In a surprise decision, U.S. District Judge Denise Cote of the Southern District of New York ruled on Wednesday that a provision in the settlement agreement in the class-action case against WorldCom was illegal. Judge Cote indicated that the settlement was unfair to banks named in the lawsuit and stated that any jury award in a trial against the other defendants would be reduced as a result of the prior deal with the directors.
While the directors named in the lawsuit were able to reach a settlement based on a percentage of their own personal holdings, the banks named in the suit would have been open to potentially greater damages as the case heads for trial. Without the directors facing trial along with the banks, Judge Cote maintained that the banks would be prevented from reducing any verdict against them by the amount of investor losses found to be the fault of the WorldCom board.
Alan Hevesi, New York State Comptroller and representative for the lead plaintiff in the massive class-action suit, announced that he and the rest of the class action plaintiffs were pulling out of the settlement in light of Judge Cote's ruling. Mr. Hevesi expressed his disappointment, "The settlement is being terminated solely because of the potential impact on the amount other defendants might pay if the suit is successful." Mr. Hevesi has indicated his belief that a large settlement with the directors in the WorldCom case will stand as a warning to corporate directors in the future that they must take personal responsibility for the actions of their companies.
The banks involved in the case have expressed their hope that members of a jury will be more lenient toward the financial institutions if they hear direct testimony from the WorldCom board members that should have been responsible for WorldCom's demise. Analysts agree that jury members may be likely to decide on a lower award if the individual WorldCom board members and the financial institutions are participants in the same settlement.
There are 42 class-action groups joining forces and getting ready to face WorldCom and its directors at trial, scheduled to begin February 28 in Manhattan. One far-reaching affect of the case may be that banks may become more cautious in underwriting corporate bond issues.
WorldCom filed for bankruptcy protection after an accounting fraud discovered in 2002 revealed that the company had produced financial statements that inflated profits by $11 billion.