate time,” said Stephen M. Cutler, the head of the S.E.C. enforcement division. “In the lexicon of what we’re doing, this is a very, very large penalty.”

But some of MCI’s industry rivals said that the settlement was too small and ineffective. “This is a pittance compared to the significant financial harm they’ve caused investors, pension funds, the marketplace and even their own customers,” SBC Communications said in a statement this afternoon. “We’re disappointed a company that can instigate this much trouble gets away with a slap on the wrist as a cost of doing illegal business.”

And lawyers representing investors led by the New York State employees’ pension fund who have filed a class-action lawsuit said that the $500 million would not satisfy claims of shareholders who say they have lost “tens of billions of dollars” from MCI’s misleading accounting.

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