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March 17, 2005

JP Morgan Chase settles WorldCom class action

JP Morgan.jpgJ.P. Morgan Chase & Co. became the final major holdout in WorldCom investor class-action lawsuit to settle as it agreed to pay a cool $2 billion in the WorldCom settlement pot. The settlement came a day before jury selection was expected to start in the class action case against the remaining defendants in the case, but now the jury selection date has been put off until next week.

It doesn't look as if J.P. Morgan improved its settlement posture by waiting until the last minute to settle. Under the formula used in Citigroup's earlier $2.58 billion settlement, J.P. Morgan would have paid $1.37 billion. But with all other major investment bank defendants already having settled, it appears that J.P. Morgan had to almost two thirds of a billion more for waiting to settle until the case was on the courthouse steps. Incredibly, the $2 billion settlement wipes out about five years worth of underwriting fees that J.P. Morgan has generated through the the sale of investment grade bonds.

The settlement raises the amount recovered in the WorldCom class action to over $6 billion, which is a record for a securities class action case that will stand at least until the Enron class action defendants begin settling or take that case to trial. Here are the earlier posts on the WorldCom class action.

WorldCom was valued at $180 billion at its peak in 1999, but collapsed into a Chapter 11 case in 2002 amidst an accounting scandal and $30 billion in debt. As is common in such huge business failures, investors sued virtually all of WorldCom's investment bankers, accusing the banks of failing to evaluate WorldCom's financial health properly when the banks sold $17 billion of WorldCom's bonds in 2000 and 2001. When WorldCom tanked, the holders of those bonds lost most of their value.

The banks collected about $85 million in fees for underwriting the WorldCom bonds, and about $5 billion of the $6 billion in settlement proceeds is earmarked for those bonds investors. Those proceeds will generate a dividend to those bond investors of about 50 cents on the dollar.

With J.P. Morgan out of the way and as predicted earlier here, the former directors of WorldCom will now enter into multimillion dollar settlement that collapsed in February. That would leave the only remaining defendants in the case as Arthur Andersen (WorldCom's auditor) and Bert Roberts, a former director.

Posted by Tom at March 17, 2005 5:19 AM |


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