On the heels of this post earlier this week about the impending outside directors’ settlement in the WorldCom case, this NY Times article reports on the impending $168 million settlement involving the class action securities fraud and related claims against eighteen former directors on Enron Corp.’s Board of Directors. Most of the settling directors were outside directors of Enron.
This settlement has actually been in the works for several months as the class action plaintiffs’ lawyers became concerned that the extraordinary defense costs of Enron’s former officers and directors would soon exhaust the insurance proceeds available to fund a settlement under Enron’s officers & directors’ liability insurance policies.
Consequently, in October, the plaintiffs reached a tentative settlement with the Enron board members that provided for payment of the remaining insurance proceeds ($200 million) under the O&D policies despite the fact that such a result would leave dozens of former Enron officers and directors not included in the settlement without insurance coverage for their defense costs. In addition, certain settling directors agreed to pay an additional total of $13 million out of their own pockets, which was essentially 10% of each such director’s net gain from their Enron stock sales during the class period. The D&O liability insurers agreed to contribute $155 million toward the settlement, which exhausted the insurance coverage for the non-settling directors and officers.
With that agreement in principle in hand, Enron’s outside directors in late October obtained an injunction against Enron’s O&D liability insurers from the U.S. District Court in Houston that enjoined the insurers from using any further policy proceeds to pay defense costs of former Enron officers and directors pending the District Court’s consideration of the proposed settlement. Since that time, the plaintiffs, the outside directors, and non-settling former Enron officers and directors such as Kenneth Lay and Jeffrey Skilling have cut a deal in which $13 million of the insurance proceeds will be set aside for their future defense costs in return for the non-settling officers and directors’ consent to the outside directors’ settlement. The class action plaintiffs will get $155 million of the remaining insurance proceeds under the settlement and $32 million of the proceeds has been earmarked in the settlement for the Enron bankruptcy estate. The settlement does not include many former Enron officers, including all former Enron officers who have either pleaded guilty to criminal charges or who are currently facing criminal charges.
The outside directors settlement is the fourth major settlement in the class action lawsuit that was commenced against Enron’s former officers, directors, and financial institutions nearly three years ago on the heels of Enron’s hyper-publicized accounting scandal. Including the latest settlement, the class action has generated just under $500 million, which is really rather paltry compared to the over $30 billion in damages that the plaintiffs have alleged in the class action.
Indeed, contrary to the generally laudatory press accounts relating to this and other settlements in cases such as Enron and WorldCom, the handling of the Enron class action by the plaintiffs’ lead lawyers — Lerach Coughlin Stoia Geller Rudman & Robbins LLP — has been subject to sharp criticism among professionals close to the case. The genesis of that criticism was the plaintiffs’ lawyers alleged involvement in allowing a proposed $750 million settlement with Arthur Andersen slip away in early 2002 during the early stages while Anderson was still a going concern operation. In addition to the substantial settlement payment, that proposed settlement would have involved a resolution of the criminal charges against Andersen in a manner that would have allowed Andersen to continue in business as a major accounting firm, saving thousands of jobs in the process. When the proposed deal allegedly blew up in a dispute between the plaintiffs’ lawyers and the financial institution defendants, Andersen’s criminal trial went forward, resulting in the felony conviction of Andersen that prompted Andersen’s demise as an accounting firm. Andersen remains a defendant in the Enron class action, but it is a virtual shell that no longer has the resources necessary to pay $750 million in either damages or a settlement in the Enron class action. Consequently, the plaintiff’s lawyers appear to have left a considerable amount on the table, and have not made up for it yet.
Nevertheless, the plaintiffs in the class action are still seeking billions in damages from a large group of financial institutions for allegedly assisting Enron in defrauding shareholders and creditors. The financial institutions include J.P. Morgan Chase & Co., Citigroup Inc., Merrill Lynch & Co., and Credit Suisse First Boston, to name just a few.
The Enron directors paying the total of $13 million out of their pockets are Robert Belfer, Norman Blake, Ronnie Chan, John Duncan, Joe Foy, Wendy Gramm, Robert Jaedicke, Charles LeMaistre, Rebecca Mark-Jubasche and Ken Harrison. The other directors covered by the settlement who are not required to pony up any money out their own pockets are Paulo Ferraz-Pererira, John Mendelsohn, Jerome Meyer, Frank Savage, John Urquhart, John Wakeham, Charles Walker and Herbert Winokur. As is typical in such deals, none of the directors are admitting any wrongdoing as part of the settlement, which still requires final court approval.