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91–564 PDF 2004

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

(

(II)

COMMITTEE ON THE JUDICIARY 

ORRIN G. HATCH, Utah, Chairman 

CHARLES E. GRASSLEY, Iowa 

ARLEN SPECTER, Pennsylvania 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

LARRY E. CRAIG, Idaho 

SAXBY CHAMBLISS, Georgia 

JOHN CORNYN, Texas 

PATRICK J. LEAHY, Vermont 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERBERT KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

JOHN EDWARDS, North Carolina 

BRUCE ARTIM, Chief Counsel and Staff Director 

BRUCE A. COHEN, Democratic Chief Counsel and Staff Director 

(III)

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page

Durbin, Hon. Richard J., a U.S. Senator from the State of Illinois .................... 25

Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah ............................ 1

prepared statement .......................................................................................... 99

Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, prepared 

statement .............................................................................................................. 119

WITNESSES 

Bahr, Morton, President, Communications Workers of America, Washington, 

D.C. ........................................................................................................................ 16

Baird, Douglas G., Vice Chair, National Bankruptcy Conference, Chicago, 

Illinois ................................................................................................................... 17

Barr, William P., General Counsel, Verizon Communications, Washington, 

D.C. ........................................................................................................................ 10

Goldstein, Marcia L., Weil, Gotshal and Manges, LLP, New York, New York .. 13

Katzenbach, Nicholas DeB., Board Member, MCI Telecommunications, 

Ashburn, Virginia ................................................................................................. 12

Neporent, Mark A., Chief Operating Officer, Cerberus Capital Management, 

LP, New York, New York .................................................................................... 20

Thornburgh, Richard, Bankruptcy Examiner, Kirkpatrick and Lockhart, LLP, 

Washington, D.C. ................................................................................................. 2

QUESTIONS AND ANSWERS 

Responses of William Barr to questions submitted by Senator Hatch ............... 41

Responses of Marcia L. Goldstein to questions submitted by Senators Feingold and Kohl ....................................................................................................... 45

Responses of Richard Thornburgh to questions submitted by Senator Hatch ... 53

SUBMISSIONS FOR THE RECORD 

Bahr, Morton, President, Communications Workers of America, Washington, 

D.C. ........................................................................................................................ 55

Baird, Douglas G., Vice Chair, National Bankruptcy Conference, Chicago, 

Illinois, prepared statement ................................................................................ 60

Barr, William P., General Counsel, Verizon Communications, Washington, 

D.C., prepared statement .................................................................................... 67

Durbin, Hon. Richard J., a U.S. Senator from the State of Illinois, letter 

and attachments ................................................................................................... 78

Goldstein, Marcia L., Weil, Gotshal and Manges, LLP, New York, New York, 

prepared statement .............................................................................................. 84

Katzenbach, Nicholas DeB., Board Member, MCI Telecommunications, 

Ashburn, Virginia: 

prepared statement .......................................................................................... 101

letter and attachments to Senator Durbin ..................................................... 114

Neporent, Mark A., Chief Operating Officer, Cerberus Capital Management, 

LP, New York, New York, prepared statement ................................................. 121

Thornburgh, Richard, Bankruptcy Examiner, Kirkpatrick and Lockhart, LLP, 

Washington, D.C., prepared statement and attachments ................................. 131

(1)

THE WORLDCOM CASE: LOOKING AT 

BANKRUPTCY AND COMPETITION ISSUES 

TUESDAY, JULY 22, 2003 

UNITED STATES SENATE, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Committee met, pursuant to notice, at 2:23 p.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Orrin G. Hatch, 

Chairman of the Committee, presiding. 

Present: Senators Hatch, Kennedy, Schumer, and Durbin. 

OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. 

SENATOR FROM THE STATE OF UTAH 

Chairman HATCH. Good afternoon. I apologize to you for being 

late, but we are way behind, and I got waylaid in the subway coming back, so I could not very well get here on time. 

I am happy to welcome you all here to today’s hearing, entitled 

‘‘The WorldCom Case: Looking at Bankruptcy and Competition 

Issues.’’ 

I first would like to thank all of our witnesses today for their 

time and cooperation, and I hope that this hearing will help us better understand the WorldCom situation and its potential public policy implications. 

Along with many Americans I am deeply concerned about the 

devastation caused by WorldCom’s massive corporate fraud which 

has caused immeasurable harm to so many. While we cannot go 

back in time and undo what has already occurred, we are presented today with an opportunity. We have an opportunity to examine the WorldCom case and determine whether there are lessons 

to be learned with respect to our public policy going forward. 

The focus of today’s hearing will be two-pronged. First we will 

examine the WorldCom bankruptcy case and consider in light of 

the facts whether any changes in our current bankruptcy laws may 

be in order. Second, we will assess the implications of a reorganized MCI emerging from bankruptcy on competition in the telecommunications market. Here again we will examine and evaluate 

what impact if any this anticipated competitive landscape should 

have on public policy. 

Some have raised fairness concerns that WorldCom will be able 

to emerge from bankruptcy with much of the fruits of its widespread fraudulent conduct intact. They argue that it will emerge 

from Chapter 11 with an enhanced market position relative to its 

competitors, giving it not only a fresh start, but a head start. They 

2

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 

3

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 

4

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 

5

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 

6

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. 

7

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 authoriVerDate 0ct 09 2002 14:50 Mar 04, 2004 Jkt 091564 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\91564.TXT SJUD4 PsN: CMORC
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ties 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 reVerDate 0ct 09 2002 14:50 Mar 04, 2004 Jkt 091564 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\91564.TXT SJUD4 PsN: CMORC
9

organized 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, repVerDate 0ct 09 2002 14:50 Mar 04, 2004 Jkt 091564 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\91564.TXT SJUD4 PsN: CMORC
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resents 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 

11

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 illgotten 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, 

12

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. 

13

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, 

14

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, 

15

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 approxi- mately $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. 

16

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 laidoff 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. 

17

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 socalled 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. 

18

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 

19

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. 

20

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-tofunds. 

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. 

21

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, 

22

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 emVerDate 0ct 09 2002 14:50 Mar 04, 2004 Jkt 091564 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\91564.TXT SJUD4 PsN: CMORC
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ployees 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 

24

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. 

25

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 

26

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? 

27

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 

28

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. 

29

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 

30

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 deVerDate 0ct 09 2002 14:50 Mar 04, 2004 Jkt 091564 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\91564.TXT SJUD4 PsN: CMORC
31

stroy 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 

32

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 

33

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 nondischargeable 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. 

34

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 

35

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 visa-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 

36

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 

37

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— 

38

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— 

39

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. 

40

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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