Bank to Pay $2 Billion to Settle WorldCom Claims

[FaGal]

Bank to Pay $2 Billion to Settle WorldCom Claims
By GRETCHEN MORGENSON

J. P. Morgan Chase, which sold billions of dollars in WorldCom bonds to the public about a year before the company filed for bankruptcy, agreed yesterday to pay $2 billion to settle investors' claims that it did not conduct adequate investigation into the financial condition of WorldCom before the securities were sold.

The bank reached its settlement with Alan G. Hevesi, comptroller of New York and trustee of the New York State Common Retirement Fund, the lead plaintiff representing investors who lost money when WorldCom collapsed in 2002.

If the court approves the settlement, the amount recovered in the suit will exceed $6 billion - almost twice the previous record of $3.18 billion paid by Cendant and its accounting firm to settle a securities class action related to a fraud that occurred at the company in 1998.

The $6 billion recovered by Mr. Hevesi and his lawyers is also unusual because it amounts to more than half the damages sought by the fund on behalf of the investors it represented. Typically investors receive pennies on the dollar when they file suits against bankrupt companies. Under the terms of an agreement approved by the court, the hundreds of thousands of investors - both large and small, including mutual funds, insurance companies and individuals - will receive 94.5 percent of the money recovered in the suit. The rest will go to the lawyers.

Jury selection in the WorldCom civil trial was scheduled to begin today - just two days after WorldCom's former chief executive, Bernard J. Ebbers, was found guilty of fraud - in federal court in lower Manhattan, putting pressure on Morgan Chase to settle the case. It is the last of the 17 WorldCom banks to reach a settlement, and it had argued that it appropriately relied on financial statements vetted by WorldCom's auditor, Arthur Andersen, and that it could not have spotted the $11 billion accounting fraud that felled the company.

William B. Harrison Jr., chief executive of J. P. Morgan Chase, said in a statement: "Given recent developments, we made a decision to settle rather than risk the uncertainty of a trial." The bank said it expected to take a charge to earnings of $900 million in the first quarter of this year in connection with the settlement. The bank neither admitted nor denied wrongdoing.

The board of J. P. Morgan Chase met on Tuesday to discuss a possible settlement with WorldCom investors, according to a person briefed on the meeting. During those discussions, the news came that Mr. Ebbers had been found guilty.

But a more important turning point in the case came last December when Denise Cote, the federal judge overseeing the WorldCom litigation, wrote an opinion noting that the prospectus in the 2001 bond offering was false and misleading and that the banks would therefore have to prove to a jury that they had conducted appropriate due diligence before selling WorldCom securities to the public.

"Underwriters perform a different function from auditors," the judge wrote. "They have special access to information about an issuer at a critical time in the issuer's corporate life, at a time it is seeking to raise capital. The public relies on the underwriter to obtain and verify relevant information and then make sure that essential facts are disclosed."

Judge Cote's opinion represented a new legal perspective and was a blow to the banks that were defendants in the case. Soon, they began to approach Mr. Hevesi's lawyers about settlements.

"This settlement makes it unlikely that the due diligence responsibilities of underwriters as articulated by Judge Cote will be overruled in this case," said Lewis D. Lowenfels, an authority on securities law at Tolins & Lowenfels in New York. "As a result her opinion will stand as an important precedent in the future."

But J. P. Morgan Chase remained a holdout even as Bank of America, Deutsche Bank and other WorldCom banks struck deals with Mr. Hevesi in the last two weeks. As the other banks dropped out, Morgan's potential liability to an unfavorable jury verdict grew substantially. The bank was a co-manager in both the 2000 and the 2001 offerings; it sold roughly a third of the securities offered to investors.

On Monday, Judge Cote issued another ruling that put J. P. Morgan Chase at even greater peril if it chose to go to trial. Addressing the bank's objections to the previous settlements, the judge suggested that the $5.1 billion in damages that the bank viewed as its maximum exposure, based on the amount of WorldCom bonds it sold, could actually be larger. That drove the bank to the bargaining table, according to two people briefed on the matter.

J. P. Morgan Chase had a chance to settle with Mr. Hevesi last year for $1.4 billion. That opportunity came in May, when Citigroup, WorldCom's other lead bank, struck its own deal with the fund and paid $2.575 billion. But Morgan chose not to deal.

The decision was costly. The $2 billion J. P. Morgan agreed to pay yesterday amounts to a 45 percent premium to the settlement formula used by Citigroup when it settled. The $2 billion is tax deductible.

The bondholders in the case had sought a total of $9 billion in damages. Of the $6 billion recovered from the banks, $5 billion will go to bond investors and $1 billion will go to holders of WorldCom stock. The $5 billion recovered for bondholders is 56 percent of the amount sought by the plaintiffs in the case.

As a result of yesterday's settlement, defendants remaining in the case include Arthur Andersen, WorldCom's auditor, and 12 former WorldCom directors. Jury selection has been postponed until March 24.

Sean Coffey, a lawyer at Bernstein Litowitz Berger & Grossmann, one of the two firms representing Mr. Hevesi, said: "We are retooling our approach to focus on the only player in the WorldCom drama that was specifically paid to make sure WorldCom's books were kept accurately - Arthur Andersen."

