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States See Opportunity in MCI Suits

Cash-strapped governments might like to earn a buck or two in civil suits, a former prosecutor says.

First it was Big Tobacco. Now it's WorldCom.

Yes, the latest target of revenue-hungry state attorneys general looks to be the scandalously failed telco now known as MCI. But at least one analyst suspects the effort will go up in smoke.

Oklahoma top cop Drew Edmondson charged this week that WorldCom and six of its former executives, including founder Bernie Ebbers, are a

bunch of crooks. Now officials in other states are suddenly seeing dollar signs as they explore civil charges of tax fraud.

Attorneys general in West Virginia, Alabama and Arkansas are considering whether to bring lawsuits against WorldCom for allegedly evading millions in taxes during the years of its heaviest accounting scandals, just prior to bankruptcy, according to story Friday in

The Wall Street Journal

.

With budgets across the nation steeped in red ink, state officials can hardly help sizing up the potential tax-fraud booty as a hefty collection opportunity.

They could "earn some penalty money to solve any budget shortfall the state might have," says Seth Taube, a former enforcement official with the

Securities and Exchange Commission

.

"If successful, you can be sure WorldCom money will become like tobacco money, and shareholders will suffer by paying lots of attorneys general for no good reason," says Taube, who heads the business defense practice for McCarter & English, a Newark, N.J., law firm.

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WorldCom, which sought Chapter 11 protection last year in the wake of an $11 billion accounting scandal, is in the process of emerging from bankruptcy under the name MCI. Many observers protest that the company, which appears to have broken so many rules in its rise to become the nation's No. 2 long-distance company, is now unfairly benefiting from generous bankruptcy-protection laws and stands to emerge debt-free and in many ways stronger than its law-abiding rivals.

Notably, the loudest uproar and state-by-state campaigning against the MCI emergence process has come from competing outfits like

Verizon

(VZ) - Get Report

and

SBC

(SBC)

and the lobby groups they support.

Clearly, hindering MCI's progress helps the Bells' cause. And if MCI does win approval to exit bankruptcy, a slew of expensive state civil suits and tax settlements would help hobble the otherwise unimpeded business.

But not everyone sees a very fulfilling feeding frenzy on the tax fraud issue.

It seems much of the tax assumptions are based on what were likely fake numbers.

"If you do the true accounting, they weren't making any money," says CIBC World Markets analyst Tim Horan. "You can figure state taxes are around 3%. Well, 3% of next to nothing isn't going to amount to very much."