Capital Markets

J. P. Morgan Settles WorldCom Suit

A day before jury selection is set to begin, bank agrees to pay WorldCom lenders $2 billion.
Stephen TaubMarch 17, 2005

J.P. Morgan Securities, the last bank holdout, agreed to pay $2 billion to settle claims related to two bond offerings for scandal-plagued WorldCom. The bonds were hawked about a year before the Clinton, Mississippi-based WorldCom filed for Chapter 11 bankruptcy protection.

The $2 billion deal was announced by Alan G. Hevesi, New York State comptroller and sole trustee of the New York State Common Retirement Fund, the court-appointed lead plaintiff in the WorldCom securities litigation. With the Morgan settlement, the total amount recovered by WorldCom lenders now tops $6 billion, nearly double the previous settlement record in a civil suit filed against Cendant Corp. Reportedly, plaintiffs in the WorldCom suit have recouped more than half the damages they were seeking. Typically, lenders in these sorts of situations wind up settling for just a few cents on the dollar.

Altogether, 17 banks have settled with Hevesi’s group. The remaining holdouts: WorldCom’s auditor Arthur Andersen, plus 12 former WorldCom directors. “We remain willing to talk with other defendants about potential settlements, but we remain focused on the start of the trial against any remaining defendants next week,” Hevesi noted in a statement.

As it turns out, the amount J.P. Morgan agreed to pay is higher, on a percentage basis, than the rate established in an earlier settlement with Citigroup, a co-lead on the WorldCom bond offerings. It’s also a whole lot more than the $1.4 billion lenders were reportedly willing to take in an earlier proposal. Said J.P. Morgan CEO William B. Harrison, Jr., in a statement. “Given recent developments, we made a decision to settle rather than risk the uncertainty of a trial.”

It’s not completely clear what recent developments Harrison was referring to. But the deal was announced just a day before jury selection in the WorldCom civil trial was scheduled to begin. And earlier this week, former WorldCom CEO Bernard Ebbers was convicted on nine counts of fraud stemming from the accounting scandal at the troubled telco (now known as MCI). Ebbers, who transformed the tiny reseller of long distance service (known then as LDDS) into a global telecommunications giant, faces up to 85 years in prison. Under federal sentencing guidelines, he’ll likely get about 25 years.

4 Powerful Communication Strategies for Your Next Board Meeting