WorldCom's fate as US govt contractor hangs in the balance

WorldCom may have settled its problems with the US Securities and Exchange Commission, but its political battles with US...

WorldCom may have settled its problems with the US Securities and Exchange Commission, but its political battles with US government are just beginning.

The US Federal District Court in the Southern District of New York approved the SEC's amended proposed settlement with the firm earlier this week, allowing a civil penalty of $2.25bn to be satisfied by a $500m cash payment and $250m in common stock to shareholders and bondholders upon the company's emergence from Chapter 11 protection.

But one question that has not been settled is whether WorldCom, now known as MCI, should be suspended or barred from holding government contracts. The Senate Judiciary Committee will hold a hearing today on the issue as part of a broader investigation into the ramifications of MCI's bankruptcy.

Ahead of that hearing, news reports today indicated that MCI has enough votes in the House Appropriations Committee to block an amendment being pushed by rivals AT&T and Verizon Communications that would bar any extension of MCI government contracts while a General Services Administration (GSA) review is under way.

A spokeswoman for the GSA declined to provide details on what she called a "quasi-judicial proceeding" but said the issues of suspension and debarment are being studied.

The ramifications of debarment could be enormous for government agencies. MCI remains a critical federal contractor, holding either prime or subcontractor status on a wide range of contracts, including vital defence programs.

Grover Norquist, president of Americans for Tax Reform, called tomorrow's hearing and the debate about MCI's federal contract status part of "an orchestrated effort by unions to tear to pieces a company whose workers voted against union membership".

One union, the Communications Workers of America (CWA), stated publicly that MCI should not be rewarded with government contracts for what was the largest case of corporate fraud in US history.

CWA president Morton Bahr said the government has plenty of viable alternatives. "Clearly, both AT&T and Sprint, with national networks that equal and surpass that of MCI, [would] have no problem handling all available business."

However, in May, GSA general counsel Raymond McKenna stated that any shift away from MCI would disrupt telecommunications services to a vast array of federal agencies, including military, law enforcement and homeland security organisations.

"Long-distance voice service to the Pentagon, the FBI's Trilogy data network, the National Weather Service's Weather Net, the Social Security Administration's national voice and data networks and the Center for Medicare Services' Medicare/Medicaid Hotline could be jeopardised," he said, adding that MCI's prices remained the best choice for the government, and user agencies would likely have to bear "multimillion-dollar expenses" to transition to another carrier.

A spokesman for the Defense Information Systems Agency (DISA), the Defense Department's telecommunications and network management agency, said a thorough review of all MCI contracts is now under way and officials are evaluating alternative service providers to lessen the impact if MCI is debarred.

The DISA spokesman cautioned, however, that some contracts in existence before a suspension or debarment, particularly those related to national security, may remain in effect afterward.

"Based on the urgency of the mission supported by the contract, however, DISA could transition to a new contractor to protect our customers and then later recompete [the contract] as time and mission permit," he said.

Robert Guerra, a partner at government consulting firm Guerra, Kiviat, Flyzik & Associates, said viable alternatives exist.

"AT&T, for instance, does everything MCI does and can probably handle a smooth transition with their size and existing presence in the federal market," said Guerra.

"I hope it does not happen, as agencies are dealing with real problems these days, and I'd rather they stay focused on the business of government."

Dan Verton writes for Computerworld

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