Deal Is Off for Former WorldCom Directors

New York Comptroller Alan Hevesi canceled the deal after the judge's ruling. (Gregory Bull -- AP)

NEW YORK, Feb. 2 -- A groundbreaking settlement in which 10 former WorldCom Inc. directors agreed to pay $54 million, including $18 million of their own money, to settle a shareholder lawsuit collapsed Wednesday after a federal judge rejected a key part of the deal.

Shortly after the one-page ruling from U.S. District Judge Denise L. Cote, New York Comptroller Alan G. Hevesi, the lead plaintiff in the class-action case, canceled the deal with the 10 former directors.

"While we respect the decision rendered by Judge Cote today, we are disappointed that it invalidated what was an integral provision in the settlement agreement," Hevesi said in a statement. "As a result, we are constrained to terminate the settlement, and we are continuing to prepare for trial against any and all defendants remaining in the case."

The class-action case was filed by shareholders and bondholders who lost billions of dollars when WorldCom filed for bankruptcy protection in 2002 after revealing accounting fraud.

Securities lawyers said the ruling could make future settlements in which directors pay out of their own pockets harder to reach. But they added that the massive scale of WorldCom's bankruptcy filing and the enormous liability faced by defendants in the lawsuit make the case unique.

Cote's ruling applied to one finely drawn provision of the WorldCom settlement, not to the broader concept of directors paying settlement money from their own pockets rather than relying on insurance coverage.

Hevesi cited that distinction in his statement. "To be clear, the Judge did not rule against the personal payments by Settling Director Defendants and that is not the reason for the termination of the settlement," he said.

However, some attorneys said that the ruling on the narrower issue also might have implications for future settlements.

The ruling from Cote came after a group of Wall Street investment banks named as defendants in the case, including J.P. Morgan Chase & Co. and Bank of America Corp., asked the judge to reject the settlement.

The banks argued in part that the settlement was unfair because, if there was a judgment against them, it would have limited their ability to deduct damages attributed by a jury to the settling directors.