MCI Shareholders Jump the Payout Line

As precedents go, the Securities & Exchange Commission's proposed settlement with MCI is certainly eye-popping: At $500 million, the penalty is 50 times greater than heaviest fine that the SEC had ever levied on a company accused of accounting fraud. But what's truly fascinating about the deal, details of which were released on May 19, is the possible precedent it sets for bankruptcy law.

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The SEC has proposed taking the penalty funds and putting them in a restitution fund for shareholders who lost their shirts when MCI -- known at the time as WorldCom -- revealed $3.8 billion in accounting misstatements last June. Where's the money coming from? Since WorldCom-turned-MCI is now in bankruptcy, the SEC is essentially diverting half a billion dollars from creditors to shareholders.

That move would turn bankruptcy law on its head: Usually, creditors are second only to the government in collecting from the assets of a bankrupt company. The owners usually come dead last on any list of who gets paid. And with a public company, the owners are shareholders, who normally get hit with the loss.