J.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.

Bernie Ebbers’ honest idiot defense fails as he is convicted on all counts.
The conviction is further bad news for former Enron chairman Ken Lay and former CEO Jeff Skilling who are claiming — as did Mr. Ebbers — that former Enron CFO Andrew Fastow kept them in the dark regarding the dire implications that Mr. Fastow’s creation and management of several off-balance sheet partnerships had on Enron’s true financial condition.
In fact, in many respects, Messrs. Lay and Skilling’s defense is harder than Mr. Ebbers’ because both Lay and Skilling supported Fastow’s involvement in the off-balance sheet partnerships and their co-defendant — former Enron chief accountant Richard Causey — approved the dubious accounting relating to the partnerships. It is going to be risky for Messrs. Lay and Skilling to criticize Mr. Causey’s accounting for Fastow’s machinations with off-balance sheet entities during a trial in which all three are defendants. The bet here is that Mr. Causey cops a plea prior to trial and Messrs. Lay and Skilling end up defending the case between themselves. In that regard, Mr. Ebbers’ defense counsel — Reid Weingarten — is one of the lawyers on Mr. Causey’s defense team.
However, a key difference between the Ebbers theory of the case and that of Messrs. Lay and Skilling is that the latter two are not arguing that they were left in dark because of ignorance, but because of Mr. Fastow’s desire to hide the enormous income that he was making from managing the partnerships. Thus, where Mr. Ebbers was forced to argue that he simply did not understand WorldCom’s complicated accounting, Messrs. Lay and Skilling are contending that Mr. Fastow’s greed to generate huge income from Enron’s off-balance sheet partnerships incentivized him to lie to Lay and Skilling regarding the true nature of Enron’s off-balance sheet partnerships. Of course, a complicating fact in Messrs. Lay and Skilling’s defense is that they engineered the Enron board’s dubious approval of Fastow’s management of the partnerships, but that’s another issue.
Moreover, another difference between the Ebbers case and the case against Mr. Lay is that the government’s indictment against the three former Enron executives attributes a much larger role in the alleged crimes to Messrs. Skilling and Causey than to Mr. Lay. Messrs. Skilling and Causey are charged charged with crimes all the way back to 1999, and are identified as the men who “spearheaded” the purported conspiracy to hide Enron’s true financial condition from the marketplace. On the other hand, the charges against Mr. Lay are focused on his actions during the months following following Mr. Skilling’s resignation as CEO in August, 2001, when the government alleges that Lay “took over leadership of the conspiracy.”
This past weekend, Mr. Lay continued an unusual public relations campaign that he has mounted since his indictment in which he has claimed that he was ignorant of wrongdoing at Enron. During an interview on CBS’ 60 Minutes, Lay contended that Enron was a huge company in which senior management was delegated enormous trust to do the right thing. Mr. Lay contended that Mr. Fastow had “betrayed that trust” and “ultimately caused Enron’s collapse. To the extent that I did not know what he was doing, and he obviously didn’t share with me what he was doing, then indeed I cannot take responsibility for what he did.”
Similarly, although Mr. Skilling has not been spoken publicly since his indictment, he did raise eyebrows in legal circles by testifying before Congress in February 2002 in which he asserted that “while I was at Enron, I was not aware of any financing arrangements designed to conceal liabilities or inflate profitability.”