February 3, 2005

Ex-WorldCom Directors’ Deal Breaks Down

Yesterday, the plaintiffs pulled out of the proposed settlement under which 10 former WorldCom directors would personally pay $18 million of a $54 million settlement. New York State Comptroller Alan Hevesi, the lead plaintiff, announced that the plaintiffs were pulling out of the deal after U.S. District Judge Cote struck down a key component of the agreement yesterday.

Judge Cote ruled in this order that any jury award resulting from the February 28 trial could not be reduced using a formula that would have taken into account the limited finances of the directors who settled. Some investment banks that were defendants in the case had objected to the settlement, telling the Judge that they would be unfairly prejudiced unless all the defendants stood trial together.

Here is a more technical explanation from Mike Holliday: The Stipulation of Settlement has a condition that the amount of the reduction of any verdict or judgment against a non-settling defendant in the action be limited to the greater of the “Settlement Credit” or the “Contribution Credit.” The “Settlement Credit” is simply the total settlement amount of $54 million to be paid by the settling directors ($18 million) and the insurers ($36 million) plus any interest. The other prong of the maximum reduction is more complicated. It would be the contribution claim non-settling defendants would be entitled to assert against settling directors equal to the aggregate proportionate shares of liability of settling directors (determined by the Court), BUT ADJUSTED to reflect any limitation on the financial capability of settling directors to pay their proportionate shares of liability. Absent Court approval of this provision relating to the Settling Director’s ability to pay, the Lead Plaintiff is entitled to terminate the Settlement.

Judge Cote’s order denied the application to approve the judgment reduction formula insofar as the “Contribution Credit” is “adjusted to reflect any limitation on the financial capability of the Settling Director Defendants, ” as a violation of 15 U.S.C. Sec. 78u-4(f)(7)(B)(i). There will be an opinion to follow that will explain the reasons.

Under Subsection (f)(7)(B), which is part of the Private Securities Litigation Reform Act, where a defendant (covered by the Subsection) enters into a settlement prior to final verdict or judgment, the verdict or judgment is to be reduced by the greater of (i) “an amount that corresponds to the percentage of responsibility of” that settling defendant; or (ii) “the amount paid to the plaintiff by” that settling defendant. In this case, the provision in question in the Settlement could have reduced the amount in (i). That could decrease the amount by which any final verdict or judgment is reduced, which would have the effect of increasing the amount of any final verdict or judgement required to be paid by non-settling defendants.

All of this should make the March 3rd webcast – “Steps to Take: How to Avoid Director Liability After WorldCom, Enron and Disney” – even more interesting as the directors now have the potential to pay significantly more than they would have under the proposed settlement.

Webb Report on Grasso Pay Now Available

Yesterday, the NYSE released the 142-page Webb Report that details how Dick Grasso was paid when he ran the NYSE. Here is Grasso’s response.

The NYSE released the Webb report – named for attorney Daniel Webb who compiled it – after a judge overseeing New York Attorney General Eliot Spitzer’s suit against Grasso ruled last week that it was not subject to attorney-client privilege. Here are some comments on the report culled from a longer article in the Washington Post:

– The report in many ways tracks Spitzer’s complaint, although it offers no legal conclusions or analysis. The report generally concludes that Grasso’s pay was unreasonable and that Grasso had undue influence over his own compensation, chiefly by controlling appointments to the board and the compensation committee.

– The report concludes that Grasso’s pay was incorrectly based on compensation for chief executives at much larger, publicly traded companies. And it says the composition of the board and the compensation committee changed too often for directors to attain full understanding of the nature of Grasso’s complex pay arrangements.

– The report says Grasso’s executive assistant was paid $240,000 per year for the last three years of Grasso’s tenure and that Grasso used the services of two drivers on the NYSE payroll, each of whom earned about $130,000 per year.

I will blog further after I analyze the report myself. It will be interesting to see what Michael Melbinger blogs on, since he is with the law firm, Winston & Strawn, that prepared the report.

Musical Lawyers and Accountants for Scrushy

Yesterday’s WSJ article about how the Scrushy defense team has rotated extensively over the past 20 months is one of the more fascinating “reveals” I have read lately.

My favorite quote from the article is from my pal Mike Mulligan, who served as a foresenic accountant for a period of time for the defense team: “I’ve never seen a case of this profile involve a shift from law firm to law firm and accounting firm to accounting firm,” said accountant Michael Mulligan, the executive director of FCL Advisors International LLC, Great Falls, Va., who was replaced as a forensic accountant on Mr. Scrushy’s team. The turnover, he added, “in some ways is even bizarre.”