[Senate Hearing 108-343]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-343
 
    THE WORLDCOM CASE: LOOKING AT BANKRUPTCY AND COMPETITION ISSUES

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 22, 2003

                               __________

                          Serial No. J-108-26

                               __________

         Printed for the use of the Committee on the Judiciary


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                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman
CHARLES E. GRASSLEY, Iowa            PATRICK J. LEAHY, Vermont
ARLEN SPECTER, Pennsylvania          EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona                     JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio                    HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama               DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
LARRY E. CRAIG, Idaho                CHARLES E. SCHUMER, New York
SAXBY CHAMBLISS, Georgia             RICHARD J. DURBIN, Illinois
JOHN CORNYN, Texas                   JOHN EDWARDS, North Carolina
             Bruce Artim, Chief Counsel and Staff Director
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director


                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Durbin, Hon. Richard J., a U.S. Senator from the State of 
  Illinois.......................................................    25
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     1
    prepared statement...........................................    99
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, 
  prepared statement.............................................   119

                               WITNESSES

Bahr, Morton, President, Communications Workers of America, 
  Washington, D.C................................................    16
Baird, Douglas G., Vice Chair, National Bankruptcy Conference, 
  Chicago, Illinois..............................................    17
Barr, William P., General Counsel, Verizon Communications, 
  Washington, D.C................................................    10
Goldstein, Marcia L., Weil, Gotshal and Manges, LLP, New York, 
  New York.......................................................    13
Katzenbach, Nicholas DeB., Board Member, MCI Telecommunications, 
  Ashburn, Virginia..............................................    12
Neporent, Mark A., Chief Operating Officer, Cerberus Capital 
  Management, LP, New York, New York.............................    20
Thornburgh, Richard, Bankruptcy Examiner, Kirkpatrick and 
  Lockhart, LLP, Washington, D.C.................................     2

                         QUESTIONS AND ANSWERS

Responses of William Barr to questions submitted by Senator Hatch    41
Responses of Marcia L. Goldstein to questions submitted by 
  Senators Feingold and Kohl.....................................    45
Responses of Richard Thornburgh to questions submitted by Senator 
  Hatch..........................................................    53

                       SUBMISSIONS FOR THE RECORD

Bahr, Morton, President, Communications Workers of America, 
  Washington, D.C................................................    55
Baird, Douglas G., Vice Chair, National Bankruptcy Conference, 
  Chicago, Illinois, prepared statement..........................    60
Barr, William P., General Counsel, Verizon Communications, 
  Washington, D.C., prepared statement...........................    67
Durbin, Hon. Richard J., a U.S. Senator from the State of 
  Illinois, letter and attachments...............................    78
Goldstein, Marcia L., Weil, Gotshal and Manges, LLP, New York, 
  New York, prepared statement...................................    84
Katzenbach, Nicholas DeB., Board Member, MCI Telecommunications, 
  Ashburn, Virginia:
    prepared statement...........................................   101
    letter and attachments to Senator Durbin.....................   114
Neporent, Mark A., Chief Operating Officer, Cerberus Capital 
  Management, LP, New York, New York, prepared statement.........   121
Thornburgh, Richard, Bankruptcy Examiner, Kirkpatrick and 
  Lockhart, LLP, Washington, D.C., prepared statement and 
  attachments....................................................   131


    THE WORLDCOM CASE: LOOKING AT BANKRUPTCY AND COMPETITION ISSUES

                              ----------                              


                         TUESDAY, JULY 22, 2003

                              United States Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:23 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Orrin G. 
Hatch, Chairman of the Committee, presiding.
    Present: Senators Hatch, Kennedy, Schumer, and Durbin.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
                       THE STATE OF UTAH

    Chairman Hatch. Good afternoon. I apologize to you for 
being late, but we are way behind, and I got waylaid in the 
subway coming back, so I could not very well get here on time.
    I am happy to welcome you all here to today's hearing, 
entitled ``The WorldCom Case: Looking at Bankruptcy and 
Competition Issues.''
    I first would like to thank all of our witnesses today for 
their time and cooperation, and I hope that this hearing will 
help us better understand the WorldCom situation and its 
potential public policy implications.
    Along with many Americans I am deeply concerned about the 
devastation caused by WorldCom's massive corporate fraud which 
has caused immeasurable harm to so many. While we cannot go 
back in time and undo what has already occurred, we are 
presented today with an opportunity. We have an opportunity to 
examine the WorldCom case and determine whether there are 
lessons to be learned with respect to our public policy going 
forward.
    The focus of today's hearing will be two-pronged. First we 
will examine the WorldCom bankruptcy case and consider in light 
of the facts whether any changes in our current bankruptcy laws 
may be in order. Second, we will assess the implications of a 
reorganized MCI emerging from bankruptcy on competition in the 
telecommunications market. Here again we will examine and 
evaluate what impact if any this anticipated competitive 
landscape should have on public policy.
    Some have raised fairness concerns that WorldCom will be 
able to emerge from bankruptcy with much of the fruits of its 
widespread fraudulent conduct intact. They argue that it will 
emerge from Chapter 11 with an enhanced market position 
relative to its competitors, giving it not only a fresh start, 
but a head start. They believe that, in view of the WorldCom 
case, our bankruptcy system is set up to make crime pay.
    Others contend that the MCI which will emerge from 
bankruptcy is a new entity with new leadership. They point to 
the extraordinary measures it has taken to prevent the 
recurrence of past misdeeds. They further argue that MCI will 
not have a meaningful competitive advantage from its Chapter 11 
reorganization. And they argue that our bankruptcy laws 
appropriately are not designed to punish, but rather to permit 
a company to reorganize and emerge from bankruptcy as a viable 
entity.
    As we move forward, I believe we need to have a full 
understanding of the WorldCom case to help us determine whether 
our bankruptcy laws are functioning fairly and effectively. We 
also need to understand the WorldCom case in order to conclude 
whether our policies are sufficient to enable the telecom 
industry to enjoy robust competition under fair terms that 
benefits consumers. No doubt, this is a complex case containing 
important issues deserving of examination.
    We are fortunate to have highly-respected individuals here 
today to testify on these important matters. We will first hear 
from former Attorney General Richard Thornburgh, who is the 
Bankruptcy Examiner in the case. We are fortunate to have you 
with us, General Thornburgh, and of course I personally look 
forward to your testimony. I think others will also. I think 
there would be more here--and they will come later--but Paul 
Bremer is testifying in closed session, and I wish I could have 
made that myself, but I am very happy to be able to listen to 
you.
    On our second panel we are honored to hear former Attorney 
General William Barr, the Executive Vice President and General 
Counsel of Verizon Communications; former Attorney General 
Nicholas Katzenbach, who serves on the Board of Directors of 
MCI Telecommunications; Marcia Goldstein of the law firm of 
Weil, Gotshal and Manges; Douglas Baird, Vice Chair of the 
National Bankruptcy Conference; and Mark Neporent, the Chief 
Operating Officer of Cerberus Capital Management.
    I appreciate all of you appearing here today, and with 
that, we will start with you, General Thornburgh.

     STATEMENT OF RICHARD THORNBURGH, BANKRUPTCY EXAMINER, 
        KIRKPATRICK AND LOCKHART, LLP, WASHINGTON, D.C.

