Risk & Compliance

MCI Creditors Facing SEC Probe

The Former WorldCom, however, is not a target of the Securities and Exchange Commission's investigation.
Stephen TaubSeptember 21, 2004

A Securities and Exchange Commission probe is focusing on whether members of MCI’s creditors committee committed insider-trading violations when the company, the former WorldCom, Inc., was in Chapter 11, The Wall Street Journal reported.

Although the commission’s investigation is currently in a preliminary stage, it could be widened to a number of firms trading in the securities of several companies, according to the report.

MCI itself is not a target of the investigation and hasn’t been subpoenaed, according to the newspaper. The Journal reported that the SEC and MCI declined to comment and that a creditors committee representative did not answer a request for comment by the newspaper.

At issue is whether members of the creditors committee took appropriate measures to keep their firms from trading on inside information available to their officers serving on the committee, according to the paper.

Frequently, creditors committees consist of members of aggressive investment firms, including hedge funds, that buy up a major portion of a company’s bonds, bank debt, or trade claims, and then hope to play an instrumental role in devising the company’s reorganization.

The temptation to trade on insider information is enormous, since such committee members have access to some of the most intimate details of a company’s finances and strategies. Often, their goal is to craft a reorganization plan that the bankruptcy judge would approve and one that would still protect their investments, which are usually made for pennies on the dollar.

For their part, senior financial executives and other members of top management, tend to be more interested in a plan enabling the company to thrive, as well as to avoid another bankruptcy filing in the near future.

The SEC fired off subpoenas to 11 current MCI creditors committee members, according to the Journal, which cited documents filed with the U.S. Bankruptcy Court for the Southern District of New York.

The subpoenas demanded “thousands if not millions of pages” concerning communications between WorldCom and its bondholders, according to Reuters. The communications reportedly included confidentiality agreements, meeting notes, and other information.

Reuters reported last week that the SEC’s probe is zeroing in on a particular WorldCom creditor, the New York investment firm Blue River Capital.

Blue River declined to comment, according to the news service. Its founder, Van Greenfield, was formerly co-chairman of the WorldCom creditor’s committee, the wire service pointed out.

WorldCom’s original creditors committee reportedly included 15 banks, vendors, and investors. They included hedge-fund titan Cerberus Capital Management, a major player in the distressed securities market. Reuters notes that a top executive at Cerberus, Mark Neporent, serves on MCI’s board.

Other original committee members included aggressive hedge fund ESL Investments, Deutsche Bank, ABN Amro, Electronic Data Systems Corp., and Time Warner Inc., according to Reuters.

The creditors committee, however, has been mostly disbanded since MCI emerged from bankruptcy protection last April, according to the Journal.