J.P. Morgan Chase will pay $2 billion to settle a class-action investor lawsuit that alleges the bank failed to investigate WorldCom's financial health when it sold bonds just before the company imploded amid scandal.
J.P. Morgan Chase is the last of 14 bond underwriters to settle the case, led by New York Comptroller Alan Hevesi, who oversees the New York State Common Retirement Fund. The Chase settlement is smaller than only one other financial institution, Citigroup, which agreed to pay a $2.58 billion settlement last year, the Wall Street Journal reported.
The Chase settlement comes on the eve of the scheduled trial, and one day after Bernard Ebbers, former WorldCom chief executive, was found guilty on nine felony counts for his role in the scandal that led to the largest bankruptcy in U.S. history.
The Journal reported that J.P. Morgan could have settled for $1.37 billion last year, using the same formula used to figure Citigroup's payout amount. J.P. Morgan executives, however, said the formula was unfair because Citigroup had also promoted WorldCom's stock.
Settlement payouts have gone up since then, as the seven banks that recently reached agreements are paying big premiums on top of the Citigroup formula. The 14 investment banks, which underwrote a number of WorldCom bond offerings between 2000 and 2001, have agreed to pay about $6 billion in total.
Securities fraud cases rarely go to trial because companies are not willing to risk exposure at trial.
"In the current climate defendants don't feel that they will be believed by a jury," John Coffee, a Columbia Law School professor and securities law expert, told CNN.
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, but observers say it could be two years before they see any money. Shareholders received just 2 percent of their estimated losses on average in 2004.