Risk & Compliance

WorldCom Directors’ Settlement Nixed

The 10 former directors will rejoin 16 investment banks as defendants in a shareholder lawsuit.
Stephen TaubFebruary 3, 2005

So much for a historic settlement in which former WorldCom directors agreed to be held personally liable in a shareholder lawsuit. The deal collapsed after a judge struck down one critical provision of the agreement.

As we reported last month, 10 former outside directors of WorldCom (now MCI Inc.) agreed to pay $54 million — including $18 million out of their own pockets — to settle part of a class-action lawsuit brought by investors burned by the telecom giant’s accounting scandal. Typically, the directors’ portion of the settlement would have been paid in its entirety from their directors’ and officers’ (D&O) insurance.

Almost from the start, the deal was opposed by 16 investment banks that are also defendants in the case. When the banks’ portion of the case went to trial, the agreement by the directors would have limited their damages — and therefore increased the banks’ exposure.

U.S. District Judge Denise Cote, however, undermined the deal when she ruled that any jury award could not take into account the limited finances of the directors who settled, according to the Associated Press.

As a result of the ruling, the plaintiffs are withdrawing from the deal. “The so-called ‘ability-to-pay’ provision at issue was a necessary part of the settlement,” said New York State Comptroller Alan Hevesi, in a statement. Hevesi is the trustee of the New York State Common Retirement Fund, the lead plaintiff in the WorldCom class action lawsuit.

The directors will now rejoin the investment banks as defendants at a trial scheduled to start on February 28, according to Bloomberg.

Sean Coffey of Bernstein Litowitz Berger & Grossmann, the lead counsel to the plaintiffs, told The New York Times that the plaintiffs “would have preferred to have this historic settlement stand, but it does not distract in the slightest from our focus on the trial and proving our case concerning the banks’ central role in the WorldCom debacle.”

Less than a week after the announcement of the now-scuttled WorldCom settlement, 18 former directors of Enron Corp. announced that they would pay $168 million — including $13 million out of pocket from 10 of the directors — to settle a similar lawsuit. Because Judge Cote’s ruling focused on one technical aspect of the WorldCom agreement, noted the Times, it won’t necessarily affect the Enron deal or similar agreements between investors and directors.