    Mr. Thornburgh. Good afternoon, Mr. Chairman.
    I appreciate the opportunity to appear before you today in 
connection with my responsibilities as the examiner int 
WorldCom bankruptcy proceedings, the largest bankruptcy in 
United States history. To date, my examination, which began in 
August 2002 and continues to date, has resulted in two interim 
reports detailing my observations concerning the conduct of 
WorldCom management and others affecting the operations of the 
company. I anticipate filing a third report this fall. Today I 
will limit myself to summarizing for you the observations 
contained in my first and second interim reports, as well as 
describing the examination process itself.
    On July 21, 2002, WorldCom and substantially all of its 
direct and indirect subsidiaries filed voluntary petitions 
seeking relief under Chapter 11 of the United States Bankruptcy 
Code in the United States Bankruptcy Court for the Southern 
District of New York. These positions came just four weeks 
after the company publicly disclosed on June 25, 2002 that it 
had discovered substantial accounting irregularities that would 
result in adjustments to its financial statements totaling more 
than $3.8 billion. The company restated an additional $3.3 
billion in August 2002.
    The day after WorldCom filed its bankruptcy petitions, 
Judge Arthur J. Gonzalez, the presiding Bankruptcy Court Judge, 
granted the motion of the United States Trustee for the 
appointment of an examiner pursuant to Section 1104(c)(2) of 
the Bankruptcy Code. On August 6, 2002 the Court approved my 
appointment as examiner. The Court's order provides that the 
examiner--and I am quoting the order--``shall investigate any 
allegations of fraud, dishonesty, incompetence, misconduct, 
mismanagement or irregularity in the management of the affairs 
of [WorldCom] by current or former management, including but 
not limited to issues of accounting irregularities.'' The Court 
also directed me to coordinate with the United States 
Department of Justice, the United States Securities and 
Exchange Commission, and other Federal agencies investigating 
matters related to WorldCom so as to avoid any duplication of 
effort. Further, the Court ordered me to file a report 
regarding my examination within 90 days of my appointment.
    Upon my appointment I promptly engaged professionals to 
assist me in discharging the broad mandate prescribed by the 
Court. I engaged my law firm, Kirkpatrick & Lockhart LLP, as my 
legal counsel, and engaged J.H. Cohn LLP as my forensic 
accountants and financial advisors. My professionals and I 
immediately set out toward our goal of assessing thoroughly, 
objectively and responsibly the acts and omissions of current 
and former management, as well as the integrity of WorldCom's 
management, its accounting and financial reporting processes 
and its corporate governance practices and internal controls.
    Our investigation has been and continues to be multi-
faceted. We have reviewed millions of pages of documents 
received from numerous sources and conducted or participated in 
scores of interviews of persons with relevant information. Our 
document collection efforts and interviews continue to date. I 
am pleased to acknowledge the cooperation of WorldCom and its 
counsel regarding these matters. I also acknowledge with 
appreciation the assistance provided by Hon. Richard C. 
Breeden, the Corporate Monitor, appointed by the United States 
District Court for the Southern District of New York in a 
proceeding commenced by the SEC against WorldCom. Further, in 
an effort to avoid unnecessary duplication of effort and 
expense, I note that we have maintained an active dialogue 
regarding matters related to our examination with counsel and 
financial advisors for the Official Committee of Unsecured 
Creditors in the bankruptcy proceedings, as well as the Special 
Investigative Committee of the Company's Board of Directors and 
its counsel and professionals, and KPMG LLP, the company's 
current outside auditors.
    Consistent with the Court's initial directive, my 
professionals and I have also coordinated extensively with the 
Department of Justice, the SEC and other agencies that are 
investigating matters related to WorldCom. We have refrained 
from publishing certain findings or results of our 
investigation in deference to those ongoing prosecutorial and 
regulatory inquiries, because those agencies have represented 
to us that such disclosures may adversely affect the process of 
determining possible criminal or other wrongdoing by persons 
involved in these matters.
    Mr. Chairman, I respectfully request that you and other 
members of the Committee respect my inability to discuss these 
matters at today's hearing because of the related law 
enforcement and regulatory concerns. Similarly, I feel it would 
be inappropriate for me to discuss our ongoing fact-gathering 
efforts because any such comments may have a detrimental impact 
on our investigation. Accordingly, I will confine my remarks 
this afternoon to matters that have been addressed in my first 
and second interim reports of examination which are a part of 
the public record.
    As I stated earlier, the Court initially directed that I 
file a report of examination within 90 days of my appointment. 
Pursuant to that directive, I filed my first interim report in 
a timely manner on November 4, 2002. The initial 90-day period 
obviously did not permit me the time necessary to explore all 
matters related to the conduct of WorldCom management. In 
addition, as I stated a moment ago, we omitted from the first 
interim report certain details, particularly items related to 
the specifics of the company's accounting fraud in deference to 
ongoing prosecutorial and regulatory interests. Therefore, the 
observations set forth in my first interim report were 
preliminary in nature. Nonetheless, as described in that 
report, a picture had already begun to emerge regarding the 
deeply problematic culture and lack of corporate controls at 
WorldCom.
    After I filed my first interim report, my professionals and 
I continued our investigative efforts to advance the 
preliminary observations contained in that first interim 
report. My second interim report filed July 9, 2003, summarized 
my observations based upon this additional investigation. As 
stated in that report, the WorldCom story is not limited to the 
massive accounting fraud that has been publicly reported. We 
uncovered additional deceit, deficiencies and a disregard for 
the most basic principles of corporate governance. My 
observations in that report reflect a broad breakdown of the 
system of internal controls, corporate governance and 
individual responsibility, all of which worked together to 
create a culture which all too few individuals took 
responsibility until it was too late.
    Our investigation reflects that WorldCom was dominated by 
Bernard Ebbers and Scott Sullivan, the former chief executive 
officer and chief financial officer of the company, 
respectively, with virtually no checks or restraints placed on 
their actions by the Board of Directors or other management. 
Significantly, although many present or former officers and 
directors of WorldCom told us that they had misgivings 
regarding decisions or actions by Mr. Ebbers or Mr. Sullivan 
during the relevant period, there is no evidence that these 
officers and directors made any attempt to curb, to stop or to 
challenge the conduct by Mr. Ebbers or Mr. Sullivan that they 
deemed questionable or inappropriate. Instead, as described in 
our reports, it appears that the company's officers and 
directors went along with Mr. Ebbers and Mr. Sullivan, even 
under circumstances that suggested corporate actions were at 
best imprudent and at worst inappropriate and fraudulent.
    There are many specific corporate governance failings 
identified in my first and second interim reports. I will 
highlight only a few examples for you this afternoon. First, we 
observed no meaningful deliberative processes related to the 
company's acquisitions. As stated in my reports, WorldCom's 
dramatic rise in stock value throughout the 15 years preceding 
its bankruptcy fueled numerous acquisitions that caused the 
company to grow tremendously in both size and complexity in a 
relatively short period of time. The company's approach to such 
acquisitions was ad hoc and opportunistic. Acquisitions were 
completed with little meaningful or coherent strategic 
planning. WorldCom management routinely provided the company's 
directors with extremely limited information regarding many of 
these acquisitions. In fact, several multibillion dollar 
acquisitions were approved by the Board of Directors following 
discussions that lasted for 30 minutes or less and without the 
directors receiving a single piece of paper regarding the terms 
or implications of the transactions. Significantly, although 
persons involved with the Board's consideration of some of 
these matters informed us that they were disturbed at the time, 
no director or anyone else voiced any objection to cursory 
considerations by the Board.
    Second, the company's lack of internal controls infected 
its debt offerings and use of credit facilities. Indeed, there 
is no evidence that WorldCom management or the Board of 
Directors reasonably monitored the company's debt level or its 
ability to satisfy its outstanding obligations. Messrs. Ebbers 
and Sullivan had virtually unfettered discretion to commit the 
company to billions of dollars in debt obligations with 
virtually no meaningful oversight. WorldCom issued more than 
$25 billion in debt securities in the 4 years preceding its 
bankruptcy. With respect to such offerings, Messrs. Ebbers and 
Sullivan comprised the entirety of the company's price 
committee. The Board passively ``rubber-stamped'' proposals 
from Messrs. Ebbers or Sullivan regarding additional borrowing, 
most often via unanimous consent resolutions that were adopted 
after little or no discussion.
    It seems clear that WorldCom's ability to borrow monies was 
facilitated by its massive accounting fraud, which allowed the 
company to falsely present itself as credit-worthy and 
``investment grade.'' It also seems clear that the company's 
ability to borrow vast sums allowed it to perpetuate the 
illusion of financial health created by its accounting fraud. 
As late as a few weeks before it disclosed its massive 
accounting irregularities, WorldCom used false financial 
statements to access all of a $2.65 billion line of credit, the 
proceeds of which it used to pay down another credit facility. 
As the company's treasurer candidly told us in an interview, 
WorldCom merely ``robbed Peter to pay Paul.''
    Third, our investigation raises significant concerns 
regarding the circumstances surrounding the company's loans of 
more than $400 million to Mr. Ebbers. As detailed in my 
reports, the Compensation and Stock Option Committee of the 
Board of Directors agreed to provide enormous loans and a 
separate guaranty for Mr. Ebbers without initially informing 
the full Board or taking appropriate steps to protect the 
company. Further, as the loans and guaranty increased, the 
Committee failed to perform appropriate due diligence that 
would have demonstrated that the collateral offered by Mr. 
Ebbers was grossly inadequate to support the company's 
extensions of credit to him, in light of his substantial other 
loans and obligations. Our investigation reflects that the 
Board was similarly at fault for not raising any questions 
about the loans and merely adopting the actions of the 
Compensation Committee.
    I believe the loans to Mr. Ebbers are troubling for another 
additional reason. These extraordinary loans highlighted the 
extent of Mr. Ebbers' business activities that were not related 
to WorldCom. In my view, the Board should have questioned 
whether these non-WorldCom business activities were consistent 
with the need for Mr. Ebbers to devote his time and attention 
to managing the business of such a large and complex company as 
WorldCom. However, it appears that the Board did nothing to 
attempt to persuade Mr. Ebbers to divest himself of his other 
businesses or otherwise limit his non-WorldCom business 
activities. To the contrary, the Compensation Committee and the 
Board provided the massive funding that facilitated Mr. Ebbers' 
personal business activities.
    Finally, the fact that WorldCom's accounting irregularities 
went undetected for so long provides further testament to the 
inadequacy of the company's systems of internal controls. The 
Audit Committee of the Board of Directors and the Internal 
Audit Department appear to have acted in good faith. To their 
considerable credit, they took significant and responsible 
steps once accounting irregularities were discovered in the 
spring of 2002. Nonetheless, it seems abundantly clear that the 
Audit Committee over the years barely scratched the surface of 
any potential accounting or financial reporting issues. 
Moreover, the Internal Audit Department adopted an operational 
audit function: that is, it focused its efforts on efficiency 
and cost savings concerns, rather than acting as WorldCom's 
``internal control police.'' Finally, it appears that the Audit 
Committee, the Internal Audit Department, and Arthur Andersen, 
the company's former outside auditors, allowed their missions 
to be limited and shaped by Mr. Sullivan in ways that served to 
conceal and perpetuate the company's accounting fraud.
    All told, I believe that WorldCom's conferral of 
practically unlimited discretion upon Messrs. Ebbers and 
Sullivan, combined with passive acceptance of management's 
proposals by the Board of Directors, and a culture that 
diminished the importance of internal checks, forward-looking 
planning and meaningful debate or analysis formed the basis for 
the company's descent into bankruptcy. In many significant 
respects, WorldCom appears to have represented the polar 
opposite of model corporate governance practices during the 
relevant period. Its culture was dominated by a strong chief 
executive officer who was given virtually unfettered discretion 
to commit vast amounts of shareholder resources and determine 
corporate direction with only minimal scrutiny or meaningful 
deliberation or analysis by senior management or by the Board 
of Directors. The Board of Directors appears to have embraced 
suggestions by Mr. Ebbers without question or dissent, even 
under circumstances where its members now readily acknowledge 
they had significant misgivings regarding his recommended 
course of action.
    Although the absence of internal controls and the lack of 
transparency between senior management and the Board of 
Directors at WorldCom does not directly translate to the 
massive accounting fraud committed by the company, I believe 
that these corporate governance failings fostered an 
environment and culture that permitted the fraud to grow 
dramatically. A culture and internal processes that discourage 
or implicitly forbid scrutiny and detailed questioning can be a 
breeding ground for fraudulent misdeeds. They also can beget 
ill-considered and wasteful acquisitions, improperly managed 
and unchecked debt and poor credit management, a lack of due 
diligence regarding personal loans made by the company to its 
chief executive officer, and an effective neutering of other 
gatekeepers, such as the lawyers, the Internal Audit Department 
and the company's outside auditors. In tandem with the 
accounting irregularities, these developments fostered the 
illusion that WorldCom was far more healthy and far more 
successful than it actually was during the relevant period. 
Ultimately, they also produced the largest bankruptcy in the 
history of this country.
    With that, Mr. Chairman, I will conclude my introductory 
remarks. I thank you for the opportunity to address the 
Committee this afternoon. With your permission I will offer the 
summary sections of my first and second interim reports, which 
outline more fully my observations based upon our 
investigation, to be entered into the record as a supplement to 
my statement. Thank you.
    Chairman Hatch. Thank you, General Thornburgh. Let me 
commend you for the work you are doing as the examiner in this 
case. As always you have demonstrated a commitment to finding 
out the facts in a careful, deliberative and thorough manner. I 
have to say the reports are valuable to this Committee as we 
examine this difficult issue.
    Now, your reports carefully describe WorldCom's massive 
fraud accounting irregularities and a complete lack of basic 
principles of corporate governance. Some contend that the ``bad 
apples'' responsible for these problems have left or have been 
forced to leave the company. Would you briefly describe your 
findings to date concerning--you have given us the extent of 
the fraud and other problems with WorldCom, but I would like to 
know whether personnel who are responsible for these 
activities, are still with the company, in your opinion.
    Mr. Thornburgh. In the course of my duties as examiner and 
carrying out the Court's instruction to us in carrying that job 
forward, we have identified in our investigation individuals 
who were guilty of fraudulent, dishonest, incompetent 
activities and of misconduct, mismanagement and irregularity in 
the management of the affairs of WorldCom. That was what we 
were charged to do by the Court. Those persons identified in 
the two reports that I have rendered up to now in many cases 
have been the subjects of criminal proceedings or proceedings 
by the Securities and Exchange Commission, and a number of 
these persons have, to my understanding, been discharged or 
terminated by the company.
    Our investigation proceeds, as I indicated. We are 
constrained in identifying any other potential subjects of this 
kind of activity we were directed to investigate by two 
limitations which I am sure you will understand. One is our 
deference to law enforcement authorities who have requested in 
some cases that we not even interview individuals who are 
persons of interest to them in their investigation. Secondly, 
with respect to matters that are under way and will be spelled 
out in our final report, it would be premature to discuss or 
identify any of those persons.
    All that being said, I think that the task of cleaning out 
the company is a business responsibility, one for the current 
management of WorldCom. Our job is to report the facts and to 
identify those practices and persons that come within the scope 
of the order entered by Judge Gonzalez in my appointment.
    Chairman Hatch. I think that you have done some relative 
work in examining WorldCom's accounting and internal controls. 
What is your assessment of MCI's prior and current accounting 
and internal controls?
    Mr. Thornburgh. The examination that we undertook that 
resulted in our first report dwelt on a number of accounting 
issues. At that time we were requested by law enforcement 
authorities to forego any mention in our first interim report 
of any findings or conclusions in that respect. Since that time 
the Securities and Exchange Commission, the United States 
Attorney's Office in the Southern District of New York and the 
Special Committee appointed by the Board of Directors and its 
counsel and accountants have more or less carried the ball on 
the completion of those examinations, and mindful of Judge 
Gonzalez's admonition about duplication of effort, we have been 
content to monitor those ongoing efforts rather than run out to 
completion the initial work that we undertook last fall.
    I think those accounting deficiencies have been pretty well 
chronicled to date with regard to the internal controls. The 
deficiencies that existed during the period in question on the 
part of the external auditors, Arthur Andersen, the Internal 
Audit Department and the Audit Committee of the Board of 
Directors have been set forth in great detail in the two 
reports that we have filed, and I think they provide a road map 
of precisely what went wrong in that regard.
    Chairman Hatch. Let me just say, in your second interim 
report you observed that there is a great deal more to this 
story, and that you believe, ``that the extent of the 
breakdowns that WorldCom will eventually be determined to 
extend even beyond the examiner's findings.''
    Without compromising your ongoing investigation, when do 
you anticipate that you will have a more complete picture of 
the problems at MCI/WorldCom?
    Mr. Thornburgh. We hope and expect to wind up our efforts 
by the end of September of this year. Let me develop a little 
bit more beyond the record and the order entered by Judge 
Gonzalez what our charge was from the Judge. First of all, and 
obviously, was to compile a history, if you will, of precisely 
what occurred within the company that brought it to its 
collapse, and that is really the prime narrative of the reports 
that we will file and will be completed we hope by the end of 
September. The second was to identify practices and persons 
responsible for the wrongdoing that we found, so as to ensure 
the bankruptcy judge that any plan of reorganization did not 
carry forward either those persons or those practices in any 
reorganized company. The third is to identify potential causes 
of action against third parties or against insiders that will 
enhance the bankrupt estate and recover any ill-gotten gains.
    In each of those cases our task, I am sorry to say, is not 
complete to the extent that we can give you a full and complete 
picture today, but I anticipate with the filing of our final 
report and the examination of the three reports in toto will 
give as good a record as can be compiled in each of those three 
areas and provide a basis for appropriate action by Judge 
Gonzalez as he requested.
    Chairman Hatch. I understand that your investigation is 
still continuing, but do you believe that your final report 
will be completed before the bankruptcy court confirms its 
reorganization plan?
    Mr. Thornburgh. That of course we do not really have any 
control over because that is under Judge Gonzalez's 
jurisdiction. I hope that we will be able to proceed with 
dispatch, although I must say that recent scheduling problems 
for interviews and recent requests for documents have been a 
bit frustrating, and we are in constant communication with the 
company in order to try to speed that up so that we can meet 
whatever deadlines Judge Gonzalez feels are appropriate. As I 
said, we have had a lot of cooperation from all the parties 
involved here, but in order to finish our task within the 
parameters that permit the proceedings to go forward and 
ultimately determinate, we need to have that cooperation 
stepped up a couple levels.
    Chairman Hatch. I want to thank you for being here. I 
appreciate your testimony and always appreciate having you 
appear before the Committee.
    Mr. Thornburgh. Thank you, Senator.
    Chairman Hatch. Thanks my friend.
    [The prepared statement of Mr. Thornburgh appears as a 
submission for the record.]
    Chairman Hatch. Let me to go to the second panel. William 
Barr will be our next witness. He is the former Attorney 
General of the United States. He headed the Justice Department 
during the first Bush administration and brings a unique 
perspective on the telecom industry, given his previous 
position as General Counsel for GTE and his current position as 
the Executive Vice President and General Counsel for Verizon 
Communications. So we are happy to have you here, Attorney 
General Barr, and look forward to hearing your testimony here 
today.
    Nicholas Katzenbach, I would like to welcome you to the 
Committee, yet another former Attorney General, Hon. Nicholas 
Katzenbach, held the top position at the Justice Department 
during the Johnson administration, and later served as Under 
Secretary of State from 1966 to 1969. Attorney General 
Katzenbach appears today in his capacity as a Board member of 
MCI.
    Marcia Goldstein, we are honored to have you here as well. 
She a partner with the New York law firm of Weil, Gotshal and 
Manges. Ms. Goldstein is the lead attorney in charge of 
WorldCom's Chapter 11 reorganization.
    Morton Bahr is the President of the Communication Workers 
of America. We are delighted to have you here and welcome you. 
CWA is America's largest communications and media union, 
represents over 700,000 telecom workers in the private and 
public sectors. We are just honored to have you with us, and we 
look forward to hearing what you have to say.
    Douglas Baird. Mr. Baird is the Vice Chair of the National 
Bankruptcy Conference. NBC is a well-established nonprofit 
organization that has routinely advised us up here in Congress 
on the operation of the bankruptcy laws. So we are grateful to 
have you here to enlighten us.
    Then Mark Neporent is the Chief Operating Officer for 
Cerberus capital Management. He appears today on behalf of the 
largest creditor for MCI, and as Co-Chair of the MCI/WorldCom 
Official Creditors Committee.
    We are happy to have all of you here, and we will turn to 
you first, General Barr.

