NEW YORK, March 16 -- J.P. Morgan Chase & Co. agreed Wednesday to pay $2 billion to settle its part of the WorldCom Inc. shareholder lawsuit, bringing total settlement payments to more than $6 billion, by far the largest amount ever for such a shareholder action.
J.P. Morgan helped underwrite major WorldCom bond offerings in the two years before the telecommunications firm filed the largest bankruptcy case in U.S. history in 2002. Plaintiffs in the class-action case, lead by New York State Comptroller Alan G. Hevesi, claim J.P. Morgan and other WorldCom advisers and directors should have discovered the company's $11 billion accounting fraud and disclosed it to investors.
J.P. Morgan's settlement, which requires approval from a federal judge, is the second largest in the case. Citigroup Inc., WorldCom's biggest bond underwriter, agreed last year to pay $2.6 billion. It also sets the stage for a settlement with 11 of WorldCom's former directors, 10 of whom previously agreed to pay $54 million, including $18 million of their own money, to settle shareholder complaints.
If the J.P. Morgan settlement is approved, which is expected, plaintiffs will have recovered more than $6 billion in the case from the banks. The largest previous settlement in a similar shareholder class-action case came in 1999, when Cendant Corp. and its accountants agreed to pay $3.2 billion to settle fraud charges. Plaintiffs' attorneys say about $5 billion in WorldCom settlement money will go to WorldCom bondholders and about $1 billion to stockholders.
J.P. Morgan could have gotten out of the WorldCom case for significantly less money. Following the Citigroup settlement, plaintiffs offered to settle with the bank for about $1.4 billion. But J.P. Morgan rejected the deal, saying its bankers could not have unearthed WorldCom's fraud, especially since WorldCom's accountants failed to do so. J.P. Morgan executives said at the time that they were being held guilty by association.
However, as more firms settled and plaintiffs won favorable rulings in the case, the price for J.P. Morgan to settle went up. Hevesi said Tuesday's criminal conviction on all counts of former WorldCom chief executive Bernard J. Ebbers helped hasten talks that led to Wednesday's deal.
"There was a sense from the Ebbers verdict that there were serious issues with WorldCom," he said, adding, "I'm delighted we are coming to closure. This is a huge securities case, and I think we've made a substantial recovery for the people we represent."
Legal experts had long predicted that all of WorldCom's investment banks would ultimately settle rather than risk several billion dollars in exposure from a jury verdict.
In a written statement, J.P. Morgan chairman and chief executive William B. Harrison Jr. said, "Given recent developments, we made a decision to settle rather than risk the uncertainty of a trial. We can now put this litigation behind us and continue to focus on our goal of making JPMorgan Chase the best financial services company in the world."
The firm said it would take a $900 million charge against earnings in the first quarter of this year to fund the settlement. After tax deductions, the charge will be $560 million. J.P. Morgan reported profit of $1.67 billion in the fourth quarter of 2004.
Two smaller New York banks also settled Wednesday. Blaylock & Partners LP agreed to pay $572,840, and Utendahl Capital Partners LP agreed to pay $234,000.
Plaintiffs in the case said Wednesday that they are also close to settling with 11 former WorldCom directors. A previous settlement, to which the banks had objected, fell apart when the federal judge overseeing the case, Denise L. Cote, objected to a technical provision. The settlement was viewed as precedent-setting because directors rarely pay their own money, relying instead on insurance coverage to cover such agreements.
A new settlement with the directors, along terms similar to the original deal, is expected soon. Attorneys for some of the directors, however, want the settlement amount to be reduced somewhat to reflect the time and expense required to prepare for trial in the case, which had been scheduled to begin Thursday. Lawyers for some of the directors already had prepared opening statements.
The J.P. Morgan settlement leaves only former WorldCom director Bert C. Roberts Jr. and the defunct Arthur Andersen LLP accounting firm as defendants in the case. Cote directed the two remaining parties to continue settlement talks under the supervision of another federal judge.
Cote on Wednesday congratulated the settling parties on their agreement. "I think this is very much in the public interest and the interest of all the settling parties," she said. Cote made it clear she was eager to see settlement progress with the remaining two defendants. Nonetheless, she said jury selection in the case would begin next week.