A federal bankruptcy judge ruled yesterday that MCI Inc. cannot be forced to pay legal costs incurred by a group of former creditors subpoenaed by the Securities and Exchange Commission in connection with an insider trading investigation.
U.S. Bankruptcy Judge Arthur J. Gonzalez, who oversees cases in the Southern District of New York, ruled that the payment is not authorized under an agreement put in place between the creditors and the company shortly after the Ashburn-based telecommunications giant filed for bankruptcy protection in July 2002.
None of the 11 former creditors that requested MCI pay their expenses is the target of the investigation. Sources familiar with the probe, who spoke on condition of anonymity, said the documents indicate that Blue River Capital LLC, a former member of the unsecured creditors committee, is the focus of the SEC inquiry.
The SEC is trying to determine whether Blue River improperly used confidential information gained as a member of the unsecured creditors committee. A person who answered the phone at Blue River's office in Manhattan declined comment.
The SEC inquiry is not related to MCI's accounting fraud, which lead to the long-distance giant's collapse two years ago as WorldCom Inc. Last year, the SEC and MCI reached a $750 million settlement to resolve civil charges related to its $11 billion in improper accounting.
During a hearing yesterday, SEC senior trial counsel Neal Jacobson told Gonzalez that the subpoenas are part of a fact-finding investigation.
"Since it is a fact-finding investigation, the SEC has no idea where it may lead to, if anywhere," Jacobson said. He indirectly cautioned MCI's attorney Marcia Goldstein, however, against referring to the inquiry as "informal." Jacobson noted that the SEC commissioners routinely take a formal vote to open an investigation before they issue subpoenas.
The SEC's investigation came to light only after the creditors asked the court to force MCI to cover the costs of gathering hundreds of thousands, if not millions, of documents demanded by the SEC. Daniel H. Golden, a lawyer for the group of creditors, said the total cost could be as much as several hundred thousand dollars.
But Gonzalez said that a detailed agreement that indemnified creditors for costs related to MCI's massive accounting fraud did not require the company to pay for investigations into the creditors themselves.
Gonzalez noted that an inquiry similar to the one now underway could have been anticipated, in part because the creditors agreed to take steps to avoid concerns about insider trading. Among those steps was to set up so-called screening walls at firms, aimed at preventing traders from taking advantage of the confidential information provided to the creditors' committee. "That an inquiry could occur was always possible," Gonzalez said yesterday.
Although MCI emerged from Chapter 11 reorganization in April, Gonzalez continues to preside over remnants of the case, which includes hundreds if not thousands of bankruptcy-related claims.
Meanwhile, at a Banc of America Securities LLC investors conference in San Francisco yesterday, MCI chief executive Michael D. Capellas confirmed that the company had hired investment advisers but declined to comment further on reports that the company is considering putting itself up for sale. "We have a set of advisors, and if that is a surprise to anybody in this room . . . I would be shocked," he said.
Capellas said that MCI will continue to move forward with its plan to focus on building secure private Internet networks for large companies. Large business customers are increasingly turning to firms including MCI to manage their voice and data networks rather than trying to operate them internally.
Still, MCI continues to struggle as its revenue steadily declines. In order to keep costs under control, MCI cut its workforce from 59,000 employees last year to 45,000 today and hopes to reduce jobs even further. Capellas said the company still expects 2004 revenue to be in the $21 billion to $22 billion range.
"We have got a business plan that we are driving through our organization. Our people are focused. We have been through every distraction known to man. Our number-one priority is we are going to drive forward with this business plan," Capellas said.
Stern reported from Washington, Cha from San Francisco.