   STATEMENT OF WILLIAM P. BARR, GENERAL COUNSEL OF VERIZON 
                COMMUNICATIONS, WASHINGTON, D.C.

    Mr. Barr. Thank you, Mr. Chairman.
    MCI committed largest fraud in American history, inflicting 
the greatest harm on the greatest number of American citizens 
ever. I believe that the Federal Government's enforcement 
response to this has been the most shameful episode I have 
witnesses in 25 years in Washington, D.C.
    The problem in my view is not with the bankruptcy laws. I 
believe the problem is the abdication of enforcement 
authorities. Have the enforcement authorities taken any action 
to strip away the fruits of the crime? No. In fact, they have 
left this company with virtually all of the fruits of the crime 
intact to deploy against law-abiding companies in the 
marketplace. Have they taken any action which would have been a 
matter of course to suspend the company from doing further 
business with the Government? No. In fact, they have radically 
expanded MCI's business with the Government in the months since 
the fraud came to light. Have they obtained meaningful 
restitution for the victims of this crime? No. In fact, 
restitution has been limited to three-tenths of 1 percent of 
the loss.
    I believe that the problem here involves the intersection 
of two different and distinct bodies of law that have very 
different objectives in which the Government plays very 
different roles. The first of these is the bankruptcy law. 
Bankruptcy law provides the general rules for handling the 
estate of an insolvent company. Here, under bankruptcy, 
creditors are given priority, and obviously there is a lot of 
interest in conserving the assets of the entity. But when a 
company engages in criminal activity, criminal fraud, deriving 
substantial ill-gotten gains and business advantages at the 
expense of a variety of victims including shareholders and 
other companies, than a wholly different set of rules and laws 
and principles come into play, and that is the criminal 
enforcement process.
    When a crime is committed the Government's interest is not 
in preserving the assets of the company that committed the 
crime and derived those assets through fraud. It is in securing 
the disgorgement of the ill-gotten gains through enforcement 
processes, and also it is not just directed at the interest of 
the creditors, it is directed at the interest of vindicating 
the interest of all of the victims of the fraud. Title 18 makes 
this explicit in the criminal code where it says that these 
enforcement responsibilities of the Government take priority in 
bankruptcy. In other words if I was a massive con artist and 
went out and--and probate law provides a good analogy here 
because probate are the general rules that apply to the 
disposition of an estate when someone died--but if I was a 
massive con artist and part of my estate involved ill-gotten 
gains, money I had obtained through fraud, the Government does 
not waltz in and say, now the probate process takes over, now 
we are interested in conserving your assets and passing them 
on. No, the enforcement authorities sort out what goes into the 
estate and what does not, and the same is true with bankruptcy. 
If I was a con artist and did not die, but just declared 
bankruptcy, then it is no answer to say, well, gee, the 
bankruptcy process is now invoked. The person is in bankruptcy. 
Let the bankruptcy rules handle this. No. The Government's 
responsibility is the same. In other words, bankruptcy relates 
to the disposition of assets that are in the estate, but where 
a crime is involved, it is the responsibility of the 
enforcement authorities to determine what assets are fair to 
allow to go into the estate, and that is the threshold issue.
    But what is happening here is that the Government has 
abdicated its responsibility and it is stumbling all over 
itself to meet MCI's timeline and private preferences as to how 
it wants to emerge from bankruptcy. It is interesting, we have 
a lot of bankruptcy aficionados here today, and it is always 
interesting to hear about bankruptcy, but it sort of misses the 
point which is the enforcement responsibilities of the 
Government. Bankruptcy does not provide the remedial scheme for 
crime. The enforcement authorities and the criminal laws 
provide the remedial scheme for crime. For people to come in 
today and say, well, the Government should only punish 
individuals. That is one proposition, the Government should 
punish individuals not the company; and the other proposition 
is: hey, under bankruptcy law creditors get everything. 
Therefore, you should not take any of the assets away from the 
company, you should leave it all for the creditors. That is 
clearly fallacious and I cannot imagine that any member of this 
Committee would embrace either of those principles. Enforcement 
is not just about punishment, as every of this Committee knows. 
Enforcement is about, in part, remediation, disgorgement of 
ill-gotten gains and restitution, dealing with the victims of 
crime. It is not a question of punishment. It is a question of 
the intervention of enforcement authorities to make sure that 
crime does not pay and ill-gotten gains are surrendered.
    MCI is suggesting that we are here trying to force the 
liquidation of MCI, but in fact we are not. We do not care what 
result is ultimately reached in bankruptcy so long as the 
Government does a fair job with its enforcement 
responsibilities, and MCI is not able to use its ill-gotten 
gains to secure dishonest advantage in the marketplace, and it 
is very clear that the Government could do far more without 
denying MCI the opportunity to reorganize. Indeed, some of the 
major issues such as continuation of Government contracts and 
the use of net operating losses, that is, their claim that they 
should be able to operate tax free for the foreseeable future, 
these are matters which they themselves say are not integral to 
their reorganization plan.
    So, further, the amount of penalty that has been exacted by 
the SEC, as I said, is three-tenths of 1 percent of the losses, 
and is a tiny fraction of the amount of ill-gotten gains, and 
it leaves the company in a position where its debt-to-sales 
ratio is the lowest in the sector, 22 percent, compared to the 
average in the sector of 85 percent. So it is being put in an 
extremely advantageous position in the sector. None of the 
companies here today who are concerned with this--and I know I 
am speaking here not just for Verizon but for AT&T and SBC and 
Bell South. None of these companies are concerned about 
competing with anyone on an honest playing field. But what we 
object to and what should offend the sense of justice of this 
Committee, is that MCI, far from being punished and far from 
being held to account, required to remedy the consequences of 
its wrongdoing, it is being massive advantages over competitors 
and law-abiding citizens. That is not good for the employees in 
this sector. It is not good for the consumers in this sector. 
It is not good for the economy.
    Thank you.
    [The prepared statement of Mr. Barr appears as a submission 
for the record.]
    Chairman Hatch. Thank you, General Barr.
    General Katzenbach, we will turn to you.

   STATEMENT OF NICHOLAS DEB. KATZENBACH, BOARD MEMBER, MCI 
             TELECOMMUNICATIONS, ASHBURN, VIRGINIA

    Mr. Katzenbach. Mr. Chairman, my name is Nicholas 
Katzenbach. I serve as an independent member of the Board of 
Directors of MCI. I served as Attorney General from 1964 to 
1966, and since leaving public service I have practiced law, 
including serving for 17 years as General Counsel of IBM.
    I joined the Board of MCI in July 2002, and I served as a 
member of the Special Investigative Committee of the Board. 
Prior to that time I had no connection with WorldCom or any of 
its affiliates. I knew none of the directors, all of whom have 
since resigned. I knew none of its senior management, all of 
whom have since either been dismissed or resigned. I was not 
around the company in any way when its then senior management 
perpetrated the largest financial fraud in American business 
history.
    In my written statement, which has been submitted to the 
Committee, Mr. Chairman, I describe at some length the measures 
that the new management under Michael Capellas has taken to 
overcome the legacy of gross misconduct. I have not seen the 
slightest doubt that we are succeeding in that effort, and it 
is gratifying to know that Judge Rakoff, who presides over the 
SEC suit against the company, agrees. In his recent decision 
fining the company he said, ``The Court is aware of no large 
company accused of fraud that has so rapidly and so completely 
divorced itself from the misdeeds of the immediate past and 
undertaken such extraordinary steps to prevent such misdeeds in 
the future.'' That is the end of the quote. I do not think even 
our competitors question those efforts. I certainly hope not.
    What they do seek is to inflict more pain on MCI, and if 
possible, I believe, to destroy the company. I think their real 
purpose is to reduce competition, but their ostensible reason 
to punish the corporation for past misdeeds. There is of course 
no way to punish an abstract legal concept. So the question is 
who? Which real people do they believe should be punished? Is 
it the 55,000 remaining employees of MCI who already have seen 
their jobs put at risk and their retirement savings driven 
toward oblivion? Or is it the stockholders whose investment has 
been totally destroyed? Or the creditors who financed this huge 
expansion only to see fraud destroy most of their investment? 
All these people are victims of the fraud, not perpetrators. 
The perpetrators are long gone, and they are defendants in the 
courts where they should be. Or is it the new management and 
the new board who are trying successfully both to make the 
company a model for ethical behavior and a successful 
competitor? Or is it our customers who are free today and 
should be free tomorrow to choose the most reliable service at 
the best price? Or is it, as I believe, simply a ploy to reduce 
competition and raise prices in troubled times at the expense 
of those who have already suffered far more than competitors 
have suffered?
    I am not a bankruptcy expert by a long shot, but it seems 
to me that our competitors seek to amend those laws narrowly 
for no reason other than to enhance their competitive 
advantage. If they believe that those laws should be changed 
whenever the management of a company is guilt of fraud, they 
should at least be forthright and say so. Such changes would 
potentially affect companies in many diverse industries who are 
not here today to defend laws duly enacted by Congress. Such 
changes raise important policy questions which kicking around 
MCI's past management does not suffice to answer.
    Mr. Chairman, I heard the eloquent statement of Mr. Barr, 
and all I can say is that what he describes as those ill-gotten 
gains are the loans that were made to MCI/WorldCom, which were 
made in part as a result of fraud. I do not see any pot of gold 
anywhere that is not before the bankruptcy court, and I think 
Mr. Barr would agree that all the assets are before the 
bankruptcy court. They are to be distributed there in 
accordance with law, in an effort to punish those to reward as 
far as it can, those who have suffered the losses from this 
fraud. Mr. Barr refers to the interest of justice, and quite 
frankly, Mr. Chairman, I cannot see how punishing innocent 
people who are not involved in the fraud serves the interest of 
justice in any way whatsoever.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Katzenbach appears as a 
submission for the record.]
    Chairman Hatch. You are welcome. Thank you so much.
    Ms. Goldstein?

 STATEMENT OF MARCIA L. GOLDSTEIN, PARTNER, WEIL, GOTSHAL AND 
                MANGES, LLP, NEW YORK, NEW YORK

    Ms. Goldstein. Thank you, Mr. Chairman.
    I am MCI's bankruptcy counsel, and I co-chair the Business, 
Finance and Restructuring Department at Weil, Gotshal and 
Manges, which is the largest bankruptcy and reorganization 
practice in the country.
    This is a hearing on public policy matters arising from the 
WorldCom Chapter 11 case. The company's competitors have called 
for MCI's liquidation or have demanded other punitive actions 
against the company. Verizon particularly has done so in 
written communications to Chairman Donaldson of the SEC, and in 
submissions to the District Court presiding over the SEC 
enforcement action and presiding over the recent approval of 
our settlement with the SEC.
    My view is that these demands represent the narrow, 
competitive self-interest of MCI's long-time competitors and 
completely ignore the structure and goals of our bankruptcy 
laws. Let me state emphatically that as a matter of law the 
liquidation or forced sale of MCI is not an option here. MCI 
will emerge from bankruptcy consistent with its reorganization 
plan and the requirements of Chapter 11. The only parties who 
would benefit from a liquidation or forced sale would be MCI's 
competitors, not creditors, not shareholders, not employees, 
not consumers.
    The Federal bankruptcy laws balance two goals: equal 
treatment for creditors of equal rank and the restructuring of 
a business to preserve jobs and to maximize return to 
creditors. At the heart of these goals stands the basic premise 
of bankruptcy policy, that when the going concerned value of an 
enterprise exceeds liquidation value, reorganization of the 
debtor will maximize return to creditors and lead to 
preservation of the enterprise.
    Following the announcement of the accounting fraud last 
June, WorldCom turned to Chapter 11 in order to preserve value 
for its creditors. Just as the bankruptcy laws intended, 
Chapter 11 enabled WorldCom to obtain otherwise unavailable 
financing and the much-needed breathing room to develop and 
implement a business plan, provide uninterrupted service to its 
customers, and propose a plan of reorganization that is 
supported by 90 percent of its creditor constituencies.
    Under Verizon's theory MCI should be liquidated, subjected 
to a forced sale, or otherwise punished, rather than 
reorganized to prevent it from benefiting from its pre-petition 
fraud. The theory, however, not only completely ignores the 
fundamental principles of Chapter 11 but also the realities of 
who the stakeholders are in this Chapter 11 case. The 
legislative history of Chapter 11 is clear that the creditors, 
the new owners of the company, should not pay for the fraud. 
Indeed, in this case, if any parties were the victims of the 
fraud who should receive the restitution that Mr. Barr talked 
about, it is the creditors who made loans based upon misleading 
financial information. Contrary to the premise of the Verizon 
theory, a Chapter 7 sale or a forced sale would not yield a 
fair result to either the company's employees or its creditors. 
Creditors would recover significantly less than under MCI's 
reorganization plan. In the scenario of a Chapter 7, and this 
is what was suggested to Chairman Donaldson in the letter from 
verizon back in March, financing would be cut off, trade credit 
would dissipate, new business would be highly unlikely, 
customers would be unnerved and the value and stability that 
has been achieved in the Chapter 11 state could precipitously 
decline. Most significantly, creditors would have no vote as 
they would in Chapter 11, and as a natural result of 
consolidation, many MCI jobs would be eliminated. The notion 
that MCI would remain a going concern and employees would not 
suffer is just disingenuous.
    Let us be clear: Verizon's proposed punishment, which as we 
have read would be a break up or forced sale of MCI, is only 
for its own benefit so that it can bid for MCI's business at a 
distressed value, and eliminate it as a competitor. This 
scenario demonstrates clearly why bankruptcy laws are not 
driven by the interests of competitors, but rather, by their 
nature, preserve competition. In addition, injured stockholders 
of MCI, many of whom are employees or were employees will 
receive compensation, including stock from reorganizes MCI 
through the settlement made with the SEC. However, the 
distributions contemplated by the SEC settlement would only be 
available upon completion of a successful emergency from 
Chapter 11. If Verizon gets its way, the shareholders would 
suffer as well.
    Verizon and others have expressed the concern that MCI will 
emerge from Chapter 11 with a reduced debt load and therefore a 
competitive advantage. Such concerns are misplaced. Chapter 11 
assists all debtors in restructuring a balance sheet when they 
cannot meet the debt load that they have. Over leverage was one 
of the problems that resulted from WorldCom's fraud, and lack 
of corporate governance as described by Mr. Thornburgh.
    The proposed debt level for reorganized MCI, which is 
approximately $5.5 billion, represents about 41 percent of the 
post-bankruptcy value of the company. In contrast, Verizon's 
debt represents only 30 percent of the value of its company. We 
do not believe that that is necessarily a relevant measure, nor 
the measure of debt service to sales is a relevant measure for 
determining the ability to compete in a market. But if there is 
any competitive advantage based upon leverage, it clearly falls 
to Verizon. Further, in my experience, companies seek 
bankruptcy protection only as a very last resort, given the 
burdens, constraints and other negative repercussions of 
Chapter 11.
    Mr. Chairman, I apologize, but I would just like to 
conclude with a final remark. The creditors of the company will 
be the new owners of a reorganized MCI. If Chapter 11 could not 
achieve this results, such creditors would be penalized twice, 
once by the losses resulting from WorldCom's pre-bankruptcy 
fraud and again by being denied recovery under the normal 
operation of the Bankruptcy Code. It is the protections and 
benefits of Chapter 11 that have enabled MCI to take the steps 
to emerge as a rehabilitated enterprise that has regained the 
confidence of its creditors, customers and employees. The 
context in which MCI cleaned house, settled with the SEC, 
developed a business plan, and negotiated a plan of 
reorganization with its major creditor constituents is the 
product of a balance Federal bankruptcy law. It should be 
commended. It should not be punished or otherwise denied.
    Thank you, Mr. Chairman.
    [The prepared statement of Ms. Goldstein appears as a 
submission for the record.]
    Chairman Hatch. Thank you.
    Mr. Bahr, we will turn to you.

