Bruce Carton, author of the Securities Litigation Watch, has an interesting post here about the tentative $54 million settlement reached January 5th with 10 former members of WorldCom’s board in the massive securities class action attacking the financial fraud at WorldCom. Here’s what he had to say about the settlement:
Although $54 million is not itself an extraordinary amount in the context of the hundreds of billions of dollars lost in the WorldCom case, the fact that $18 million will be paid by the directors themselves is a watershed event in the securities class action world. It is virtually unheard of for directors to be personally responsible in class action settlements, as such settlements are routinely covered by the company’s D&O insurance. In a highly unusual move, however, the New York State Common Retirement Fund reportedly insisted from the beginning of negotiations that there would be no settlement with the WorldCom directors without their agreement to personally pay a significant portion of the proceeds. Indeed, the $18 million dollars reportedly will come in varying amounts from the directors, with each individual payment accounting for a full 20 percent of that director’s aggregate net worth excluding their primary residences and retirement accounts.
He goes on to say that “coming on the heels of the SEC’s recent proclamations that the penalties it imposes must be paid by individual wrongdoers rather than their employer or insurance company” it is likely that the settlement with members of the WorldCom board will “have a jarring effect on anyone serving, or considering serving, on the board of a public company”:
Never before has it been so apparent that the consequences of failing in your duties as a board member may well include a significant loss of your own personal wealth. In the WorldCom case, for instance, directors who were compensated approximately $35,000 per year are now responsible, due to their alleged failings, for the payment of millions of dollars.
The Wall Street Journal had more on this in an article yesterday: “Directors Are Getting the Jitters.” The article states that public pension funds “have begun offering higher contingency fees if their attorneys win personal payments from individual officials, too.”
The WSJ article also states:
Timothy Burns, an attorney with Neal Gerber & Eisenberg LLP in Chicago and a co-chairman of the American Bar Association’s insurance-coverage litigation committee, thinks insurance policies could be rewritten so that coverage vanishes if a settlement or judgment requires individual directors to put up personal assets. Given the choice of either collecting more money from insurers or less directly from board members, investors might think twice before targeting personal assets, Mr. Burns believes.