Judge Approves Return of $6B to WorldCom Investors

A federal judge yesterday approved a $6.1 billion settlement to compensate investors in WorldCom, the telecommunications giant that collapsed in 2002 amid accounting fraud.Judge Denise Cote of Manhattan also ordered that about $347 million of that amount be paid to attorneys who brought class action lawsuits resolved in the settlement.Investors could see payments from the settlement within nine to 12 months, barring any appeals of yesterday’s ruling, one of the lead attorneys for the class, Jeffrey Golan, of Philadelphia, said.The largest portion of the money will come from a $2.575 billion settlement reached last year with Citigroup, one of its subsidiaries, Salomon Smith Barney, and a former Internet stock analyst for the firm, Jack Grubman.Earlier this year, deals were struck with other WorldCom underwriters, as well as the company’s executives, outside directors, and accountants. The investment bank JPMorgan agreed to pay $2 billion and Bank of America will pay $460 million, while the Arthur Andersen accounting firm paid $65 million.In a provision unusual to such lawsuits, the outside directors agreed to pay nearly $25 million out of their personal funds.The lawsuits alleged, in essence, that the defendants either knew about accounting problems at WorldCom or failed to investigate adequately the company’s financial condition.The New York State comptroller, Alan Hevesi, served as lead plaintiff in the case because of investments of more than $300 million that the state’s public-employee retirement funds had in WorldCom.A spokesman for Mr. Hevesi applauded the judge’s decision. “We’re very gratified that Judge Cote has signed off,” the spokesman, John Chartier, said.Much of the judge’s 91-page opinion is devoted to complex formulas that will be used to allocate the funds among the approximately 834,000 investors who have filed claim forms. Judge Cote cited estimates that holders of WorldCom stock will get about 56 cents a share, while holders of certain WorldCom bonds will get about 43% of the face value of their investments.In awarding $336 million in fees and more than $10 million in costs, Judge Cote said she was strongly influenced by a fee agreement the attorneys reached with Mr. Hevesi’s office in 2003. “When class counsel in a securities lawsuit have negotiated an arm’s length agreement with a sophisticated lead plaintiff possessing a large stake in the litigation, and when that lead plaintiff endorses the application following close supervision of the litigation, the court should give the terms of that agreement great weight,” the judge wrote.Judge Cote’s opinion was replete with praise for the work of the plaintiff’s law firms in the case, Bernstein, Litowitz, Berger & Grossman of New York, and Barrack, Rodos & Bacine of Philadelphia. “Lead counsel obtained remarkable settlements for the class, while facing formidable counsel from some of the best defense firms in the country,” the judge wrote.Judge Cote noted that the fee award amounts to about 5.5% of the total amount recovered.Still, critics said the award to the attorneys was excessive.“It seems a little obscene … a third of a billion dollars,” Paul Kamenar of the Washington Legal Foundation said. “This is another prime example of excessive attorneys’ fees that rightfully should belong to shareholders that were defrauded.”Mr. Kamenar said it makes little sense to consider the percentage the award represents when the settlement is so large. “It doesn’t take that much more skill to litigate a $6 billion case as opposed to a $1 billion case,” he said.Mr. Golan, a lead attorney on the case, declined to discuss the fee award, but he praised the court’s ruling. “We are delighted with the court’s order,” he said. “We believe that the underwriter settlements have already changed the way that investment banks will do due diligence in the future and we believe the directors’ settlement has already changed the way in which boards will supervise management.”In a footnote to her ruling, Judge Cote said a prominent class action lawyer, William Lerach, of San Diego, urged some large pension funds to drop out of the lawsuit and to pay his firm as much as 17% in fees. “Those pension funds which accepted that solicitation run the risk of paying a hefty premium to their counsel,” the judge observed.Mr. Lerach did not return a call seeking comment for this story.

Judge Approves Return of $6B to WorldCom Investors

Judge Approves Return of $6B to WorldCom Investors

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