STATEMENT OF MORTON BAHR, PRESIDENT, COMMUNICATIONS WORKERS OF 
                   AMERICA, WASHINGTON, D.C.

    Mr. Bahr. Thank you, Mr. Chairman, Senator Durbin.
    WorldCom's bankruptcy was not the result of honest business 
mistakes or unforeseen economic conditions. Rather, it was the 
produce of persistent, pervasive and massive corporate fraud. 
WorldCom's Chapter 11 filing cost investors $200 billion, three 
times the size of Enron. WorldCom's lies and false financial 
reports destabilized the entire telecommunications industry.
    I want to talk about the real people that General 
Katzenbach referred to. Tens of thousands of employees, not 
only at WorldCom but throughout the telecom sector lost their 
jobs and retirement savings, yet WorldCom is positioned to 
emerge from bankruptcy with perhaps the strongest balance sheet 
in the industry. This would cause further destabilization and 
job loss in the struggling telecom sector.
    The victims of WorldCom's crimes are legion. Among the 
largest group are employee pension funds. Public pensions and 
Taft-Hartley funds lost at least $70 billion. Public funds in 
almost every State suffered staggering losses, $1.2 billion in 
California, $393 million in New York, $277 million in Texas, 
$23 million in Utah, to cite just four examples. I have 
attached a list of public pension funds losses by State.
    State and local governments have been forced to make up for 
these losses by cutting vital public services. According to New 
York State Comptroller Alan Hevesi, and I quote, ``Police 
officers, firefighters, teachers and other public servants have 
lost their jobs and public services have been diminished 
throughout New York State because of these financial losses.''
    Mr. Chairman, the damage does not stop there. More than 
22,000 WorldCom employees lost their jobs, and thousands more 
saw their 410(k) retirement savings decimated. Initially, these 
laid-off workers were left with nothing, even as the new 
WorldCom Board agreed to pay its new CEO $20 million over 3 
years. The AFL-CIO came to their aid, and won minimal severance 
benefits of $5,000 each.
    WorldCom employees were not the only telecom workers who 
saw their livelihoods and careers collapse. How can an honest 
company compete with WorldCom's $11 billion in counterfeit 
earning? Imagine that you are AT&T or Sprint, bidding against 
WorldCom. AT&T and Sprint have to price the bid to cover costs, 
plus a reasonable profit, but WorldCom could low-ball the bid, 
get the contract and then cover the losses by cooking the 
books. When WorldCom's fraudulent accounting was revealed, 
AT&T's Vice Chairman said, and I quote, ``We were constantly 
dissecting all of the public information about WorldCom and we 
would scratch our heads and try to figure out how they were 
doing it.''
    Trying to match WorldCom's cost structure, AT&T turned to 
cost cutting. AT&T told us it had to downsize half of the 
employees who took care of the network, maintained the network, 
to make it line up with WorldCom. During the period of 
WorldCom's corrupt practices, AT&T eliminated 18,000 jobs 
represented by our union. These job cuts devastated individual 
workers and their families.
    Let me read from just one letter written by Laura Unger, 
the CWA Local president in New York City. ``AT&T told us it had 
to downsize half of the employees that took care of AT&T's 
network to make it line up with WorldCom's financials. Cost 
cutting was accomplished in several ways: layoffs, office 
consolidations and so-called voluntary terminations. My local 
had over 800 members in 1999. By the spring of 2002 it was 
under 400. An office was moved from New York City and 
consolidated with another in White Plains to cut costs. In 
order to keep their jobs many members added over 2 hours to 
their daily commute. One member was leaving at 5:00 a.m. every 
morning to get to work. This winter he died suddenly of a heart 
attack at age 47. His wife attributed it to the extra strain of 
traveling so far every day.'' I have attached letters from CWA 
leaders across the country with similar stories to my 
testimony.
    WorldCom is using the bankruptcy proceeding to shed more 
than $27 billion in debt and to avoid punishment for its 
crimes. Absent meaningful penalties, WorldCom is positioned to 
emerge from bankruptcy with the best balance sheet in the 
business. Employees at companies that played by the rules will 
once again be victims of aggressive cost cutting setting off 
another destabilizing cycle of job loss throughout the 
industry.
    Mr. Chairman, to date WorldCom has received paltry 
punishment for its crimes. The $500 million SEC cash settlement 
plus $250 million in stock is less than the cash penalty 
imposed on junk bond trader Michael Milken in the 1980's.
    Some argue that higher penalties would prevent WorldCom's 
emergence from bankruptcy, and this in turn would hurt the 
company's remaining employees and customers. This argument 
fails on at least three counts.
    First, our bankruptcy laws were not designed to shield 
criminal companies from punishment.
    Second, WorldCom could sell assets. There are buyers who 
would continue WorldCom's operations and provide stability to 
WorldCom's employees.
    Third, in today's marketplace long distance customers have 
many choices. Wireless plans and the Bell companies' bundled 
offerings would be the driving force behind price competition, 
not WorldCom.
    No company including Enron has done as much damage to the 
American economy. The Federal Government must send a clear 
message that it will not coddle the poster child of corporate 
crime. It is long past time for the Government to suspend 
WorldCom from Federal contracts and prevent its unfair use of 
tax loopholes.
    Thank you.
    [The prepared statement of Mr. Bahr appears as a submission 
for the record.]
    Chairman Hatch. Thank you, Mr. Bahr.
    Mr. Baird, we will take your testimony.

STATEMENT OF DOUGLAS G. BAIRD, VICE CHAIR, NATIONAL BANKRUPTCY 
                 CONFERENCE, CHICAGO, ILLINOIS

    Mr. Baird. Mr. Chairman, I am grateful for the opportunity 
to speak on behalf of the National Bankruptcy Conference.
    We should not underestimate the harm done in the name of 
WorldCom before it filed for bankruptcy. Fraudulent conduct 
disrupted the lives of thousands of workers both at WorldCom 
and elsewhere. Moreover, this conduct likely caused others to 
invest billions of dollars on telecommunications equipment that 
no one needs. The frauds and other crimes committed by 
WorldCom's former managers give rise to a large number of 
issues in many areas of the law.
    I have been asked to focus narrowly on the bankruptcy 
issues raised by WorldCom. I make two points. First, we should 
be mindful of the central concern of bankruptcy law. When a 
firm's finances become hopelessly confused, we need to make 
sure that the assets of the firm are preserved and put to good 
use rather than broken up piecemeal. Second, we want to make 
sure that any bankruptcy reforms made because of WorldCom take 
account of other bankruptcy cases. These include the 
bankruptcies of firms that were victims of the fraud committed 
by WorldCom.
    Let me elaborate first on the need to preserve assets. 
Bankruptcy law fully respects the legal rights of those who 
have recourse against WorldCom's assets. These include 
competitors to the extent they have causes of action under non-
bankruptcy law. Moreover, bankruptcy law does not and should 
not affect the regulatory sanctions WorldCom must face for 
these past transgressions. The job for bankruptcy law, given 
all this, is to ensure that WorldCom's assets are not destroyed 
in the process of holding those responsible for the frauds and 
other crimes they committed. We use WorldCom's fiberoptic 
cables every day as we access the Internet and place a phone. 
WorldCom still employs thousands who keep this vast network up 
and running. It makes no sense to rip up that cable or tear out 
those phone lines because of what was done in the name of 
WorldCom in the past.
    Imagine I commit a crime with a car. Now, I of course 
should be held accountable. I should not be able to keep the 
car. But we should not destroy the car. Destroying the car does 
nothing to help the victims of the crime. Indeed, preserving 
the car may be the only way we can compensate the victims for 
their loss. In the end we can punish only people, not assets. 
You can imagine Chapter 11 at that part of the law that is 
worried about the car as opposed to the criminal who used it. 
Bankruptcy law allows the assets to be used productively, while 
allowing the bad guys to be punished and the victims to obtain 
redress. Chapter 11 creates a forum in which the assets of 
troubled firms can be kept together rather than scrapped.
    Now, there are different ways of doing this.
    In many large Chapter 11's a firm can be sold as a unit. In 
others, there is not a formal sale of the firm. Instead, a new 
capital structure is put in place, and those with rights to the 
assets, rather than getting cash, get interest in the 
reorganized firm. But in the end these two routes are the same. 
These two routes both allow the assets to be used productively. 
Both allow the on-the-ground people to maintain those assets 
and to keep their jobs. Both allow victims to be compensated. 
The choice between these two routes depends on what is best for 
the investors, fraud victims and others with rights against the 
firm. In short, bankruptcy allows us to make the best of a bad 
situation.
    WorldCom, I should say, does present some peculiar 
challenges. For example, in part of because of WorldCom's bad 
behavior but also because of technological innovation, much 
fiberoptic cable throughout the telecommunications industry 
lies unused and will remain dark forever.
    Hard regulatory issues need to be sorted out by virtue of 
this overcapacity that is now in the system. These issues, 
however, are not bankruptcy issues. Chapter 11 focuses only on 
a particular firm and asks whether that firm going forward can 
succeed, notwithstanding its troubled past. What do we do with 
the car, assets, now that the car is in the hands of new 
owners? Bankruptcy judges are poorly equipped to decide how to 
make an entire industry work better. Bankruptcy judges are not 
regulators and they should not be regulators.
    I focused on bankruptcy issues narrowly, but I think 
bankruptcy law may offer one broader lesson. After all, Chapter 
11 has had to deal with fraud from the time of Charles Ponzi to 
the present day. Bankruptcy suggests that solutions to 
industry-wide problems should be forward looking. If we are to 
use Government regulation to solve the problem of overcapacity, 
we should ask what regulations make the most sense for 
consumers today and for consumers tomorrow. We should not focus 
on bad acts committed in the past. Again, we have to separate 
the car from the driver.
    I conclude with a brief note about S. 1331 and the 
treatment of net operating losses on consolidated returns. We 
have a tax code that treats related entities as a single entity 
for some purposes but not for others. Sorting through what type 
of treatment, whether it should be treated as one or many 
separate firms, has proved enormously complex. S. 1331 
addresses a question that is currently unsettled. This is the 
question when there are consolidated returns should net 
operating losses of one entity be reduced when another related 
entity has cancellation of indebtedness income? S. 1331 
provides that net operating losses should be reduced in these 
cases. This is a reasonable position, and this indeed may be 
the law today.
    I would urge caution however before legislating this 
change. This question arises all the time. It applies to many 
firms. It affects WorldCom but it also affects firms that are 
in bankruptcy that may have been the victims of WorldCom. In 
some cases reducing net operating losses of related entities 
makes intuitive sense. In others it makes no sense at all. The 
tax treatment of consolidated returns is an intricate web. You 
cannot pull out one thread and expect nothing else to change. 
In my written statement I identified one technical problem, but 
there may be others. This kind of change--and again, it would 
be a reasonable outcome--is a change that the experts on the 
Joint Committee on Taxation should vet carefully before you 
proceed.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Baird appears as a 
submission for the record.]
    Chairman Hatch. Mr. Neporent, we will turn to you.

