NEW YORK, Jan. 11 -- In an unusual legal move, a group of Wall Street banks has challenged the settlement announced last week between 10 former WorldCom Inc. directors and plaintiffs in a class-action shareholder lawsuit filed after WorldCom collapsed into bankruptcy court in 2002 following charges of widespread accounting fraud.
The 16 banks, including J.P. Morgan Chase & Co., Bank of America Corp. and Deutsche Bank AG, were among the underwriters of WorldCom securities and are also defendants in the lawsuit, which is scheduled to go to trial on Feb. 28. Citigroup Inc. agreed last year to pay $2.6 billion to settle its part of the case. Citigroup was the main underwriter for WorldCom, which emerged from bankruptcy protection as Ashburn-based MCI Inc.
The 10 former outside directors last week agreed to a settlement deal, unusual in such cases, in which they would pay $18 million out of their own pockets. As part of the deal, insurance companies agreed to pay an additional $36 million. Typically, outside directors do not pay for settlements with their own money, relying instead on insurance policies or the companies where they served to cover payments.
In a letter delivered on Monday to U.S. District Judge Denise L. Cote, who is overseeing the WorldCom class-action case, the banks argued that the settlement with the former directors was inappropriate because, among other reasons, it was reached too close to the scheduled trial date, could leave the remaining defendants to shoulder too much liability and could be scuttled by the insurance companies, which under certain circumstances could back out of the agreement.
In a brief hearing Tuesday, Cote declined to grant a request by plaintiffs that the 10 former directors be immediately excused from the case.
Instead, she asked both sides to quickly submit briefs further detailing their arguments. She expressed some concern regarding certain provisions of the settlement, particularly those dealing with insurance companies. But she did not otherwise discuss the merits of the agreement. She said the trial would begin as scheduled on Feb. 28, whether the 10 former directors have been excused from the case at that point or not.
John P. Coffey, an attorney representing the New York State Common Retirement Fund, the lead plaintiff, told reporters after the hearing that he viewed the banks' effort as a delaying tactic and was not dismayed that the 10 former directors were not immediately excused from the case. "I think the judge, as is customary, is being cautious and careful. I am optimistic that the settlement will ultimately be fully approved."
Coffey also said he hopes a deal with Francesco Galesi, one of two remaining outside WorldCom directors who have not yet agreed to settle, would be announced soon. During the hearing, Paul C. Curnin, an attorney for several of the former directors, said he expected Galesi to settle.
Thomas E.L. Dewey, a securities litigator at Dewey Pegno & Kramarsky LLP in New York, said the banks' effort was not surprising. He said the banks do not want their main argument in the case -- that all the parties involved were victims of fraud committed by top WorldCom management -- to be undermined by the tacit admission of culpability by the directors. The directors neither admitted nor denied wrongdoing as part of the settlement deal.
"I think as a tactical matter, with a trial looming, it's an awful lot easier for the banks that are defendants to have as many other defendants as possible," Dewey said. But he added that he believed it was unlikely that the banks would succeed in scuttling the settlement. "These challenges are quite uncommon because usually there isn't much of a basis to them."
