February 14, 2005

WorldCom Judge Issues Opinion on Rejection of Director Settlement

Last Wednesday, Judge Cote issued a 38-page Opinion in the WorldCom case, which expounds on the one-page Order she issued on February 2nd that rejected the request to approve a cap called for by the proposed settlement on the amount by which any judgment against the non-settling defendants could be reduced.

Under the proposed settlement, the settling directors would have had to pay out of their own pockets but would have avoided the risk of paying even more if they had stayed in the case. The Court’s decision did not change the amount those directors would have paid under the settlement, but would have the effect of potentially reducing the amount the plaintiffs could collect from any verdict or judgment against the non-settling defendants if the settlement became effective.

Mike Holliday notes that this Opinion explains why she denied the application for approval of the Judgment Reduction Formula in the proposed settlement insofar as the “Contribution Credit” in the Formula was adjusted to reflect any limitation on the financial capability of the Settling Directors. The February 2nd Order led to the termination of the proposed settlement by the Lead Plaintiff.

The decision is dictated by the complex interplay of provisions of the Private Securities Litigation Reform Act of 1995, in a result which the Opinion notes “will make it extraordinarily difficult for outside directors to settle Section 11 claims before all deep-pocket defendants facing joint and several liability have done so . . . .” The Opinion discusses how the PSLRA applies to settlements involving outside directors.

The proposed settlement contained a condition that the reduction of any verdict or judgment against a non-settling defendant in the action be limited to the greater of the “Settlement Credit,” the “Insurance Credit” or the “Contribution Credit.” Mike referred in my February 3rd blog to the “Settlement Credit” and the “Contribution Credit” – the “Insurance Credit” apparently was added in a revision to the original proposed settlement.

At issue here is the “Contribution Credit” – what the settling directors’ assessed proportion of the judgment would have been without the settlement but limited to what those directors would actually be capable of paying. The Court found that the proposed reduction limited to the financial capability of the settling directors violated the statue.

The two other prongs of the Reduction Formula were the “Settlement Credit,” or amount of the Settlement, of $54 million, $18 million to be paid by the settling directors and $36 million by the insurers, plus any interest; and the “Insurance Credit,” or available insurance coverage, which the Opinion concluded would be at most $85 million. It was reported that the proposed $18 million to be paid by the directors represented in excess of 20% of their cumulative net worth (excluding primary residences, retirement accounts and jointly held assets) which offers some insight into the capability of the directors to pay.

Criticism of the SEC Restitution Fund

Recently, the SEC’s restitution fund has been criticized, such as in this NY Times article from yesterday and today’s Washington Post article.

Learn How to Blog

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