J. P. Morgan Chase agreed yesterday to pay $2 billion to settle its part of the WorldCom shareholder lawsuit, bringing total settlement...
NEW YORK — J.P. Morgan Chase agreed yesterday to pay $2 billion to settle its part of the WorldCom 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 under-
write 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, led by New York State Comptroller Alan 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.
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J.P. Morgan’s settlement, which requires approval from a federal judge, is the second largest in the case. Citigroup, 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 directors who 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.
The largest previous settlement in a similar shareholder class-action case came in 1990 when Cendant 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. After 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 Ebbers helped hasten talks that led to yesterday’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.
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 net earnings of $1.7 billion in the fourth quarter of 2004.
Plaintiffs said yesterday that they are also close to settling with the 11 former WorldCom directors.