NEW YORK -- MCI WorldCom is being sued by investors and may be facing a federal probe over whether it improperly concealed its plans to buy paging company Skytel Communications.
A class-action suit was announced late Thursday by a group of investors charging they made money-losing trades after MCI WorldCom made misleading statements. The suit alleges MCI WorldCom drove down the price of SkyTel's shares -- and the price tag for last week's deal -- by downplaying news it had reserved the Internet address "www.skytelworldcom.com."
Regulators, meanwhile, are reportedly investigating whether MCI WorldCom intentionally mislead investors with its statements regarding the Web address on May 25, three days before announcing the $1.3 billion purchase of Skytel.
The Securities and Exchange Commission plans to ask MCI WorldCom to supply all documents related to the SkyTel negotiations to determine who knew what and when they knew it, The Wall Street Journal reported today, citing a person familiar with the matter.
MCI WorldCom declined comment today on both the investor suit and the Journal report. An SEC official did not return a phone call seeking comment.
Shares of SkyTel rose as much as 16 percent to $21.87 1/2 on May 25 after an Internet service named Company Sleuth reported that MCI WorldCom had reserved an Internet address combining the two companies' names, suggesting a merger could be in the works.
MCI WorldCom quickly played down the significance of that move, saying it routinely reserves domain names that might have value, and that the SkyTel-related registration was the work of an overzealous employee.
"From time to time, MCI WorldCom employees, sometimes acting on their own initiative, register domain names they believe may be potential targets of domain-name squatters. The action is not an indication of any official company intention," said the statement read that day by spokeswoman Barbara Gibson.
By the close of trading, SkyTel had closed with a 6 percent gain at $20.12 1/2 , with MCI WorldCom compounding the confusion by first saying the registration had been withdrawn and later that night saying it had not. The merger agreement announced on May 28 valued SkyTel at about $21.25 per share.
The investor group, represented by the New York law firm Bernstein Liebhard & Lifshitz, alleged that "MCI was aware that many public shareholders of SkyTel would sell their SkyTel stock if they believed that market rumors of takeover talks between MCI and SkyTel were unfounded. Defendant's motive was to reduce the price MCI would have to pay to acquire SkyTel."
The Journal said the SEC will try to determine if an executive decision had been made at MCI WorldCom to secure the Internet address and whether the employee had been directed to do so.
The report also noted that MCI WolrdCom could easily have declined to comment on the SkyTel situation, a common strategy used by companies in merger discussions and one that is endorsed by the SEC and the courts. But in choosing to respond publicly, the company was required to make a full, truthful statement, the Journal said, quoting a securities lawyer.