Capital Markets

‘Opt-out’ Plaintiffs Settle with WorldCom

Pension funds claim that by not joining in the $6.1 billion settlement earlier this year, they will fare better than the class-action plaintiffs; o...
Stephen TaubOctober 19, 2005

Five New York City public pension funds that did not join in the $6.1 billion WorldCom class-action settlement have settled their own lawsuits for a total of $78.9 million, reported Reuters.

The pension funds lost more than $200 million on WorldCom stock and bond investments after the company, now called MCI, filed for bankruptcy in 2002 after an $11 billion accounting fraud. About $130 million of that amount was directly related to the fraud, said Bruce Stanton, a senior attorney in the pensions division at the New York City Law Department, according to Reuters.

The defendants who agreed to settle include Citigroup, J.P. Morgan Chase & Co., Bank of America Corp., Deutsche Bank AG, ABN AMRO, and Lehman Brothers Holdings Inc., which underwrote WorldCom
bonds, reported Reuters.

“This settlement fully validates the decision of the funds’ trustees to opt out of the class action to pursue an individual case,” Michael Cardozo, the city’s corporation counsel, said in a statement, according to the wire service. The pension funds asserted that they wound up with about three times more than they would have received had they joined in the class action, Reuters added.

Sean Coffey, a lawyer for the plaintiffs in the class action against WorldCom, told the wire service that he would be “very skeptical” of
such a claim. Indeed, it’s a little tricky to figure out which group might have fared better.

Reuters reported that attorneys’ fees totaled 5.5 percent of the class-action settlement, or about $363 million, and that the city pension funds are paying about 15 percent, roughly $11.8 million. Stanton told the wire service that it’s typical to pay a higher percentage in an individual case than in a larger class action, which offers attorneys a much higher total of fees. It’s unclear whether the fees will be subtracted from the total settlement amount.

The numbers are also hard to calculate because plaintiffs have invested in many different issues of bonds, as well as in equity. Since it’s difficult to figure out the losses, it’s difficult to figure out the recovery base.

It’s also unclear how many investors represented by the class will ultimately file a claim for their part of the settlement. If there is a very low filing rate, the class investors who do file will fare better than the New York plaintiffs in the opt-out group; if there is a high filing rate, the converse may be true.

Another group of pension funds also opted out of the class action and may announce the terms of a separate settlement next week. According to Compliance Week, the plaintiffs in that group include about 80 state and multi-employer pension funds and other institutional investors, including CalPERS, CalSTERS, The Los Angeles City Employee Retirement Association, Northwest Mutual Life Insurance Co. and Scotland-based Standard Life.