## Facts

- WorldCom announced it would restate financial results after accounting irregularities; the SEC filed a civil enforcement action alleging WorldCom overstated income by about $9 billion from 1999 through the first quarter of 2002.
- WorldCom later filed for Chapter 11 bankruptcy, and an Official Committee of Unsecured Creditors was appointed to represent unsecured creditors.
- The SEC action settled with a judgment requiring WorldCom to pay a $750 million civil penalty and $1 in disgorgement to allow creation of a Sarbanes–Oxley § 308(a) Fair Fund for distribution to injured investors.
- After WorldCom emerged from bankruptcy, the SEC proposed a Fair Fund distribution plan that limited eligibility because the fund was far smaller than total investor losses.
- The plan excluded (i) claimants who had recovered at least 36 cents on the dollar through the Chapter 11 plan or sale of their securities and (ii) claimants who realized a net profit on aggregate WorldCom securities transactions during the fraud period.
- The district court approved the distribution plan as fair and reasonable over the Committee’s objections.
- The Committee, which had not intervened as a party in the SEC action, appealed the plan’s approval.

## Issues

1. Whether a nonparty creditors’ committee had standing to appeal the district court’s order approving the SEC’s Fair Fund distribution plan.
2. What standard governs district court review of SEC Fair Fund distribution plans under Sarbanes–Oxley § 308(a), and whether review is limited to whether the plan is “fair and reasonable.”
3. Whether excluding claimants who recovered at least 36 cents on the dollar and claimants with net trading profits was unlawful or inequitable.

## Decision

- The court held the Committee had nonparty appellate standing because it asserted an affected interest and participated meaningfully in the proceedings concerning the distribution plan.
- The court affirmed that district court review of an SEC Fair Fund distribution plan is deferential and ends once the court is satisfied the plan is fair and reasonable, absent contrary terms in the consent judgment.
- The court held the district court did not abuse its discretion in approving the plan.
- The court upheld the plan’s exclusions as permissible line-drawing designed to concentrate limited funds on those most financially harmed.

## Legal Principles

- A nonparty may appeal when it has a direct, affected interest in the order and meaningfully participated in the proceedings below; Article III standing must also be satisfied.
- Under Sarbanes–Oxley § 308(a), the SEC has broad discretion to design Fair Fund distribution plans and set eligibility parameters.
- A district court’s role in reviewing an SEC distribution plan is limited to determining whether the plan is fair and reasonable; the court should not substitute its own allocation approach once that standard is met.
- Eligibility lines in remedial distributions may be upheld where they are rationally related to compensating injured investors and allocating limited funds, including exclusions based on recovery levels and net profit status.

## Conclusion

The Second Circuit permitted a nonparty creditors’ committee to appeal but affirmed approval of the SEC’s Fair Fund plan, holding that courts review such plans only for fairness and reasonableness and that the SEC may reasonably exclude relatively compensated claimants and net winners to direct limited funds to those with net losses.


Official Comm. of Unsecured Creditors of WorldCom, Inc. v. S.E.C., 467 F.3d 73 (2d Cir. 2006)