    STATEMENT OF MARK A. NEPORENT, CHIEF OPERATING OFFICER, 
      CERBERUS CAPITAL MANAGEMENT, LP, NEW YORK, NEW YORK

    Mr. Neporent. Mr. Chairman and distinguished members of the 
Committee, thank you for the opportunity to express my views 
and the views of the Official Unsecured Creditors Committee in 
MCI's Chapter 11 case at this hearing.
    My name is Mark Neporent and I am the Chief Operating 
Officer of Cerberus Capital Management, one of the largest 
creditors in MCI's Chapter 11 case. My firm, together with its 
affiliates, manages funds and accounts with committed capital 
exceeding $9 billion. Our investors includes insurance 
companies, pension funds, endowments, institutions, wealthy 
individuals and many fund-to-funds.
    I have personally been engaged in the business of 
restructuring and reorganizing companies, both large like this 
one, and small companies, as a practicing lawyer and as a 
principal, and I have observed the delicate balancing of policy 
and law that occurs in this process. I am also the Co-Chairman 
of the Official Unsecured Creditors Committee in MCI's case. 
The committee, as the statutory representative of all unsecured 
creditors, represents creditors across the entire MCI corporate 
structure with aggregate claims exceeding $40 billion.
    MCI's creditors, employees, customers and public policy are 
best served and protected by adherence to the process 
envisioned by and incorporated in the Bankruptcy Code. Ms. 
Goldstein has already described today the two separate and 
distinct policies that have long guided this process in the 
United States. They are, one, a fresh start for financially 
distressed companies, and two, the equality of treatment of 
creditors. These policies, while designed to protect two 
different albeit converging interests are equally important to 
the success of the Federal bankruptcy regime. Taking punitive 
action against MCI, as suggested by Verizon and others, will 
only undercut the policies underlying the Bankruptcy Code and 
its role in our economy. These actions will harm, not help, the 
very parties and interests that these policies were designed to 
protect, the victims here, the creditors.
    Bankruptcy long ago lost its stigma and it is now widely 
recognized as a legitimate and sometimes necessary corporate 
strategy in the context of our capitalist system. As noted in a 
recent news article, scores of businesses, some of them icons 
of American industrialism, have gone through bankruptcy and 
emerged to become strong, vibrant concerns, employing millions, 
offering consumers a wide variety of desirable goods and 
services. Texaco, Remington Arms, Continental Airlines, 
Southland Corporation's 7-11 stores, these companies have all 
gone through this process and been restored to viable business 
enterprises.
    MCI's bankruptcy case is an excellent example of how the 
policies underlying Federal bankruptcy law are being 
implemented effectively to take what is a truly tragic 
situation and salvage the maximum possible value for the true 
victims of this fraud, again, the creditors.
    MCI was forced to seek bankruptcy protection in July 2002 
due to the fraudulent activities of but a handful of its top 
executives. Within a year of the filing, virtually all 
employees remotely connected to the fraud, and the entire Board 
of Directors, had been fired or replaced. A dynamic new CEO has 
been hired to lead MCI out of the woods, and its financial 
management team has been completely rebuilt. All parties have 
worked closely with Hon. Richard Breeden, the former Chairman 
of the SEC, to shape and ensure that MCI will emerge from 
bankruptcy as a model of good corporate governance and a good 
corporate citizen.
    A number of MCI's competitors have asserted that it should 
be punished for the crimes of its former executives by being 
either forced to liquidate or restricting its ability to obtain 
and serve its Government contracts. This is the equivalent of 
the corporate death penalty, capital punishment for the 
transgressions of a few rogue executives. In doing so, those 
opposing MCI's reorganization ignore a fundamental policy of 
Federal bankruptcy law, the protection of the creditors, the 
real victims here, which include numerous individuals, banks, 
pension funds, insurance companies and endowments, who had 
nothing to do at all with the fraud perpetrated by these few 
senior executives.
    MCI's reorganization plan provides creditors with a much 
greater chance of recovery than does liquidation. MCI's going-
concern value is estimated to be approximately 12 to $15 
billion, while its liquidation value is estimated to be only $4 
billion. Within 9 months after this filing, representatives of 
virtually all of MCI's debt have quickly and efficiently 
resolved their differences exactly in the manner contemplated 
by the Bankruptcy Code, and have given their support to MCI's 
reorganization plan.
    Mr. Chairman, this would be remarkable in any case, but it 
is especially so in this case, the largest bankruptcy case in 
history. The only parties who will benefit from MCI's 
liquidation are its competitors and related powerful special 
interest groups. These competitors have enjoyed decades of 
unchecked monopolistic advantage as the mega combinations of 
the past. Monopolies, which built their franchises in an 
environment protected from competition, now rather than face 
MCI head-to-head on the competitive landscape, they seek to 
eliminate the competition and destroy creditor value with 
misplaced and misguided attacks on innocent creditors, 
employees and customers.
    I note that the recently enacted Sarbanes-Oxley Act of 2002 
has reaffirmed the policy of allowing corporations to attain 
relief from claims arising from fraud, while revoking that 
privilege for individuals. This underscores an important 
distinction that has already been made here today between the 
individual corporate officers that commit a fraud and the 
corporate entity and creditors that they victimize.
    I see I am virtually out of time, Mr. Chairman, so let me 
say that MCI's new management, the Board, and the creditors 
Committee have worked tirelessly for more than a year to 
provide the building blocks for the emergence of MCI from 
bankruptcy and a chance to recover some of the billions of 
dollars that have been lost at the hands of a few dishonest and 
misguided executives.
    This Chapter 11 case is an exemplar of how Congress 
envisioned the Bankruptcy Code to work. I can tell you from two 
decades of personal experience, it does not often work this 
well. The company, its employees, its creditors, the Federal 
judges supervising this case, and the system are to be 
commended. The self-serving attempts by MCI's competitors to 
force liquidation find no support in the law, public policy or 
common sense, and should be dismissed.
    Thank you again, Chairman Hatch and distinguished members 
of the Committee for allowing me to share my views.
    Mr. Chairman, with your permission, I would like to submit 
my full written testimony to the record.
    Chairman Hatch. Without objection we will take all the full 
written statements as though fully delivered.
    [The prepared statement of Mr. Neporent appears as a 
submission for the record.]
    Chairman Hatch. Mr. Barr, let me turn to you. Some have 
suggested that MCI/WorldCom's past frauds have had a direct 
impact on bursting the telecommunications bubble. As a 
competitor in the market, can you describe what impact the 
WorldCom fraud had on the actions of your company and others in 
the telecommunications industry? And if you care to--and I want 
to give the same rights to Mr. Katzenbach or Ms. Goldstein--
comment on what you have heard here today from those who 
disagree with you.
    Mr. Barr. Yes. If I could start with the latter part of the 
question and then work my way around to the bubble.
    Chairman Hatch. Sure.
    Mr. Barr. In our criminal justice system we recognize two 
kinds of misconduct by corporations. One is where there is in 
fact a rogue employee, who for self-serving reasons, to benefit 
themselves, commits a violation. In that situation the company 
is viewed as a victim. In the other situation, as where the 
acts are committed to benefit the company's business, in that 
situation the company is not the victim. They are the 
beneficiary of the fraud. It might do well to remember why do 
people commit corporate crimes other than of the latter type, 
that is, to benefit the corporation? Why do they do it? They do 
it to hurt competitors. That is the reason they commit the 
fraud in the first place.
    So if I go out and steal $15 billion from a bank, and I set 
up a business, and I use that cost-free money to me to set up a 
business, what am I doing? I am stealing customers, I am 
stealing business, from competitors. So there are two sets of 
victims, there are the people I stole the money from, and then 
there are the--the reason I stole that money is to deploy it to 
hurt other companies and to gain advantage over those 
companies.
    There are two sets of victims. Now, we have no problem with 
the creditors getting paid money for their losses, but what is 
wrong here is for the creditors to waltz in as if they are the 
only ones that have been hurt by this, and says, you know what? 
That looks like a good deal. This company is set up with cost-
free money. We want a piece of that action.
    What justice requires and what enforcement requires, and 
what that means in this situation is that they are getting the 
premium for the crime. They are the participants after the fact 
and the beneficiaries of the fraud, and the continuing injury 
is done to competitors in the marketplace. So I make no apology 
for being a competitor in the marketplace. We are the obvious 
victim of the fraud, and we, like they, are an entity. So who 
are the victims? It is our employees and our shareholders, and 
we are standing up for them, and we do not want them to 
continue to be victimized for the benefit of vulture funds.
    Now, turning to the bubble. This is another very severe 
injury done to our economy by WorldCom and by the senior 
leadership of WorldCom, who for years put out statements that 
the Internet was doubling, traffic was doubling every 3 months, 
and that combined with their own fallacious revenue reports, 
led to a lot of investment in long-haul fiber, $50 billion of 
misinvestment, largely driven, in my view, by the false public 
statements of high-level WorldCom executives. This is all laid 
out in a very good article by Greg Sidak over at AEI, which I 
call to the Committee's attention. So that is even another 
example of the damage done to our sector and to our economy by 
this company.
    Chairman Hatch. Mr. Katzenbach or Ms. Goldstein?
    Mr. Katzenbach. I will be very brief. I must say that I was 
amazed to hear that Mr. Ebbers and Mr. Sullivan were acting for 
the benefit of the company. That is something I had never 
perceived before. I think they were acting for their own 
benefit, for the millions of dollars which they got out of this 
purported success for an enormous ego trip that they were on, 
and I think that is why they acted.
    I was also happy the Mr. Barr at least acknowledged that 
his purpose was liquidation. He had not said that as precisely 
before. He just does not want--
    Mr. Barr. I did not say that.
    Mr. Katzenbach. Yes, you did. You did say that. You said 
that the purpose was to punish them in a way--it is all right 
for the creditors to get money, but they could not get back 
into the market.
    Mr. Barr. Nick, not punishment. To surrender the ill-gotten 
gains. That is called justice.
    Mr. Katzenbach. The ill-gotten gains? You are talking about 
the money that the creditors lent because of the fraudulent 
representation of Mr. Ebbers. Those are the ill-gotten gains.
    Ms. Goldstein. Mr. Chairman, I would like to also make a 
few comments on that point. Mr. Barr makes the analogy of 
stealing from a bank and having cost-free assets to run a 
company. That is not what happened here. There is no cost-free 
money here. The company, as a result of the acts of its prior 
management, poor corporate governance, ended up in a very over-
levered situation. At the same time creditors were defrauded. 
They were the parties who lent the money to WorldCom during 
this frenzy of the telecom bubble. So I would like to address 
at both times the question of the telecom boom and WorldCom's 
part in it, and also who are the victims and what is the proper 
way to proceed to punishment.
    There is no theft here that is cost free. As I said, there 
was a fraud, an accounting fraud. Creditors lent money. The 
company became over leveraged. What is the ill-gotten gain? The 
ill-gotten gain, as Mr. Katzenbach said, was the money taken 
from creditors, not from competitors. Those same creditors were 
also investing in the competitors. Shareholders were also 
investing in the competitors. WorldCom was not responsible for 
either the boom or the bust in the telecom industry. There were 
a number of economic issues that were taking their toll on the 
overall telecom market, and that had much more to do with just 
WorldCom and its particular fraud in the accounting area, and 
the telecom bust occurred well before WorldCom announced and 
discovered its fraud.
    The problem here, Mr. Chairman, and other members, is that 
the company is in part the victim. Even as Mr. Thornburgh 
described, the frenzied acquisitions undertaken with 
insufficient corporate governance, who is the victim today of 
assets that this company overpaid for substantially when we 
look at those transactions in hindsight and look at the real 
value of the assets that this company has.
    The fraud overinflated the company's earnings. It resulted 
in unnecessary and over leverage. The company is now 
reorganizing. It has to make restitution, but it has to make 
restitution to the parties who were injured in the first 
instance. That is the creditors. The creditors lent the money.
    The other point to make here is there has long been a 
distinction between the bankruptcy of an individual who commits 
a fraud--that individual cannot obtain money by purposes of 
fraud and then discharge that debt in bankruptcy. But the 
policy that this Bankruptcy Code enacts is very different for 
the corporate entity that has been involved in a pre-petition 
fraud. The creditors of that company are not the perpetrators 
of the fraud. They are not, as Mr. Barr suggests, the 
beneficiaries who are going to run off with a premium. They are 
not going to recover more than 100 percent here, indeed far 
less. The creditors become the new owner of the company, so the 
company will be sold, maybe not sold to a competitor, but it 
will be sold to a new owner, the group of creditors, who in 
exchange for the indebtedness that was incurred by WorldCom 
from them will now become the shareholders of this company.
    I would like to quote, if I may, from the legislative 
history of this Bankruptcy Code. ``A corporation which is taken 
over by its creditors through a plan of reorganization will not 
continue to be liable for obligations arising from the 
corporation's pre-petition fraud, since the creditors who take 
over the reorganized company should not bear the burden of acts 
for which the creditors were not at fault.''
    This is the core of a number of provisions in the 
Bankruptcy Code, including the distinction between individuals 
who commit fraud and a corporation that commits fraud. It is 
also notable that Section 510(b) of the Bankruptcy Code 
requires the subordination of securities fraud claims to the 
claims of creditors in the same class. The defrauded security 
holders have other remedies that are being pursued. There are 
many, many class actions here, and it is not the normal 
creditors who extended credit, made loans to this company, who 
should pay for the fraud committed vis-a-vis these defrauded 
security holders. The individuals responsible are being sued. 
They are being pursued by the criminal authorities and rightly 
so. That should not interfere with the transfer of ownership 
under the plan of reorganization that has been--
    Chairman Hatch. My time is up, but I want to give Mr. Barr 
a chance since both of you have testified, to say anything he 
wants to say.
    Ms. Goldstein. Sorry, sir.
    Mr. Barr. Yes. This notion that the creditors are the only 
victims here is just nonsense, and I will give just one very 
tangible example why the existing business, the customers and 
the network, are not all the assets of the creditors here. 
During the time of this fraud WorldCom's business in Government 
contracts went from $122 million to $1.2 billion, increased ten 
times, tenfold, its business with the executive. But for the 
fraud they were not qualified for that business. If their true 
financial picture had been presented to the Government, they 
could not have gotten that business. They lied to the 
Government and they increased their business by $1.2 billion. 
Now, who would have gotten that business? That is money out of 
the pocket primarily of AT&T. That is business stolen from AT&T 
shareholders by this fraudulent company, and those customers, 
the Federal Government, exists today. That business exists.
    So to say that, gee, we want an interest in this thing 
because we were the only ones hurt, is simply wrong.
    Chairman Hatch. Senator Durbin?

