In two weeks, the trial cranks up of claims by investors and creditors who lost billions in the WorldCom accounting scandal against WorldCom’s former underwriters, outside directors, and Arthur Andersen. Consequently, over the next several weeks, there will probably be a series of “courthouse steps” settlements announced as the defendants in that litigation hedge their risk of a huge judgment for damages if they elect to go to trial. Yesterday, the first of such settlements was announced as Bank of America Corp. agreed to pay $460.5 million to settle the claims against it in the litigation.
The plaintiffs in the class action essentially allege that Bank of America and the other underwriters failed to conduct adequate due diligence in regard to about $17 billion of WorldCom bonds that were issued in the early part of this decade. Citigroup Inc. agreed to pay $2.65 billion to settle its portion of the lawsuit in May 2004. The Bank of America and Citigroup settlements increases the price of poker for the 14 other underwriters in the lawsuit, who now face the prospect of having to pay a larger share of damages if they risk taking the case to trial.
The Bank of America settlement increases the settlement pot in the WorldCom class action $3.04 billion. In comparison, the similar class action litigation involved in the Enron case has generated a settlement pot of only about $500 million to date. The Enron case remains mired in the discovery phase with a trial date currently scheduled for some time in mid-2006.
In its public statement announcing the deal, BofA denied violating any laws and added that it settled solely to hedge the risk of litigation. For their part, the plaintiffs’ representative in the lawsuit stated that Bank of America settled under the same formula used in the Citigroup settlement, which other underwriters protest because of their more limited role in WorldCom offerings. Under that settlement formula, J.P. Morgan — another underwriter defendant in the litigation — would have to pay about $1.3 billion in a settlement. Last year, J.P. Morgan set aside $2.3 billion of a $4.7 billion litigation reserve to cover the potential costs of litigation stemming from its role in arranging financing for Enron and for WorldCom.
Bank of America has been aggressive than most big underwriters in settling big class action claims over the past year. During that time, BofA has agreed to pay about more than $1 billion in settlements of various investment banking and trading claims. For example, in July 2004, BofA agreed to pay $70 million to settle claims against it in the Enron class action for its relatively limited role as an underwriter of various Enron deals. Similarly, earlier this year, the bank paid just south of $700 million in restitution, penalties, and reduction of fees consideration to settle various civil claims that it favored certain investors in engaging in “market timing”-trading and late trading of mutual funds.