Ex-WorldCom Directors Agree to Pay from Own Pockets

In an unprecedented legal move that could send shock waves through board rooms around the country, 10 ex-directors of the former WorldCom Inc. have agreed to pay $18 million in personal funds to settle a class-action lawsuit related to the massive accounting fraud at the company.

Bondholders and shareholders who brought the suit will also receive $36 million from the directors' liability insurers under the agreement, which may be signed in federal court in Manhattan as early as today, the Wall Street Journal reported.

"New York State has done a great thing for shareholders everywhere," Greg Taxin, chief executive of Glass Lewis, an institutional investor advisory service in San Francisco, told the New York Times. "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 suit accuses the directors of a number of securities-law violations, such as knowing that statements about WorldCom's financial condition were false. Last month, for example, the judge overseeing the case stated that the prospectus in one WorldCom bond offering was false and misleading.

"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 the judge indicated that there were material 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."

The amounts being paid will differ for each director, but will amount to 20 percent of the directors' aggregate net worth, not counting their primary residences and retirement accounts.

According to lawyers involved in the case who spoke to the New York Times, personal payments by the directors were a requirement of any deal from the start, even though none directly participated in the $11 billion fraud and all suffered large losses when the company collapsed in 2002.

However, the board did agree to loan $408 million in corporate funds to former chief executive Bernard J. Ebbers to cover a call for more collateral that he had received from a brokerage firm that had lent him money against his WorldCom shares, which were plummeting in 2000.

"If there ever was a case where directors should reach into their own pockets, this is it," said Nell Minow, editor at the Corporate Library, an independent research firm specializing in corporate governance. "What I hope this is a harbinger of is the greater pursuit of justice in whatever form by plaintiffs with a significant amount at stake and the obligation of fiduciaries."

Ebbers was also named as a defendant in the securities case, but he is preparing for his Jan. 18 criminal trial.

The directors who have agreed to pay personally are Clifford L. Alexander Jr.; James C. Allen; Judith Areen; Carl J. Aycock; Max E. Bobbitt Jr.; Stiles A. Kellett Jr.; Gordon S. Macklin; John A. Porter; Lawrence C. Tucker; and the estate of John W. Sidgmore, who died in 2003. The directors in the settlement neither admitted nor denied wrongdoing.

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