NEW YORK - Ten former directors of WorldCom Inc., the telecommunications company whose bankruptcy was the largest in history, have agreed to pay $18 million of their own money to settle a class action lawsuit by investors who lost hundreds of millions of dollars when the company collapsed in July 2002.
The agreement by directors to dig into their own pockets, which is part of a $54 million settlement with plaintiffs led by the New York State Common Retirement Fund, is a remarkable concession. Directors have always relied on their companies' insurance to cover costs associated with securities cases and settlements.
Yesterday's settlement is a disturbing precedent for directors, whose duties to look after shareholders' interests have come under harsh scrutiny in the three years since the failure of Enron. Investors have become increasingly frustrated as company directors and officers escaped financial responsibility for losses incurred as a result of fraud.
Companies whose executives are accused of engaging in fraudulent practices typically pay those people's legal bills and the fines that can result when regulatory proceedings against them are settled. And directors almost never pay in such settlements because they are covered by insurance.
"New York state has done a great thing for shareholders everywhere," said Greg Taxin, chief executive of Glass Lewis, an institutional investor advisory service in San Francisco. "This may be one of the most important steps toward reinforcing the importance of performing the directorship duties with fidelity toward shareholders. It's going to be very sobering to board members around the country."
The directors' personal payments were a requirement of any deal from the start of the negotiations, according to lawyers involved in the settlement. Given the size of the WorldCom debacle, the investors who brought the case sought to make an example of the directors, said lawyers involved in the settlement.
The amounts being paid will be different for each director. While the exact individual amounts were not disclosed, the payments will account for 20 percent of the directors' aggregate net worth, not counting their primary residences and retirement accounts.
Together with $36 million provided by companies that had insured WorldCom's directors and officers, plaintiffs in the lawsuit will receive $54 million. Two former directors are still negotiating with the plaintiffs in the case.
The directors who have agreed to pay personally are: Clifford L. Alexander Jr., who was Army secretary in the Carter administration and later chief executive of Dun & Bradstreet; James C. Allen, former chief executive of Brooks Fiber Properties, a telecommunications company acquired by WorldCom; Judith Areen, a former dean of the Georgetown Law Center in Washington; Carl J. Aycock, an early investor in WorldCom; Max B. Bobbitt Jr., a private investor who was also chief executive of Metromedia China, a subsidiary of the Metromedia International Group; Stiles A. Kellett Jr., a private investor who headed WorldCom's executive compensation committee; Gordon S. Macklin, a former president of the National Association of Securities Dealers; John A. Porter, a private investor who has filed for personal bankruptcy in Florida; and Lawrence C. Tucker, a partner at Brown Brothers Harriman, the New York investment firm. The estate of John W. Sidgmore, a former WorldCom officer and director who died in 2003, is also participating in the settlement.
The directors participating in the settlement neither admitted nor denied wrongdoing. They were WorldCom directors from 1999 to 2002.
Alan G. Hevesi, state comptroller of New York and trustee of the retirement fund that was the lead plaintiff, declined to comment on the settlement. The fund lost $300 million in its WorldCom investments.
Paul C. Curnin, a lawyer at Simpson Thatcher & Bartlett who represents the directors in the settlement, also declined to comment.
It is clear that the directors faced increasing pressure to settle as the jury trial, scheduled to begin Feb. 28, drew closer. The drumbeat of corporate scandals has heightened public skepticism over the actions of executives and directors. While the insurance policy for WorldCom directors and officers provided $100 million in coverage, the risk was that the directors' exposure could have been much greater. A securities lawyer who is not involved in the case said that the directors might have settled because of the enormous liabilities faced in the jury trial.
"When securities are offered for sale under a registration statement and there is a material misstatement or omission, a plaintiff does not have to prove intent to defraud on the part of the directors to prevail under the federal securities laws," said Lewis D. Lowenfels, an expert in securities law at Tolins & Lowenfels in New York. "Since [there allegedly were] misstatements in the prospectus, and the amount of possible liability is so large, the directors may well have felt that the most prudent course was to cut off their exposure."
Directors not included in the settlement are Francesco Galesi, a real estate investor, and Bert C. Roberts Jr., former chairman and chief executive of MCI Communications, which merged with WorldCom in 1998.
The former directors in the settlement also have agreed to cooperate with lawyers representing the New York state fund against the remaining defendants in the WorldCom securities litigation. The defendants include Arthur Andersen, WorldCom's now-defunct auditor, and the 16 banks that sold WorldCom bonds to the public in two deals before its collapse, including J.P. Morgan Chase, Deutsche Bank and Bank of America.
One of WorldCom's biggest banks, Citigroup, is no longer a defendant in the case. The bank settled with the WorldCom investors last May, paying $2.65 billion. Bernard J. Ebbers, the WorldCom founder and chief executive, was also named as a defendant in the securities case, but he is preparing for his criminal trial in federal court in Manhattan that starts Jan. 18.
"Personal accountability is a touchstone of the SEC's enforcement efforts," said Stephen M. Cutler, the SEC's director of enforcement. "That's why our settlement policy is to insist that penalty amounts be paid by the individual wrongdoer, not by his or her employer or insurance company."