Arthur Andersen no longer functions as an accounting firm, after it was convicted of obstructing investigators in the Enron case, but it is still a legal entity and plaintiffs believe it has significant assets.
http://www.nytimes.com/2005/03/17/bu...rint&position=

[FaGal]

JP Morgan Chase settles WorldCom class action

JP Morgan.jpgJ.P. Morgan Chase & Co. became the final major holdout in WorldCom investor class-action lawsuit to settle as it agreed to pay a cool $2 billion in the WorldCom settlement pot. The settlement came a day before jury selection was expected to start in the class action case against the remaining defendants in the case, but now the jury selection date has been put off until next week.

It doesn't look as if J.P. Morgan improved its settlement posture by waiting until the last minute to settle. Under the formula used in Citigroup's earlier $2.58 billion settlement, J.P. Morgan would have paid $1.37 billion. But with all other major investment bank defendants already having settled, it appears that J.P. Morgan had to almost two thirds of a billion more for waiting to settle until the case was on the courthouse steps. Incredibly, the $2 billion settlement wipes out about five years worth of underwriting fees that J.P. Morgan has generated through the the sale of investment grade bonds.

The settlement raises the amount recovered in the WorldCom class action to over $6 billion, which is a record for a securities class action case that will stand at least until the Enron class action defendants begin settling or take that case to trial. Here are the earlier posts on the WorldCom class action.

WorldCom was valued at $180 billion at its peak in 1999, but collapsed into a Chapter 11 case in 2002 amidst an accounting scandal and $30 billion in debt. As is common in such huge business failures, investors sued virtually all of WorldCom's investment bankers, accusing the banks of failing to evaluate WorldCom's financial health properly when the banks sold $17 billion of WorldCom's bonds in 2000 and 2001. When WorldCom tanked, the holders of those bonds lost most of their value.

The banks collected about $85 million in fees for underwriting the WorldCom bonds, and about $5 billion of the $6 billion in settlement proceeds is earmarked for those bonds investors. Those proceeds will generate a dividend to those bond investors of about 50 cents on the dollar.

With J.P. Morgan out of the way and as predicted earlier here, the former directors of WorldCom will now enter into multimillion dollar settlement that collapsed in February. That would leave the only remaining defendants in the case as Arthur Andersen (WorldCom's auditor) and Bert Roberts, a former director.

[pietro66]

e con questa siamo a 6.000.000.000 ( SEI MILIARDI ) di dollari ....

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JPMorgan Settles WorldCom Class Action for $2 Billion

Michael Bobelian
New York Law Journal
03-17-2005


JPMorgan Chase, the last major remaining underwriter in the WorldCom securities class action, settled Wednesday for $2 billion on the verge of trial, which was scheduled to begin today.

The move brings the total amount settled in the case, which included 16 underwriters, to more than $6 billion. It is a record amount for a securities class action, topping the previous high of $3.5 billion from a 1999 case involving Cendant.

The plaintiffs in the class action, who were primarily bondholders, were led by state Comptroller Alan Hevesi acting on behalf of the New York State Common Retirement Fund. Plaintiffs accused the underwriters of failing to conduct sufficient due diligence when underwriting nearly $17 billion in WorldCom bonds in 2000 and 2001.

WorldCom fell into bankruptcy in 2002 after news of its $11 billion accounting fraud became public. It emerged from Chapter 11 reorganization last year as MCI. Five former WorldCom executives pleaded guilty to participating in the fraud and former CEO Bernard Ebbers was found guilty Tuesday of nine counts of securities fraud and related crimes.

The settlement brings to an end nearly all WorldCom related litigation.

JPMorgan and Salomon Smith Barney, a division of Citigroup, were lead underwriters in the bond offerings. The two banks took very different approaches to the litigation.

Citigroup decided to settle last May for $2.57 billion for its role in underwriting bonds as well as allegations that its former telecommunications analyst, Jack Grubman, had conflicts of interest.

At the time, Hevesi represented by Bernstein Litowitz Berger & Grossmann and Barrack, Rodos & Bacine of Philadelphia, offered to settle with the remaining underwriters, who did not face any claims against analysts, on the same schedule of liability and payout percentages in the Citigroup settlement.

The banks all declined the offer and proceeded with the litigation.

As the trial neared, the remaining underwriters began to settle. On March 3, Bank of America settled for $460.5 million. A day later, four more banks settled for a total of $100.3 million. The agreements were reached under the same terms as Citigroup.

Another seven underwriters settled in the following days at payout percentages less favorable than those under the Citigroup agreement.

That left three defendants in the case. On Monday, Southern District of New York Judge Denise Cote turned down JPMorgan's request to reject the settlement agreements. The bank claimed those agreements would unfairly impose additional liability on JPMorgan should it go to trial by making it obligated to pay for liabilities attributed to other defendants.

Had JPMorgan settled last year, under the same terms as Citigroup, it would have paid out about $1.3 billion.

When two small underwriters also settled earlier this week, the defendants remaining in the case were WorldCom's former directors and its former auditor, Arthur Andersen. Judge Cote in January rejected a proposed settlement with most of the directors on grounds made moot by the underwriters' settlements.

The class action settlement brings to an end practically all outstanding lawsuits arising from WorldCom's collapse. No other former executives are facing criminal charges. WorldCom settled civil claims with the U.S. Securities and Exchange Commission for $750 million in 2003 and bankruptcy proceedings before Judge Arthur Gonzalez in the Southern District are winding down.

Skadden, Arps, Slate, Meagher & Flom was liaison counsel for the underwriters.