Ten former directors of WorldCom, the telecommunications company whose bankruptcy was the largest in history, have agreed to pay $18-million of their own money to settle a class-action lawsuit by investors who lost hundreds of millions of dollars when the company collapsed in July 2002.
The agreement by directors to dig into their pockets, which is part of a $54-million settlement with plaintiffs led by the New York State Common Retirement Fund, is a remarkable concession. Corporate directors have always relied on their company's insurance to cover costs associated with securities cases and settlements.
Wednesday's settlement is a disturbing precedent for directors, whose duties to look after shareholders' interests have come under harsh scrutiny in the three years after the failure of Enron. Investors have become increasingly frustrated as company directors and officers escaped financial responsibility for losses incurred as a result of fraud.
Companies whose executives are accused of engaging in fraudulent practices typically pay those peoples' legal bills and the fines that can result when regulatory proceedings against them are settled. And directors almost never pay in such settlements because they are covered by insurance.
"New York state has done a great thing for shareholders everywhere," said Greg Taxin, chief executive of Glass Lewis, an investor advisory service in San Francisco. "This may be one of the most important steps toward reinforcing the importance of performing the directorship duties with fidelity toward shareholders. It's going to be very sobering to board members around the country."
The directors' personal payments were a requirement of any deal from the start of the negotiations, according to lawyers involved in the settlement. Given the size of the WorldCom debacle, the investors who brought the case sought to make an example of the directors.
The amounts being paid will be different for each director. While the individual amounts were not disclosed, the payments will account for 20 percent of the directors' aggregate net worth, not counting their primary residences and retirement accounts.
With $36-million provided by companies that had insured WorldCom's directors and officers, plaintiffs in the lawsuit will receive $54-million. Two former directors are still negotiating with the plaintiffs.