Risk & Compliance

Former WorldCom Directors Pony Up $18 Million

The settlement ''sends a message to directors that their own personal wealth is at risk if they're not diligent in their jobs.''
Stephen TaubJanuary 7, 2005

In an agreement that will surely send shivers through the spines of thousands of corporate board members, 10 former outside directors of WorldCom (now MCI Inc.) agreed to pay $54 million to settle part of a class-action lawsuit brought by investors burned by the telecom giant’s accounting scandal. The directors’ out-of-pocket expense: $18 million.

This is a stunning concession, since board members usually rely on directors-and-officers insurance policies and the companies they were serving to bear the expense of such settlements. According to Stanford law professor Michael Klausner, researchers at the university have uncovered only four cases between 1968 and 2003 in which directors used their own money to settle a shareholder lawsuit, reported The New York Times. The paper added that negotiators of the settlement have insisted all along that under any possible deal, directors would be required to make personal payments.

The $18 million represents about 20 percent of the directors’ combined personal net worth, excluding their primary residences, retirement accounts, and certain joint marital assets, according to the Wall Street Journal.

The Journal reported that the lawsuit, led by the New York State Common Retirement Fund, accused the former directors of a number of securities-law violations, including approving misleading statements about WorldCom’s financial condition that they allegedly should have known to be false.

The “unprecedented” settlement “sends a message to directors that their own personal wealth is at risk if they’re not diligent in their jobs,” said Lynn Turner, research director at proxy advisor Glass-Lewis & Co. and a former Securities and Exchange Commission chief accountant, according to the Journal. “In the past, directors’ personal wealth has not been at risk when they failed in their obligation to investors who elected them. Now, if you don’t get the job done, it appears you may very well pay.”

Directors worried that they may be more exposed to personal financial liability may also be heartened by the fact that the WorldCom fraud is very unusual because it was so egregious. “If you were considering joining the board of a solvent company that was indemnifying you and had insurance and you weren’t planning on committing fraud, then why would you be deterred?” said Howard B. Sirota, whose law firm concentrates on securities litigation, according to the Times.

The 10 directors who settled include: James C. Allen, a telecom-industry executive; Judith Areen, a former dean of Georgetown Law School; Carl J. Aycock, a former motel-industry executive; Max E. Bobbitt, a telecom consultant and executive; Clifford L. Alexander, president of consulting firm Alexander & Associates Inc.; Stiles A. Kellett Jr., chairman of Kellett Investment Corp.; Gordon S. Macklin, former president of the National Association of Securities Dealers; John A. Porter, a former WorldCom chairman and vice chairman; Lawrence C. Tucker, a partner at Brown Brothers Harriman; and the estate of the late John W. Sidgmore, who took over as WorldCom’s chief executive in April 2002 shortly before the company’s accounting problems surfaced publicly.

The settlement does not include former outside directors Bert C. Roberts Jr. and Francesco Galesi, who remain defendants in the lawsuit, the Journal added.