Hearings
are now underway before U.S. Bankruptcy Judge Arthur
Gonzalez to determine
whether MCI WorldCom will be allowed to emerge from
bankruptcy or will be dismembered and sold off in
pieces. Despite
overwhelming support from its creditors, several
large and influential telecom rivals, including
Verizon, SBC, and AT&T are running a spirited
campaign to shut down the Ashburn-based
telecommunications giant.
These opponents play to people’s sense of
outrage at the corporate scandals that rocked the
business world last year, as well as to the
breathtaking extent of the $11 billion accounting
fraud at WorldCom. Their
main claim is that allowing MCI, as the
scandal-plagued company has renamed itself, to exit
bankruptcy would allow it to profit from its
“ill-gotten gains.”
Both justice and deterrence, they argue,
require that MCI be dismembered, if not put to
death.
Such claims understandably strike an emotional chord with America’s
scandal-weary public.
Yet those claims are wrong all the same.
Simply put, MCI retains no “ill-gotten
gains” from the accounting fraud. Whatever
short-term advantage the company might have gained
has already been lost, many times over.
In his opinion on the recent
litigation between the SEC and MCI, Federal District
Court Judge Jed Rakoff placed the liquidation value
of the company at less than $6 billion. This value
pales in comparison with the $200 billion by which
the company's equity has plunged.
In
the overall scheme of things, there can be little
doubt but that MCI would be in stronger shape today
had the fraud never occurred.
Despite
the fraud, MCI remains a significant presence in the
telecom market. The
company has always been a vigorous and innovative
competitor. It
was first to challenge AT&T in long distance,
and more recently has been at the forefront of the
competitive assault on the Baby Bells’ century-old
monopoly over local telephone service.
MCI’s competitors clearly would gain by
eliminating the company, which would reduce
competitive pressures at a time of continuing
financial distress in the telecom sector.
While
MCI’s liquidation would be good for its rivals, it
would be bad for the consuming public.
It would reduce the choices available to many
consumers of telecom services, force 20 million MCI
customers to find new suppliers, and leave more of
the telecom market under the control of the still
relatively monopolistic Baby Bell companies.
Local phone competition, which has finally
started to deliver major savings to consumers in
recent years, would take an especially big hit.
An
MCI that is allowed to emerge from bankruptcy would
continue to be a major player in the telecom market,
providing consumers and businesses with a
competitive alternative to the old regime of
AT&T and the Baby Bells.
Intact, MCI will do more to protect
consumers’ interests than if the company is
dismantled and sold off in parts to its rivals.
Also
wrong are claims that the liquidation of MCI is a
means to secure justice and promote deterrence
against such misdeeds in the future.
Justice is served by punishing responsible
individuals. So
is deterrence. Neither
is served by wreaking punishment indiscriminately on
such innocent people as workers, investors,
creditors, and customers.
To
penalize an entire corporation for the misdeeds of
some of its officials is to spread the resulting
loss among all participants in the corporation.
If corporate misdeeds are punished at the
individual level, deterrence works as it is supposed
to work. But
if those misdeeds are punished at the corporate
level, the deterrence effect is weakened and the
injustice compounded.
It
would be different if all participants within
WorldCom had agreed to engage in fraudulent
practice. But
this is clearly not what happened.
A few crooked executives engaged in
fraudulent activity, and the practice was halted and
made public when other individuals within the
company became aware of it.
To punish MCI wholesale would be to punish
those innocent individuals and not the guilty
wrongdoers.
It
is easy to see why the entrenched incumbents are so
keen to bring about MCI’s demise.
The likes of AT&T and the Baby Bells
would rather feed on WorldCom’s carcass than see
it rejuvenated and have to compete with it for
business. The
public good, however, would be far better served if
MCI received a second chance instead of an early
grave.
--
November 3, 2003
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