Ten ex-directors of Enron Corp. have agreed to pay $13 million of their own money as part of a $168 million settlement of a lawsuit filed by shareholders who lost their investments after Enron's 2001 implosion, according to the Wall Street Journal.
The agreement, announced Friday, is similar to one reached by former directors of WorldCom Inc. Ten of those former board members also agreed to pay out of their own pockets to settle allegations of federal securities laws violations - specifically that they allowed misleading or false statements about the company's finances to be publicly released. None of the directors at the two companies has acknowledged any wrongdoing.
In the Enron agreement, 18 of 29 former directors named in a 2002 lawsuit agreed to settle civil claims against them. The settlement calls for 10 of them to pay $13 million from profits they earned by selling company stock before Enron's accounting problems became known, the Washington Post reported. The remainder of the settlement will be paid out of directors' and officers' insurance policies.
“This is a message to directors that there are circumstances when your ace-in-the-hole insurance is not going to protect you,” said C. Warren Neel, director of the corporate governance center at the University of Tennessee in Knoxville, according to Bloomberg.
In the Enron litigation, a federal court in Houston previously ruled that plaintiffs' attorneys had no grounds on which to seek redress from directors on fraud or insider-trading claims. Nevertheless, lead plaintiffs' attorney William Lerach said the proposed settlement "sends a message that directors can't just sit there in meetings and not think about what's going on under them."
“The settlement is very significant in holding these outside directors at least partially personally responsible,” he said. “Hopefully, this will help send a message to corporate boardrooms of the importance of directors performing their legal duties.” The court must approve the agreement.
Neel, who serves as a director on the boards of Saks Inc. and American Healthways Inc., said: “The other big question is: What impact these settlements will have on the recruitment of new directors. Will this make it harder to fill board seats?”
The directors who will pay part of the settlement from their own funds include Robert Belfer, Norman Blake, Ronnie Chan, John Duncan, Joe Foy, Wendy Gramm, Robert Jaedicke, Charles LeMaistre, Rebecca Mark-Jusbasche and Ken Harrison.
Not participating in the settlement were former Chairman Ken Lay, former Chief Executive Jeffrey Skilling, former Chief Financial Officer Andrew Fastow, former Chief Accounting Officer Rick Causey and former Chief Risk Officer Rick Buy. Fastow has pleaded guilty to fraud and has been sentenced to 10 years in prison. Lay, Skilling and Causey are awaiting trial on criminal fraud charges.