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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.

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.

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