 STATEMENT OF HON. RICHARD J. DURBIN, A U.S. SENATOR FROM THE 
                       STATE OF ILLINOIS

    Senator Durbin. Thank you, Mr. Chairman. I am listening to 
this and it sounds like a very high-level seminar involving a 
law school and a business school. Perhaps I can bring this 
discussion to a little bit different level for a moment. I 
think we all can see the obvious, the commission of the largest 
corporate fraud in history, $11 billion. I guess what we are 
trying to determine is whether or not MCI/WorldCom has been 
unjustly enriched because of that situation, because of that 
fraud. I think that is an important question. We certainly know 
the victims. They include not only creditors, they include 
people in my home State who had pension funds invested in MCI/
WorldCom. Illinois looks like they had State pension fund 
losses due to their fraud, $65 million; State bankruptcy claims 
in Illinois filed in the case, $145 million; in overall State 
residents' 401(k) funds lost due to the corporate fraud, $8.6 
billion. So there is a human side to this story.
    But I guess I will go over to your point, Mr. Barr, this 
concept of justice, and what does the Government owe its 
citizens in terms of the enforcement of justice, and the best 
we can do is to take a look at illustrations. After the Enron 
scandal, clearly something had been done which was egregious 
and demanded a response, and before the first Enron officer was 
indicted, this administration, this Department of Justice, 
brought criminal action against Arthur Andersen. The net result 
of it, corporation based in my home city of Chicago, my home 
State of Illinois I should say, was that some 18 to 20,000 
people lost their jobs. No one ever suggested they were all 
guilty of wrongdoing. Only a small number may have been. The 
net result of it is they were all out of business, they were 
all out of work, before the first Enron official was even 
indicted.
    Now let us look at the other side of the ledger at MCI/
WorldCom. $11 billion in accounting fraud with the creation of 
the trillion dollar bubble that the Chairman mentioned, the 
loss of 500,000 jobs or more in the industry. And what was the 
net result for MCI/WorldCom? It appears that they have done 
quite well. It appears that their approach is, everybody has a 
bad day. And now they have even reached the point where they 
are not only not subject to criminal action to this point, but 
are being rewarded by this administration with sole source 
contracts in Iraq.
    I would like to ask Mr. Katzenbach or Ms. Goldstein, can 
you explain to me why we should set an example where a 
corporation on one hand is guilty of the worst corporate fraud 
in the history of the world, and then is rewarded with a $45 
million sole source contract by the Government that is supposed 
to police that kind of activity?
    Mr. Katzenbach. Yes, I will certainly try to, Senator. Let 
me be absolutely clear, I agree with you in every respect about 
the nature of the fraud, about the way the company was run, 
about the horrors that took place, about the losses that people 
made in it. All of that you and I are totally in agreement 
with.
    And the question is, as you put it, what do you do about 
that? Now, the thing that I think you do not do about that is 
what you just suggested with Arthur Andersen, you do not punish 
people further. You do not punish the employees who were not 
involved in this by putting this company out of business. You 
do not punish the creditors who were the ones that were 
defrauded, in my view. There is not much point in talking about 
the stockholders. They have not got much left, although they 
might have a little bit out of this if in fact it was 
successful. You are sort of saying that there is some big 
bonanza that somebody got here? Who? Who got it? I do not know 
anybody that got it. The creditors are the only ones that could 
even be conceived as getting it, because they are not the 
stockholders.
    Senator Durbin. Mr. Katzenbach, let me ask you this. In 
terms of Government doing business with the private sector, do 
you feel any price should be paid by MCI/WorldCom for the 
largest corporate fraud in the history of the world, or it is 
just business as usual? They should be allowed to not only bid 
on contracts, to be favored with sole source contracts in Iraq 
and the like. Is that not sending a message that corporate 
misconduct of historic proportion is not even a factor in terms 
of how you will be treated by our Government?
    Mr. Katzenbach. Let me see if I cannot answer that, because 
the way in which you put it is that somehow or other you can 
punish MCI/WorldCom without punishing all these other people. I 
think that is what you are saying, I can do that in some way 
which does not punish the employees, does not punish the 
stockholders, does not punish the creditors, does not punish 
the new management, does not punish the customers of this.
    Now, let us turn to the Government contracts issue which is 
the other issue. I think it is still a punishment if you take 
that away and give it to competitors, although I can see that 
competitors would like it. But who is that a punishment of? It 
is the same people we were just talking about. May I just say 
parenthetically, that was not a sole source contract in Iraq.
    Senator Durbin. It is my understanding that it was, but I 
will stand corrected.
    Mr. Katzenbach. It was not.
    Senator Durbin. Who else bid on that contract?
    Mr. Katzenbach. It was an Australian company that bid on 
it. AT&T bid on a contract in conjunction with the other 
company.
    Senator Durbin. I stand corrected on that. I thought that 
it was.
    Mr. Katzenbach. That is my understanding.
    Senator Durbin. It is my understanding that--
    Mr. Katzenbach. It is a classified contract, and I cannot 
get into it any deeper, even if I knew, which I do not.
    Senator Durbin. I just say that it is my understanding that 
then Eriksson, the foreign corporation, was turned to by your 
company to perform under that contract. So, obviously, a lot 
remains--
    Mr. Katzenbach. As I understand it, they have performed a 
number of these kinds of contracts.
    Senator Durbin. Mr. Chairman, I will just conclude.
    And thank you very much for your response, and say try to 
rationalize the treatment of Enron, Arthur Andersen and MCI/
WorldCom. Try to rationalize the Government response to these 
three corporations, and tell me that we have established any 
meaningful standard of conduct, any meaningful punishment for 
misconduct. I just cannot find any linkage within this 
administration which gives me comfort that justice is being 
served.
    Ms. Goldstein. Senator Durbin, I would like to take a shot 
at trying to rationalize the treatment of those three entities 
if the Chairman would permit.
    Chairman Hatch. That would be fine, but let us give Mr. 
Barr equal time.
    Mr. Barr. Well, let me just say that I think--
    Chairman Hatch. Well, let her do it, and then you can sum 
up. I mean I just want to make sure this is balanced, and I 
think so far that seems to be.
    Ms. Goldstein. Thank you very much, Mr. Chairman.
    Arthur Andersen was indicted criminally for obstruction of 
justice. That is a very, very different scenario from what we 
have with respect to WorldCom. This company has fully 
cooperated with all of the authorities conducting 
investigations. When it learned of the accounting 
improprieties, the company immediately came forward to the SEC, 
and ever since then it has cooperated with the SEC, it has 
cooperated with the examiner, it has cooperated with the United 
States Attorney's Office for the Southern District of New York, 
it has cooperated with the Justice Department.
    I would just like to refer to Judge Rakoff's opinion in 
which he approved our recently-announced settlement with the 
SEC. The SEC should not be blasted, as Mr. Barr has done, for 
not taking enough action. The monetary penalty is not 
everything here. In fact, the SEC is very clear that this is 
the largest monetary penalty in corporate history. It will 
actually get some money to the company's stockholders by virtue 
of the cash and stock, $750 million, that will be set aside for 
that purpose.
    And just as an aside, with respect to the pension funds, 
Senator, the pension funds are among the creditors that I 
referred to who have been injured here. If MCI is not allowed 
to reorganize, they will be hurt twice, just like every other 
creditor, once by the fraud, and then by virtue of the fact 
that the company is not allowed to reorganize in the best way 
it can for creditors, and as the pension funds of Illinois, and 
the pension funds of New York, and many other pension funds, 
are very large creditors who would be hurt if we cannot 
reorganize in the way proposed.
    But the SEC, as Judge Rakoff commented, said that the way 
the SEC has proceeded here is not just to clean house but to 
put the company on a new and positive footing, not just a 
monetary fine, he points out. They are not just enjoining 
future and violations, but trying to take WorldCom and create a 
model of corporate governance and internal compliance for this 
and other companies to follow.
    Pursuant to the consent order, Senator, WorldCom has to 
adhere to and establish the highest ethical standards on an 
ongoing basis. It has established an Office of Ethics. It has 
established a mandatory training program, educational program 
for its officers with respect to, and to assure that these 
ethical standards are maintained. This company and this 
bankruptcy--the company's fraud and the bankruptcy are 
unprecedented in many ways, the largest corporate fraud in 
history, the largest bankruptcy in history, but also, as Judge 
Rakoff points off, few if any companies have ever been subject 
to such wide-ranging internal oversight imposed from without, 
but to the company's credit it has fully supported to corporate 
monitor's efforts and the strict discipline thereby imposed. 
Even the appointment of a corporate monitor is unprecedented in 
a situation like this.
    This company has done everything possible to cooperate with 
all the law enforcement authorities to totally clean house and 
go beyond just firing the culpable, but to establish itself as 
a good corporate citizen.
    Chairman Hatch. Mr. Barr?
    Mr. Barr. I will just focus on what Senator Durbin was 
talking about which was the Government contracts. In my view, 
the administration is flouting the requirements of law in 
Government contracts and it is a disgrace. Congress has clearly 
provided in law that to do business with the Government is a 
privilege, and the burden is on the company of establishing 
that it has a satisfactory record of business ethics, and that 
is the language in the statute, and the burden is on the 
company. If there is any doubt, the call goes against the 
company. There is no way that MCI could establish a 
satisfactory record of business ethics. Even if you just put 
aside their past misconduct, this is a company that cannot even 
file a public financial statement because they do not have 
sufficient confidence in the integrity of their data. This is a 
company whose own auditors just came forward, KPMG, and said 
they still do not have sufficient controls in place. So under 
statutory standards they should not be doing business with the 
Government, and yet the Government continues to throw contract 
after contract on them. Contrast that to Enron. Within a split 
second almost of them being put under investigation, they were 
suspended by the GSA. Andersen, suspended by the GSA. To say 
there is a double standard here is an understatement.
    Chairman Hatch. Senator Kennedy.
    Senator Kennedy. Thank you very much, Mr. Chairman.
    I thank all of the witnesses. As the Committee looks at 
this issue, we are obviously concerned about bankruptcy laws. 
We have jurisdiction on those issues. We are concerned about 
competition. We have important responsibilities on those 
issues, tax law, what the implications are going to be.
    It seems to me you have a remarkable combination of a 
variety of different forces that are taking place here, just in 
following these arguments.
    I would like to come back to questions for Mr. Katzenbach. 
We have not had the completion of the report ordered by the 
bankruptcy judge, but as we understand from Attorney General 
Thornburgh's presentation earlier that is going to be wrapped 
up in the fall. Mr. Katzenboch, How can you be so sure in terms 
of the representations that you are giving to the Committee 
that all of the challenges which the MCI was faced with during 
this area in terms of fraud, that all of the circumstances 
which might have gotten contracts based on fraudulent 
information, all of these elements, how can you give the 
assurances to the Committee that all of these issues have been 
resolved to your own kind of satisfaction? How much weight can 
we give to that?
    Mr. Katzenbach. I think you should give considerable weight 
not to what I say, but to what has been done. I think that will 
be up to the two judges are sitting in bankruptcy, to determine 
whether that has been done.
    In terms of the employees that have gone, let me speak to 
that because I was on the Special Investigative Committee. I 
should say that because of the difficulty of getting law firms 
that did not have conflict, the investigation is being done by 
more than one law firm. For the special committee, we used 
Wilmer, Cutler, Pickering and Bill McLucas, head of the group, 
to investigate all of the fraud connected with the finances of 
the company. When Mr. Capellas came in he said he wanted zero 
tolerance as far as people were concerned. Anybody who was 
connected with this, he wanted out. We did that with Wilmer 
Cutler, and I and two Board colleagues, plus the monitor, Mr. 
Breeden, spent two full days going through the history of 
everybody who was identified as even a possible person involved 
in this fraud. I think we were very tough because if any one of 
us thought somebody should be discharged, that person was 
discharged without argument. So at least in terms of a pretty 
thorough investigation, I feel pretty confident about that.
    As far as other areas are concerned, we were not involved. 
Mr. Thornburgh was responsible for looking at other areas and 
any misconduct there. Mr. Capellas went to him and said, if you 
come across anybody whom you think has been engaged in any bad 
conduct, I want their names, and you tell me what they have 
done and they are out. Mr. Thornburgh--this is not a 
criticism--Mr. Thornburgh, I think he felt his responsibilities 
were primarily to the court and not to MCI/WorldCom, so he 
declined to do that.
    But when anybody was mentioned, as they were, in his 
report, they left, rightly or wrongly. I am concerned because I 
think we may have been tougher on some people than fairness and 
justice would have required. But because of the past of the 
company we felt, and Mr. Capellas felt, there could be no doubt 
about what we did. That is a long answer, I know, but that is 
one that worries me. It is awfully hard to look at a company so 
dominated by a couple of people without any way of getting out 
the truth except to go to the Board of Directors, perhaps, who 
was also dominated by the company.
    As far as processes are concerned, we worked very hard on 
that with KPMG. I think by the time we come out of bankruptcy 
we will have controls in the financial area that are as good as 
or better than any other company that now exists. If we do not, 
we should not be allowed out of bankruptcy, and that will be 
for the judges to look at and to evaluate.
    Senator Kennedy. I gather from what you have told us, you 
are satisfied from your own personal knowledge that all of the 
