NEW YORK (AP) — A unique deal in which 10 former WorldCom directors would personally pay $18 million of a $54 million settlement to compensate investors over the company’s plunge into bankruptcy collapsed yesterday after a federal judge barred a key portion of the deal.
New York state Comptroller Alan Hevesi, the lead plaintiff, announced that the plaintiffs were pulling out of the deal after U.S. District Judge Denise Cote struck down a key component of the agreement.
Mr. Hevesi said the ruling could have reduced possible awards against other defendants, including investment banks.
In her ruling, the judge threw out a part of the settlement that adjusted the directors’ liability based on their personal finances. The directors had been set to contribute $18 million to the settlement out of their own pockets in addition to $36 million from insurance.
“I’m very disappointed,” Mr. Hevesi said. “The settlement is being terminated solely because of the potential impact on the amount other defendants might pay if the suit is successful.”
The unusual proposed settlement marked one of the few times executives who presided over corporate misdeeds have agreed to assume any personal financial liability for the resulting damage.
Mr. Hevesi said the settlement had set a precedent that directors would be held accountable and represented a “red alert to directors to do the job they have to do.”
An attorney for the directors, Paul Curnin, did not immediately return a call for comment yesterday.
The WorldCom director payments, which would have been equal to slightly more than 20 percent of their combined net worth, were to be supplemented by another $36 million from insurance policies covering WorldCom, now named MCI. Some investment banks that were defendants in the case had objected to the settlement, telling Judge Cote they would be unfairly prejudiced unless all the defendants stood trial together.
The deal had been reached about two weeks before the start of the federal criminal trial against former WorldCom Chief Executive Officer Bernard Ebbers. That trial continued yesterday before another judge in federal court in Manhattan.
Investors lost billions of dollars when it was revealed in 2002 that WorldCom had inflated profits by at least $11 billion.
“Regrettably, we have no choice but to terminate the settlement, as historic as it is, because we cannot take the risk that a jury verdict against the investment banks might be reduced by an amount substantially higher than the settling director’s ability to pay,” said Sean Coffey, a lawyer for the plaintiffs.
Jonathan Gasthalter, a spokesman for the banks, said: “The bond underwriters have no objection to the WorldCom directors entering into a lawful settlement with investors. The plaintiffs wanted to include a judgment reduction formula that we believe is clearly unlawful, and we are pleased that Judge Cote has agreed with us.”
Mr. Hevesi is the lead plaintiff because as New York State’s comptroller, he is the sole trustee of the New York state Common Retirement Fund. He estimated that the fund, which serves 971,000 people across the state, lost as much as $9 billion as a result of WorldCom’s collapse.