|J.P. Morgan and 13 other banks have agreed to pay $6 billion to WorldCom investors.|
NEW YORK (CNN/Money) -
J.P. Morgan Chase & Co. said Wednesday it would pay $2 billion to settle an investor lawsuit brought after an $11 billion accounting scandal forced WorldCom Inc. to declare the largest bankruptcy in U.S. history.
The J.P. Morgan deal comes one day after a New York federal jury convicted ex-WorldCom chief Bernard Ebbers on nine felony counts related to WorldCom's tumble.
It also comes one day before J.P. Morgan, which underwrote a series of WorldCom bond offerings between 2000 and 2001, was due to go on trial in the investor lawsuit.
All told, 14 investment banks have agreed to shell out about $6 billion to settle the case, a record for a securities fraud class action. Including legal fees, $5 billion will go to WorldCom bondholders and the remainder will go to its shareholders.
"This (securities settlement) certainly blows away any we've seen so far," said Bruce Carton, a vice president of Institutional Shareholder Services who tracks securities class-action settlements. Until recently the record was held by a $3.1 billion settlement with Cendant Corp. in 2000.
The settlement pools could get bigger. Sean Coffey, the lead lawyer for investors, said in an interview that he was confident of brokering soon a settlement with another group of defendants, WorldCom's former directors.
The other holdout defendant is Arthur Andersen, the defunct accounting firm. Jury selection in the trial, originally set for Thursday, has been delayed until next week, according to Coffey.
The WorldCom class action was filed against major banks on behalf of hundreds of thousands of investors who bought WorldCom stock and bonds before the telecommunications giant sought bankruptcy protection in July 2002. WorldCom emerged from bankruptcy a year ago and is now known as MCI.
In their lawsuit, WorldCom investors accused the banks of helping the company to sell bonds when they should have known the company was lying about its finances. Alan Hevesi, the New York State Comptroller who oversees the New York State Common Retirement Fund, is lead plaintiff in the lawsuit.
J.P. Morgan Chase CEO William Harrison said in a statement issued Wednesday that the bank was unwilling to roll the dice at trial, which could have resulted in a crippling verdict.
"Given recent developments, we made a decision to settle rather than risk the uncertainty of a trial," Harrison said. "We can now put this litigation behind us."
Settlements were expected
The settlement by J.P. Morgan and the other banks was not surprising.
Securities fraud cases very rarely go to trial. Companies will often settle them rather than risk the trial exposure and a hefty verdict.
John Coffee, a Columbia Law School professor and securities law expert, said companies are especially nervous today, when memories of the raft of corporate scandals that began with Enron Corp.'s implosion in late 2001 are still fresh.
"In the current climate defendants don't feel that they will be believed by a jury," said Coffee.
The conviction of Ebbers, who could spend the rest of his life in prison, may have been yet another reminder to J.P. Morgan officials of what they were up against. To prove Ebbers broke the law, prosecutors had to convince jurors that he acted with criminal intent.
But to put J.P. Morgan and WorldCom's other banks on the hook, all that lawyers representing investors would have to have shown under federal securities laws was that they were negligent when they underwrote the company's bond sales.
The pressure to settle had also been building since Citigroup first agreed to settle, ultimately for $2.58 billion, its piece of the investor class-action last year.
The next settlement did not come until January, when 10 former WorldCom directors agreed to pay investors $54 million. The deal, which was later scuttled by the court, was remarkable in that a portion of the payment would have come out of the directors own pockets and not any insurance policies or company coffers.
Then, on March 3, Bank of America agreed to pony up $460.5 million. Within a week, 11 more banks had cut deals, including Deutsche Bank and ABN Amro.
If WorldCom directors and Arthur Andersen settle next, legal experts said their payments would be relatively small compared to the banks' sums.
Slicing the settlement pie
The $6 billion settlement pool in the WorldCom Securities Litigation follows a $750 million payment WorldCom made last year to end a Securities and Exchange lawsuit. That money will also go back to investors, bringing the total investor pie to roughly $6.75 billion.
What happens next is likely to be a long and complicated process. First the court must approve the latest settlements, including the fees that plaintiffs lawyers will pocket for their work on the case. Then a process has to be set up for burned WorldCom investors to file claims, their losses and reimbursements calculated, and checks cut.
In the WorldCom case, the plaintiffs attorneys stand to pocket about 5.5 percent, or $330 million, of the total payout. That's low considering investor lawyers typically get about 25 percent of a securities settlement.
Legal experts estimated that it could take two years or so before any eligible investors receive a check. They said too that it's difficult to know at this point how much each investors could reasonably expect to get back for every dollar they lost.
"Unfortunately," said Joseph Grundfest, a securities law professor at Stanford University, "the best thing you can say now (to WorldCom) investors is 'wait and see.'"
But Sean Coffey, the lead WorldCom lawyer, said bondholders sustained about $9 billion in losses. Based on their $5 billion recovery, they should recoup about half of their investment.
New York State Comptroller Alan Hevesi's office estimated bondholder losses at closer to $13.3 billion.
Either way, the return to WorldCom bondholders could be extraordinary. In 2004, shareholders in similar settlements typically received just two percent of their estimated losses, according to Cornerstone Research, a litigation consulting firm.
Neither Coffey nor Hevesi's staff had readily-available estimates for losses suffered by WorldCom shareholders.
This much is known: The average amount of money that companies are paying today to settle securities class action is rising fast. Last year settlement amounts reached a record $5.5 billion both because more cases settled and also because the average settlement size grew, according to a recent Cornerstone Research study.
"The cost of settling private class action securities fraud litigation continues to rise," said Grundfest. "The price of poker is going up."