WorldCom Settlement Scuttled

Plaintiffs in a case against WorldCom Inc. said Wednesday that they would withdraw from a deal in which 10 former directors would have personally paid $18 million of a $54-million settlement to compensate investors for the company’s plunge into bankruptcy.

New York Comptroller Alan Hevesi announced that the plaintiffs were pulling out of the deal after U.S. District Judge Denise Cote struck down a key part of the agreement.

Hevesi, the lead plaintiff, said the settlement was scuttled because Cote ruled that any jury award resulting from a Feb. 28 trial could not be reduced using a formula that would have taken into account the limited finances of the directors who settled.

“I’m very disappointed,” 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 that executives who presided over corporate misdeeds have agreed to assume any personal financial liability for the resulting damage.

Hevesi said the settlement set a precedent that directors would be held accountable and represented a “red alert to directors to do the job they have to do.”

A lawyer for the directors, Paul Curnin, did not return a call for comment.

The directors’ payments, which would have been slightly more than 20% of their combined net worth, were to be supplemented by an additional $36 million from insurance policies. Some investment banks that were defendants had objected to the settlement, telling Cote they would be unfairly prejudiced unless all defendants stood trial together.

The deal had been reached about two weeks before the start of a criminal trial against former WorldCom Chief Executive Bernard J. Ebbers.

Investors lost billions of dollars when it was revealed in 2002 that WorldCom had inflated profit by at least $11 billion. WorldCom is now MCI Inc. and is based in Ashburn, Va.

“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 directors’ 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.”

Hevesi estimated that the New York State Common Retirement Fund lost $9 billion in WorldCom’s collapse.