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SEC v. WorldCom, Inc.
United States District Court for the Southern District of New York
273 F. Supp. 2d 431 (2003)
In 2002 Congress passed the Sarbanes-Oxley Act. The Sarbanes-Oxley Act allowed the Securities and Exchange Commission (SEC) (plaintiff) to recover profits illegally made by corporations and to distribute that money to wronged investors and shareholders. WorldCom, Inc. (defendant) engaged in accounting fraud, overstating its income by $11 billion and its assets by $75 billion. WorldCom’s actions resulted in an estimated $200 billion loss to its shareholders. After WorldCom’s wrongdoing became public, it filed for bankruptcy. The SEC proposed a settlement against WorldCom that included a $750 million penalty that the SEC planned to distribute to WorldCom’s shareholders. The SEC calculated the penalty by balancing the severity of WorldCom’s actions, the likelihood that the penalty would deter future violations, and the fact that WorldCom was in bankruptcy proceedings. The district court reviewed the penalty to ensure that it did not conflict with 11 U.S.C. § 510(b), a provision of the United States Bankruptcy Code that subordinated securities-law claims against a debtor to the claims of the debtor’s unsecured creditors.
Rule of Law
Holding and Reasoning (Rakoff, J.)
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