[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
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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
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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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