fraud was discovered, and you are satisfied that all of the 
employees that were involved in the fraud have left the 
company, and you are telling us that all of those who might 
have known about the fraud have left the company.
    Mr. Katzenbach. I think so. Certainly as far as the 
financial fraud I am talking about. There are areas that Mr. 
Thornburgh is investigating which could conceivably above 
fraud, and as to those I cannot make representations because I 
do not know.
    Senator Kennedy. What about a point that is made that at 
least some of the contracts that they are getting or that they 
might have received in the recent time may have been based upon 
conditions that are in place now that are based upon some 
illicit activity, and therefore given them some kind of unfair 
advantage over their competition?
    Mr. Katzenbach. I do not think they had any unfair 
advantage over the competition. The Government is free, in 
these cases, if they do not want the contracts, do not like the 
contracts, and do not believe that they are being well served 
by the company, they can avoid the contracts, as can private 
concerns. The fact that big users, private and public, have 
considered--have stayed with MCI, I believe, is because not 
only do they have well-performed at a good price, but in fact, 
and I think this is generally known, Senator, but in fact, in 
terms of outages which are of great concern to an intelligence 
agency, for example, MCI is very significantly lower than 
anybody else in this industry. It is technologically good.
    Senator Kennedy. Is there anything you want to add to that, 
Mr. Bahr?
    Mr. Bahr. I would just comment on the last statement by 
General Katzenbach. As I said in my testimony, because of its 
corporate fraud, MCI/WorldCom was able to low-ball the bid. 
When you had AT&T and Sprint bidding, they had to come in with 
a bid that was competitive, that had a reasonable profit, and 
here we had WorldCom able to come in and low-ball the bid 
because later they cooked the books.
    What we have now in the Federal Government are contracts 
that WorldCom still has that were gained during the time of 
this fraud, and now the argument is, well, if you discontinue 
MCI/WorldCom, there will be an enormous expense to put a new 
carrier in. But I would just like to make one other comment. We 
heard Mr. Barr refer as to how quickly the Government moved to 
debar or suspend from Federal contracts, Enron and Arthur 
Andersen. Somehow we are being told that this bankruptcy is 
different.
    We heard Mr. Baird here say that the guy that was driving 
that automobile should be responsible for the accident, but do 
not destroy the automobile. I do not see the analogy. First of 
all, that automobile never disadvantaged other automobile 
drivers, nor letting it still operate would further 
disadvantage. The testimony by Mr. Neporent, giving us other 
bankruptcies, or when Continental Airlines went into 
bankruptcy, prior to that bankruptcy they did not cook the 
books to the point that it caused other airlines to stress, 
caused layoffs in other airlines, or when they came out of 
bankruptcy, which they did not get in because of massive 
corporate fraud, were they at a much greater advantage than the 
other competitors and airlines. So I think that the case is not 
made to treat WorldCom differently than other bankruptcies.
    Senator Kennedy. Chairman, my time is up. Can I put a 
statement of Senator Leahy in the record, be placed in the 
record? Thank you.
    Chairman Hatch. Without objection, we will do that.
    Ms. Goldstein. Mr. Chairman, may I respond to the comments 
made by Mr. Bahr to my left?
    Chairman Hatch. Sure. Let me just make a point. Senator 
Schumer has indicated he wants to come through. I will give him 
5 minutes. We are going to recess unless he gets here, because 
I do not know whether he is coming or not. I just want to make 
that clear, so please get Senator Schumer here if he wants to 
question.
    Go ahead.
    Ms. Goldstein. Yes. I just want to get back to the issue of 
Government contracts and compare the situation of WorldCom to 
Enron and Arthur Andersen. Arthur Andersen was suspended from 
Government contracts because it was indicted. Enron, 
immediately upon commencing its Chapter 11 case, rejected its 
Government contracts and then was suspended. WorldCom, on the 
other hand, has been working with the GSA, cooperating with its 
inquiry, and has been performing and performing well under its 
Government contract, so it does stand in a different situation 
than both Enron and Arthur Andersen.
    Also I just wanted to clarify a point raised earlier with 
respect to the bidding on the Iraq contract, and I would like 
to add to the record an article dated June 9th from the 
Bloomberg Press, which indicates that a company called Telstra, 
which is Australia's largest phone company, bid together with 
AT&T Corporation to build that mobile phone network in Iraq, so 
it was bid on by a coalition between Telstra and AT&T, and I 
just wanted to clarify the record on those two points.
    I thank you very much, Mr. Chairman.
    Chairman Hatch. Thank you. We have just a few more minutes 
we will give Senator Schumer to get here.
    But, Mr. Bahr--
    Senator Schumer. I am here, Mr. Chairman.
    Chairman Hatch. I am glad to see you got here.
    You know, I appreciate your observations about the impact 
of WorldCom fraud on employees of the telecommunications 
industry. As you know, District Judge Rakoff recently approved 
the civil fine and settlement between WorldCom and the SEC, and 
in his ruling Judge Rakoff, as I understand it, noted that a 
harsher penalty would unfairly punish WorldCom's employees. 
Now, could you help us to know what your feelings are with 
regard to how you reconcile CWA's advocacy of stiffer penalties 
against WorldCom with the findings of Judge Rakoff? I think 
that is important for the record, and I want to give you that 
chance.
    Mr. Bahr. I appreciate that, Senator. I think if our 
assessments are correct, and assessments largely outside of the 
WorldCom family, that MCI coming out of bankruptcy, largely 
free of debt, creates more instability in the telecom sector 
that really cannot stand it, that there will be employees laid 
off, that they will be employees of the companies that played 
by the rules.
    We certainly do not advocate any worker getting laid off 
anywhere, but if there had to be a choice of who has a job, it 
should be those workers who work for companies that are law-
abiding and that play by the rules.
    On the other hand, there are companies that are willing to 
buy the assets and would guarantee the stability of employment 
of MCI's employees. So there are alternatives. I admit no easy 
answers, but alternatives.
    Chairman Hatch. Senator Schumer, we will turn to you.
    Senator Schumer. Thank you, Mr. Chairman. I appreciate you 
waiting for me. Most of the questions I was going to ask were 
asked already, but I have a few that I would like to ask. I 
thank this distinguished panel for being here.
    The first question I have is the settlement. As most of you 
know, I was very worried about the SEC sort of giving WorldCom 
a slap on the wrist situation. At the end of the day they did 
more than many people had feared, maybe not enough for some. 
Can I get a general view of what people thought of the 
settlement in terms of how fair it was? You do not want to be 
punitive. At the same time you want to make sure wrongdoing is 
punished. If people regard this kind of massive fraud as a cost 
of doing business, we have not done much good in this country. 
So I will just go right down the line.
    Mr. Barr. Senator, I think it was grossly deficient. It was 
not just a question of punishment, because as you know, 
enforcement is not just about punishment but making sure that 
people do not enjoy the benefits of the crime, disgorgement, 
restitution for victims. Here they did not go nearly far 
enough, and in fact, explained themselves by saying, well, even 
if we should have gone further, we really cannot, because we 
are worried if we push it too far, this is a civil proceeding 
and we may drive them into liquidation.
    But the law specifically provides that if the SEC does not 
believe that it has the civil tools, then it should refer it to 
the Department of Justice who has the criminal tools, and 
notwithstanding the misstatement of law earlier by Marcia 
Goldstein. Criminal forfeiture, disgorgement, penalties are not 
dischargeable; they take priority, which is clear recognition 
in the law that enforcement comes first, decides what is fair 
to leave in the estate, and then bankruptcy comes second, which 
determines how that state is split up.
    Senator Schumer. Mr. Katzenbach?
    Mr. Katzenbach. I have already spoken on that, so many 
times, Senator, all I will say to you on this is we could live 
with that because it did not put us out of business. I think 
anything more would have been punitive. That was also the 
opinion of Judge Rakoff. Got it as 250 million, and then said 
anything more than that is punitive and will put them out of 
business. That is the wrong--
    Senator Schumer. Do you think it compared fairly, given the 
amount of fraud, to other settlements?
    Mr. Katzenbach. Yes. But that amount of fraud is so great, 
you know, you could boil the ocean and then not satisfy people 
on that amount of fraud, I agree. But who was involved in that, 
they are gone.
    Senator Schumer. Ms. Goldstein.
    Ms. Goldstein. Than you, Senator Schumer. First, I would 
like to address what Mr. Barr said was a misstatement on my 
part, which was not. I was referring to the provisions earlier, 
Senator, in the Bankruptcy Code, that distinguish individual 
bankruptcy under which a indebtedness incurred by reason of 
fraud would not be dischargeable.
    Mr. Barr. That is only civil.
    Ms. Goldstein. It is not clear, frankly, because I have 
done a lot of work in this area, that even a criminal penalty 
would be non-dischargeable in the corporate case. There is a 
complete discharge, and there is no case and no statute that is 
clear, and I would admit, Mr. Barr, that there is some open 
issue as to the status of a criminal penalty in a corporate 
bankruptcy. But clearly, penalties associated with the 
commission of a fraud, indebtedness associated with the 
commission of a fraud, are clearly dischargeable in bankruptcy.
    And I would like to turn now more directly to Senator 
Schumer's question about the SEC settlement. That settlement 
itself is very controversial because it demonstrates to some 
extent the conflict between securities law enforcement and the 
Bankruptcy Code, and I think that the settlement is fair. It is 
still subject to approval in the bankruptcy court, and I 
believe that the bankruptcy court will approve this settlement 
because it balances the enforcement power of the SEC versus the 
goal of bankruptcy, which is to pay creditors in the order of 
their priority and rehabilitate the company.
    Senator Schumer, earlier I mentioned that it is the 
creditors who will become the new owners of WorldCom, so I 
think we have to bear in mind that this large penalty, as $750 
million recovery against a $2.25 billion fine will be paid and 
it will be a reduction in the potential recovery of the 
innocent creditors who did not commit the fraud. Now--
    Senator Schumer. But if you had a sort of classic law 
school rascal case, the creditors are probably more to blame, 
although admittedly--
    Ms. Goldstein. If the creditors were a party to the fraud, 
we might have a different instance here, but I think here--
    Senator Schumer. Do they not have some kind of watch dog 
responsibility?
    Ms. Goldstein. I do not think that a lender has ever been 
held responsible for the accounting fraud of the party who 
effectively obtained loans based on fraudulent financials from 
the particular lender or investor.
    Chairman Hatch. Senator, would you yield on that?
    Senator Schumer. I yield to my good friend, Orrin.
    Chairman Hatch. Let me just ask you this. Is there not some 
responsibility on the creditors' part to investigate why they 
rose the debt so much, and loaned so much money?
    Ms. Goldstein. I think that--
    Chairman Hatch. Let me ask you further. In that regard--and 
I am sorry to interrupt you, Senator, but this is something 
that has bothered me. In that regard, how much of the total 
debt of WorldCom will be discharged in bankruptcy, and then how 
much will remain after? I have heard various figures. I would 
just like to know for myself, but those two questions I would 
like you to answer. It seems to me some of the creditors, to 
give that kind of money, if it is as high as I have heard it 
is.
    Ms. Goldstein. Let me explain a little bit about the plan 
of reorganization that was negotiated with the creditors.
    Chairman Hatch. Would you answer that other question too?
    Ms. Goldstein. The indebtedness owed to WorldCom's 
creditors at the commencement of the case is approximately $40 
billion.
    Chairman Hatch. Do you not think that is awfully high, and 
do you not think the creditors have some responsibility to be 
sure that the money they are lending is--
    Ms. Goldstein. The creditors, I would say 30 billion of 
that or I would say 27 billion of that is institutional debt, 
bond holders, bank debt, and I would say, Senators, that those 
institutions do due diligence and make a credit assessment. I 
know for certain that banks take their loans up through a 
credit Committee and do a credit analysis of the company that 
they are making loans to, and there is information when bond 
debt is issued in the high yield market, through a prospectus 
that describes the financial condition of the company. The fact 
is that at the time some of this debt was issued, not all, for 
example, you have a $2.6 billion issue of debt at MCI, MCIC, 
which is one of the subsidiaries, that is issued before 1996. 
So I would say that with respect to that debt, there were no 
fraudulent financials. That is outside the parameter.
    So we are looking at the more recently issued debt of the 
WorldCom entities.
    Senator Schumer. Which is how much of the total?
    Ms. Goldstein. Which is at least $11 billion out of the $27 
billion total that was issued during the period of fraud. It 
may be more. It may be $18 billion.
    Senator Schumer. It is a lot.
    Ms. Goldstein. It is a lot. But those creditors, Senators, 
did not have the information that would enable them to 
understand that these books were cooked.
    Senator Schumer. Ms. Goldstein, what Orrin is saying and 
what I am saying here, or just asking, frankly, is that nobody 
is saying the creditors committed the fraud, encouraged the 
fraud, participated in the fraud. But these are all these 
bankruptcy proceedings, and all of these are very difficult 
balancing acts, and in the law we often hold that somebody who 
is not fully to blame, but might have been more in a position 
to do something to stop it, not being fully culpable, but not 
being fully removed, should suffer more than somebody who is 
totally removed, let us say one of Mr. Bahr's union members who 
is in another company that is competing, or I guess a 
stockholder would be more directly involved, per se, even if it 
is a small little stockholder, than a debtor, but a worker. I 
mean we do not have any--what about all the workers who lose 
their jobs and things like that, their pensions, et cetera?
    Ms. Goldstein. Let me make a few comments on that. Most of 
the creditors in this case will receive a recovery which we 
estimate to be 36 cents on the dollar. So it is not as if they 
are running off with a lot of money here. They are being 
punished. They have suffered dramatic losses, and that includes 
the pension funds who hold bonds in this company. So to take 
