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Former Directors Agree To Settle Class Actions

Enron, WorldCom Officials to Pay Out of Pocket

By Ben White
Washington Post Staff Writer
Saturday, January 8, 2005; Page E01

A group of former Enron Corp. directors has agreed to a $168 million settlement of their portion of a class-action securities lawsuit. Insurance will pick up most of the cost, but under the terms of the deal, the former Enron directors will personally pay $13 million.

The announcement of the deal, made by the University of California, lead plaintiff in the Enron class-action case, came on the same day that the lead plaintiff in the WorldCom class-action suit formally announced a $54 million settlement covering 10 former WorldCom directors. WorldCom directors will pay $18 million from their own pockets.

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Blame for Scandals Entering the Boardroom (The Washington Post, Jan 7, 2005)
10 Ex-WorldCom Directors Agree to Settlement (The Washington Post, Jan 6, 2005)
Judge Says MCI Broke Pay Rule (The Washington Post, Nov 25, 2004)
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The twin settlements highlight a new phase in the backlash against corporate wrongdoing in which board members are being pushed to bear much higher personal costs for failures in supervision. Liability for official actions is generally covered by insurance: It was nearly unheard of for directors to pay personally, particularly in the amounts announced this week.

The Enron directors covered by the settlement admit no wrongdoing. Plaintiffs in the case have accused directors of selling Enron shares after the company began to give false financial information to the public. The agreement to pay back some trading profits came even though a federal judge in Houston in 2003 dismissed insider trading and fraud charges leveled at the former directors.

The Enron directors' settlement was the fourth reached in a massive class-action case in which shareholders seek to recover losses they suffered in the collapse of the Houston-based energy trader. Investment banking firm Lehman Brothers agreed to a $222.5 million settlement in October, Bank of America to a $69 million settlement in July, and the international unit of now-defunct accountant Arthur Andersen agreed to a $40 million settlement in July 2002.

Claims remain against a number of major banks that handled Enron transactions, against Arthur Andersen and against a number of former Enron officers.

"The settlement is very significant in holding these outside directors at least partially responsible," said William Lerach, lead attorney for the shareholders. "Hopefully, this will help send a message to corporate boardrooms of the importance of directors performing their legal duties.''

Among former directors contributing personal funds were Wendy Gramm, former chairwoman of the Commodities Future Trading Commission and wife of former senator Phil Gramm, and Robert Jaedicke, former dean of the Stanford Business School. In total, 18 former Enron directors joined the settlement but only 10 contributed personal funds.

The WorldCom deal, announced by New York State Comptroller Alan G. Hevesi, resolves claims against the 10 directors in a larger shareholder class-action suit scheduled to go to court next month. Under the terms of the agreement, the group will personally pay a total of $18 million, an amount equal to slightly more than 20 percent of the directors' combined net worth, not including primary residences and retirement accounts. Insurance companies will pay the other $36 million.

It could not be determined yesterday how the payments will be divided among the 10, although Hevesi said one of the group has filed for bankruptcy and will not pay. He declined to identify who.

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