Risk & Compliance

Former Enron Directors Will Pay $13M

Days earlier, former directors of WorldCom agreed to pay $18 million out of pocket.
Stephen TaubJanuary 11, 2005

For the second time in less than a week, former directors from a bankrupt company embroiled in an accounting scandal agreed to pay out of pocket to settle shareholder lawsuits.

On Friday, 18 former directors of Enron Corp. announced that they would pay $168 million to settle a lawsuit filed by shareholders who lost large sums of money after the energy company collapsed three years ago, according to published reports. Under the settlement, 10 of the directors will kick in $13 million of their own money, reported USA Today.

Days earlier, 10 former outside directors of WorldCom (now MCI Inc.) agreed to pay $54 million — including $18 million of their own money — to settle part of a class-action lawsuit brought by investors.

These are dramatic developments that figure to have long-term implications. In the past. directors and officers insurance policies, typically paid for by the company, also typically covered the entire cost of any settlement.

The former Enron directors who agreed to pay shareholders from their own personal funds include Robert Belfer, Norman Blake, Ronnie Chan, John Duncan, Joe Foy, Wendy Gramm, Robert Jaedicke, Charles LeMaistre, Rebecca Mark-Jusbasche, and Ken Harrison, according to USA Today. The other directors participating in the settlement are Paulo Ferraz Pereira, John Mendelsohn, Jerome Meyer, Frank Savage, John Urquhart, John Wakeham, Charles Walker, and Herbert Winokur.

According to Bloomberg, the settlement must still be approved by U.S. District Judge Melinda Harmon, who is presiding over the class action.

“This is a watermark for corporate governance,” C. Warren Neel, director of the corporate governance center at the University of Tennessee in Knoxville, told the wire service. “This is a message to directors that there are circumstances when your ace-in-the-hole insurance is not going to protect you and the money is going to come out of your own pocket.”

“This is going to enforce a discipline that has been totally lacking in the system,” Stephen Ryan, a partner with the law firm of Manatt, Phelps & Phillips, told The New York Times. “This is the inevitable result of the revolution that has taken place over recent years and it is a reason why people aren’t going to want to be directors in the future.”

Altogether, former Enron shareholders have reclaimed $500 million from this settlement and three others, USA Today reported.