further punishment against the company, which would reduce 
recoveries even more, would be very hurtful to those parties, 
including pension funds.
    Senator Schumer. Okay, I have it. So you are saying the 
market punishment suffices.
    Ms. Goldstein. There is tremendous market punishment.
    Senator Schumer. Do you agree with that, Mr. Bahr?
    Mr. Bahr. Senator, WorldCom acquired $17-1/2 billion of 
assets through the use of its inflated earnings, so taking away 
a half a billion still leaves 17 billion.
    But as I stated in my testimony, the cash penalty was 
larger against Mr. Milken than against this company.
    Chairman Hatch. Would the Senator yield?
    Senator Schumer. I will be happy to yield.
    Chairman Hatch. Of the $40 billion how much of that would 
be dischargeable in this bankruptcy? At least approximate it.
    Ms. Goldstein. Okay. All of the 40 billion will be dealt 
with in the bankruptcy. The company will emerge with 5.5 
billion in new debt that will be issued to these creditors, and 
the creditors will receive the balance of their recovery in 
stock. Some trade creditors will also receive a cash payment.
    Chairman Hatch. But virtually all of the $40 billion except 
for the 5.5--
    Ms. Goldstein. Will be exchanged for stock and notes, that 
is correct.
    Senator Schumer. So they did not lose as much as you were 
first saying if the company comes back and does great?
    Ms. Goldstein. The valuation of the company that is 
projected on its emergence is only $12 billion.
    Senator Schumer. Yes, but they have equity and--
    Ms. Goldstein. They have equity, and if the company can 
perform, and compete in an environment vis-a-vis their much 
larger and better positioned competitors. I pointed out 
earlier, Senator, that on emergence MCI will come out with $5.5 
billion in debt vis-a-vis a value of $12 billion. It is about 
41 percent. If you look at Verizon's debt, for example, that 
represents about 30 percent of the company's value. So from who 
is more leveraged, frankly, even on emergence from bankruptcy, 
MCI will be.
    Chairman Hatch. Senator, would you yield again?
    Senator Schumer. You are the Chairman.
    [Laughter.]
    Chairman Hatch. I am grateful you would yield, but these 
are problems that bother me.
    You indicated that there would be a competitive 
disadvantage in your testimony, General Barr. And you have 
indicated that Verizon, for instance, would have an advantage 
from a debt-to-capital ratio, I guess. I am not sure. But who 
is right here?
    Mr. Barr. How do people pay off debt? They pay it off with 
money coming in the door, and money coming in the door, your 
revenue, your sales, that is a hard and fast thing that you can 
count and see. The proper way of measuring your leverage is the 
ratio of your debt to the money coming in the door, your sales, 
and that is a figure that, as I say, the average in our 
industry is 85 percent, and they are coming out with 22 
percent.
    The problem with a debt-to-equity ratio is how do measure 
equity for WorldCom? They do not have financial statements out 
in the public. They can pick any number out of the air.
    Chairman Hatch. They have all these assets that they have 
developed, right, minus the debt?
    Mr. Barr. Right.
    Chairman Hatch. Does assets--
    Mr. Barr. What is the value of the equity? I do not how to 
value the equity except sell--
    Chairman Hatch. Some would say $40 billion. I do not think 
that is accurate. I guess I am asking what would be accurate.
    Ms. Goldstein. I would like to address that. First of all, 
by saying what is our equity, we do not have financial 
statements, we have an approved disclosure statement in the 
case with financial information and a valuation done by the 
company's financial adviser, Lazard Freres and Company.
    The historical financials do not bear on the valuation of 
the company's assets today, and so that valuation, which is 
approximately $12 billion, is based upon information that has 
been available to creditors, indeed to Verizon as well, and has 
been approved as adequate information for creditors to make a 
decision.
    Chairman Hatch. So assuming that you have about 5.5 billion 
in debt and the assets are worth about 12 billion, to use your 
figures, how does that compare to other companies in the 
industry who claim that they are going to be disadvantaged by 
the reduction of $35 billion approximately in--
    Mr. Barr. Their equity value is based on a series of their 
own projections, which they have been changing almost on a 
weekly basis. They do not have accurate financial statements. 
The equity number is a number you can game, but cash in the 
door is not.
    Chairman Hatch. But, General, are you not saying that 
because of the huge discharge in bankruptcy, whatever that 
number may be, but starting with 40 billion, whatever it is 
below that, that all the other companies are stuck with their 
high debt for putting in infrastructure and so forth, and that 
WorldCom will only have 5.5 billion and yet will have all the 
infrastructure that at least some of the $40 billion built?
    Mr. Barr. What I am saying is, especially when you have 
stolen assets--
    Chairman Hatch. I mean am I right in that?
    Mr. Barr. The only way you can get fairness here is to make 
sure there is a real cost basis to the property that is being 
used by MCI going forward, a real cost basis that puts real 
constraints on their business. And when companies like Verizon 
and AT&T build network, we spend real money, and we have to 
recover that in our prices. They are coming in here with made-
up numbers as to their equity and what their costs are, and 
huge debt relief. So the only way to put the stolen assets, 
particularly, here, because--I am not complaining about the 
operation of bankruptcy law. What I am complaining about is its 
operation in tandem with forgiving their continued possession 
of tainted assets. The only way is to put a real cost basis on 
those assets. I have no problem if they want to borrow the 
money and pay the creditors cash.
    Mr. Neporent. Mr. Chairman, maybe I could address that for 
a moment. I guess I am a little bit confused by Attorney 
General Barr's analogies. I mean nobody disputes that $40 
billion has gone into this company and been lost. Nobody 
disputes, and in fact the creditors agreed, that 35 of that $40 
billion is going to be converted to equity. The valuation of 
that equity can be determined on very standard market metrics, 
multiples of earnings before interest and taxes, many other 
metrics, which incidentally is also the way that Verizon's 
equity is valued including the way that the public markets 
value the equity, so there is really no confusion here. The 
value of the equity can be measured coming out based on metrics 
that financial professionals can agree upon. The cost basis is 
fairly obvious. We know how much money has gone into the 
company; creditors' claims have been reconciled.
    So it is really quite simple. The dollars that purchased 
those assets were the dollars that were invested by the real 
creditors, by the victims of this fraud.
    Mr. Barr. Look, either your equity is based on the market, 
and you can look at our stock and what it trades for and see 
what it is, or what he is saying is it is based on historical 
numbers. But then their historical numbers are garbage.
    Mr. Neporent. No, Senator, that is not what I am saying. I 
am saying that our numbers are based probably--I think on the 
last year's worth of revenues, the last year of earnings before 
interest and taxes. There is a track record of this company 
post-fraud. There is a projection. There is a core business 
operation that can be measured, and those are the numbers that 
are being used to measure this equity value, not the completely 
different business that existed before the company was 
reorganized, simply not the case.
    Ms. Goldstein. Senator, I would like to make one other 
point here. Verizon has suggested that the proper measure is to 
look at the debt of the company as compared to its sales, but 
that really is meaningless. If you ran a company for sale and 
did not factor into it other parts of the picture such as 
costs, such as EBITDA, you could run a company to the ground 
based on the amount of sales. In fact, I was confused earlier 
by Mr. Morton Bahr when he said that the company had ill-gotten 
gains because we could underbid on a contract. The company 
probably found itself, as we did when we reviewed these as 
bankruptcy counsel, with many, many contracts that they had to 
reject because they were just not profitable.
    Let me get back to debt and compared to sales. Sales is not 
a meaningful figure here. If you look at MCI's revenue, half of 
that revenue gets paid to local exchange carriers, so you 
really cannot look at it that way. The other point to make 
here--
    Mr. Barr. Wait a minute. Excuse me. That is a ludicrous 
argument. Everyone has expenses, and we collect a lot of 
revenue that we have to pay out to expenses including companies 
like MCI.
    Ms. Goldstein. But that is my point, Mr. Barr.
    Mr. Barr. So it is ludicrous to say that if your revenue 
includes expenses, it is not a legitimate--
    Ms. Goldstein. That is my point, Mr. Barr. Let us look at 
Verizon's margin and let us look at MCI's margin. That would be 
a little different. What I am saying is, is that sales cannot 
be looked at in a vacuum, and you could argue that yours is a 
better way to look at it, and I could argue that debt-to-equity 
ratio is a better look at it, but the fact is, that if you 
actually look at the debt service as a debt service number, how 
much does Verizon pay in interest as compared to its revenues, 
or how much does any of these other--of the other RBOCs such as 
SBC pay in interest as compared to its revenues, you would see 
that this is a very small fraction. We are dealing with numbers 
of 5 percent and under. So whether we are having a competitive 
advantage really is not going to be determine on the level of 
debt here.
    Mr. Barr. This is academic. There have been repeated 
statements by all manner of MCI officials about how lean, mean, 
fighting machine they are going to be when they come out, and 
how they will have competitive advantages, and they make them 
every day up to Wall Street in order to pump up.
    Senator Schumer. Let me ask you this, Ms. Goldstein, and 
then I have one final question of Morty, of Mr. Bahr. We have 
two Barrs, only one is a member of the bar. Right? I think I am 
right about that.
    Do you think that WorldCom should emerge from this with the 
same competitive--let us not say a greater competitive 
advantage? But there is the argument, do you think that 
WorldCom should emerge with the same competitive advantage, on 
equal footing with the other companies or not?
    Ms. Goldstein. I am not convinced that based upon the plan 
of reorganization that WorldCom has filed that we are going to 
emerge with any kind of unprecedented and improper competitive 
advantage.
    Senator Schumer. That is not the question I asked you.
    Ms. Goldstein. Then I am not sure what the question is.
    Senator Schumer. My question is not whether you should have 
an advantage, but is there not an argument that can be made 
that maybe you ought to have a disadvantage?
    Ms. Goldstein. I think we already do have a disadvantage. 
WorldCom went into Chapter 11. Chapter 11 is not a desirable 
route for any company. I have been practicing in this area for 
28 years. No company wants to be in Chapter 11. It carries with 
it, no matter what we say about the fact that there is not a 
stigma, it carries with it a number of negatives. Customers are 
concerned, particularly in a company which has to enter into 
long-term contracts. Trade creditors are reticent to extend 
credit. The company is totally disabled. WorldCom has been 
fortunate that it has been able to achieve stability--
    Senator Schumer. The markets, if you have to go issue new 
debt, will the markets pay any attention to the fact that you 
have come out of Chapter 11?
    Ms. Goldstein. I think the fact that we have just been in 
Chapter 11, the markets will scrutinize us very heavily in 
terms of--
    Senator Schumer. Well, they will scrutinize everybody 
hopefully.
    Ms. Goldstein. And the fact is that the success rate of 
companies coming out of Chapter 11 is not very good. I think 
only about 20 to 30 percent succeed, and there is a high level 
of return to Chapter 11. You are weakened by Chapter 11. We 
hope that WorldCom can pursue--and when Mr. Capellas says we 
are going to come out as a lean, mean competitive machine, what 
he is trying to say is, we are going to try and be competitive 
and succeed.
    The fact is we have not changed our projections every week. 
The company put out a set of projections back in March that was 
associated with its April 15th disclosure statement. We did a 
supplement, and the company amended its projections. The 
amendment to the projection reflected a few things: the 
increase in the SEC settlement from 500 million to 750 million; 
but it also reflected a decrease in its EBITDA projections 
because of the competitive pricing that they have been 
experiencing recently with respect to bundled services. So MCI, 
in bankruptcy, where it pays no debt service, had to relook at 
how successful it could be because it is going to have to match 
the competitive pricing engaged in by competitors.
    Senator Schumer. But that is true of any new company in the 
world.
    Ms. Goldstein. I am not criticizing that. I am saying that 
is a fact.
    Senator Schumer. One final question to my friend, Mr. Bahr, 
and this is a general question. We have lost 172,000 jobs in 
the telecom sector in the last 2 years. That is pretty huge. So 
my question to you is, in relevance to this, how do we grow 
those jobs again? How do we have telecom return to be the 
vibrant sector that it was in the 1990's, growing and creating 
new jobs and all of that?
    Mr. Bahr. I think a good deal of the problem is a result of 
bad public policy by the FCC, starting in the previous 
administration and continuing into this administration. The 
order that we are expecting for the last two or 3 months from 
the FCC, which still has not come down, is going to prolong a 
good part of it. You cannot ask any company to invest in its 
business and then in the name of competition give it away below 
cost, and then still have the responsibility of maintaining the 
network.
    So I think we are driven by public policy as well as a bad 
economy at this time, and the lack of investment.
    Senator Schumer. You see it turning around in the near 
term?
    Mr. Bahr. We always hope. I always have confidence in all 
these folks sitting here. We know that it is the companies that 
create the jobs, and our role is to try and work as best we can 
in the most cooperative way to help grow the business so that 
we have good jobs and good customer service, and thus impact 
positively on the economy.
    Senator Schumer. I think you have done that. You have 
really tried to help whichever companies your members are part 
of. I have seen that.
    Mr. Bahr. Thank you.
    Chairman Hatch. I just want you to know you are my kind of 
union leader. I think you have done very, very well.
    I appreciate all of you coming today. We hope this has been 
a balanced and fair hearing, and it has been very interesting 
to me, and we will all have to reassess and reevaluate, and we 
appreciate the information that you have given us today.
    With that, we will recess until further notice.
    [Whereupon, at 4:41 p.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]
    [Additional material is being retained in the Committee 
files.]

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