Settlement
to cost the firm $51 million |
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Settlement
to cost the firm $51 million |
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Former WorldCom Inc. CEO
Bernard Ebbers and 18 former company officials agreed to pay about $51 million
to settle a suit by employees who lost billions of dollars when the
long-distance telephone company collapsed, lawyers for the employees said. |
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The pact signed Tuesday leaves
401(k) fund trustee Merrill Lynch Trust Co. of America, a subsidiary of Merrill
Lynch & Co., as the only active defendant. The suit against ex-Chief
Financial Officer Scott Sullivan is suspended until after he is sentenced Nov. 8
for his admitted role in accounting fraud. |
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The employees of WorldCom,
which emerged from bankruptcy in April as MCI, are seeking about $100 million
from Merrill, their lawyers said. |
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The case "will test the
premise of whether Merrill had a right to stand by and do nothing as the
WorldCom stock price plunged and eventually the company filed for
bankruptcy," said Lynn Sarko, a lawyer for the employees who works with
Seattle's Keller Rohrback LLP. "Do they have the right to stand by and see
the retirement plan's assets crash and become worthless and claim it wasn't
their job?" |
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The agreement follows the
$2.65-billion settlement in May of a fraud suit WorldCom investors filed
against Citigroup Inc. The investors said Citigroup sold WorldCom securities at
inflated prices. They have claims against a dozen other WorldCom underwriters. |
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MCI will pay about $19.5
million as part of the settlement, Sarko said. He said the company's portion of
the penalty could vanish if the U.S. bankruptcy court that supervised
WorldCom's bankruptcy rules that employee shareholders occupy the same low
priority for payment of debts or claims as other shareholders, said employee
lawyer Gary Gotto, also with Keller Rohrback. |
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"Employees should be
treated as general unsecured creditors, not simple shareholders," Gotto
said. |
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The suit was brought under the
Employee Retirement Income Security Act. Employees claimed the defendants
breached their fiduciary duty to workers by obtaining and retaining WorldCom
stock. |
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The settlement calls for an
immediate cash payment of $47.1 million when Cote approves the pact. In
addition to the MCI payment, the fund's primary insurer, American International
Group Inc.-owned National Union Fire Insurance Co. of Pittsburgh agreed to pay
$10 million, subtracting for legal defense costs, Sarko said. |
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The fund's excess insurers, who
deny liability because their policies allegedly were invalidated by the fraud,
will pay $18 million, Sarko said. The excess insurers include Twin City Fire
Insurance Co., Continental Casualty Co. and Gulf Insurance Co. |
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Ebbers will pay as much as $4
million, depending on how much he eventually pays MCI for debts owed it, Sarko
said. Beyond a minimum payment to the employees of $450,000, Ebbers will pay 1
percent of whatever sum he eventually pays to MCI, up to a combined $4 million
to the employee class, Sarko said. |
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Merrill and WorldCom employees
who guided the 401(k) fund investments left 46 million shares of WorldCom stock
in the fund even as analysts issued two negative reports about the stock in the
spring of 2002, said Gotto. |
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"Merrill analysts who were
following the stock in the spring of 2002 downgraded it twice in 2002, once in
March and April, and the fiduciary didn't do anything," Gotto said. |
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WorldCom shares dropped from
$8.27 in March 2002 to 9 cents the day before it filed for bankruptcy court
protection in July 2002. |
The employees sued WorldCom,
Ebbers and others to recover billions of dollars that their 401(k) accounts
lost by investing in company stock. The suit claimed the company caused
employees to keep WorldCom stock in their 401(k) accounts while knowing the
company was overstating income.
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