The following article appeared in the April 2005 edition of ISS' SCAS Alert:

WorldCom 360°
By Bruce Carton, VP and Executive Director

The final days of winter 2005 appear to have been the crescendo of nearly three years of fallout from the financial fraud at WorldCom Inc. that first came to light in June 2002. On March 15, former CEO Bernie Ebbers was found guilty by a jury of nine counts relating to the accounting fraud at WorldCom. He now faces up to 85 years in prison and is to be sentenced on June 13.

In addition, J.P. Morgan's agreement on March 16 to settle the claims against it in the WorldCom securities class action for $2 billion capped a whirlwind two-week period in which 13 banks and all 12 former WorldCom directors named as defendants in that case settled for a combined $3.486 billion. When this is combined with the $2.575 billion settlement with co-defendant Citigroup that was announced May 10, 2004, the total settlement fund in WorldCom securities class action now stands at a staggering $6.061 billion. [See this chart for a breakdown of these settlements.]

Although there are still a few loose ends, here is a 360-degree view of the WorldCom legal landscape as it heads toward closure.

Criminal Charges
With the jury verdict in the Ebbers trial, the federal criminal prosecutions of WorldCom executives appear to be completed. In addition to the Ebbers verdict, five other executives, including the company's former CFO, Controller and Accounting Director, previously pleaded guilty to charges of securities fraud and each faces a sentence ranging from probation to between 15 and 25 years in prison.

It is unclear what will become of any remaining state criminal prosecutions against WorldCom executives. In August 2003, the state of Oklahoma filed felony charges against Ebbers and former CFO Scott Sullivan, which were later dismissed pending the conclusion of the federal case. After Ebbers was convicted, Oklahoma's Attorney General stated that he intended to re-file these state fraud charges but offer concurrent sentences to Ebbers, Sullivan and possibly others on the state fraud charges if the federal sentences were "appropriate." Otherwise, the Attorney General stated, the state would prosecute these individuals on its own.

SEC
The SEC has filed settled enforcement actions against five of the six WorldCom executives who have pleaded or been found guilty of securities fraud. To date, however, the SEC has not sued Ebbers. In addition, in 2003, the SEC settled the lawsuit it filed against WorldCom itself. WorldCom agreed to pay $500 million in cash and $250 million worth of stock, all of which will be returned to investors under the Fair Funds provision of the Sarbanes-Oxley Act. To recover a share of this $750 million, investors must file a claim form no later than July 19, 2005. This SEC settlement and claims process are completely separate from the high-profile settlements in the private securities class actions, which are discussed in greater detail below.

Securities Class Action
In May 2004, Citigroup became the first WorldCom defendant to settle when it agreed to pay $2.575 billion. At the time, that settlement by itself made the WorldCom case the second-largest settlement in history behind only the $3.1 billion settlement in 2000 in the Cendant case. As discussed above, the recent flurry of settlements in this case has raised the total settlement fund to an unprecedented $6.061 billion. J.P. Morgan's recent settlement was notable not only for its enormous size (the third-largest settlement in history), but for the way it came about: J.P. Morgan reportedly was offered a settlement in May 2004 for $1.37 billion, but the bank chose to reject that offer. Less than a year later, J.P. Morgan settled the case for $2 billion, or $630 million more. Numerous other settlements in this case, such as Bank of America ($460.5 million), Deutsche Bank Securities ($325 million), and ABN Amro ($278.3 million), are among the top 25 largest settlements of all-time.

Most recently, between March 18 and March 21, all 12 former directors of WorldCom who are defendants in the securities class action settled the claims against them for a combined $60.75 million. Significantly, the directors have agreed to pay $24.75 million out of their own pockets, with the other $36 million coming from insurance proceeds. The directors' settlement is extraordinary because it is one of less than a handful of instances in which directors have agreed to settle using personal funds. The lead plaintiff, the New York State Common Retirement Fund, reportedly insisted from the beginning of the case that such personal payments would be a required part of any potential settlement with the directors.

Following the barrage of recent settlements, the only remaining defendant was WorldCom's auditor, Arthur Andersen. Although Andersen no longer functions as an accounting firm, lawyers for investors decided to take Andersen to trial because they reportedly believe that the firm may still have significant assets. A jury heard opening arguments on March 29. If the case does not settle, the trial against Arthur Andersen may provide the final exclamation point to the WorldCom saga.