Pension funds, as they collect their WorldCom Inc. class-action claims, ought to remember who achieved the settlements. Alan G. Hevesi, New York state comptroller and sole trustee of the New York State Common Retirement Fund, in his relentless pursuit of the class action, brought about settlements that total more than $6.1 billion for victimized shareholders and bondholders, the largest ever. Many pension funds will share in the restitution.
The size of the total settlement should force top executives and directors at other corporations and investment banks to take notice of the results of the suit, and the potential consequences of running up against a powerful pension fund investor.
More than anyone, Mr. Hevesi, as lead plaintiff in the class action, was responsible for driving the unprecedented WorldCom settlements.
The total recovery, accomplished only three years after the announcement of irregularities that led to the collapse of the company, is about 55% of the $11 billion the WorldCom fraud is estimated to have cost investors.
Corporate reform legislation has done much to steer behavior of executives and directors to the right path. But nothing will deter corporate fraud and malfeasance more than the 25-year prison sentence handed down to WorldCom CEO Bernard Ebbers, and the huge class-action settlement payments made by financial institutions and individual corporate directors. The unprecedented settlements should encourage underwriters to be more careful in vetting financings.
Although WorldCom, a financially devastated company, had little in wherewithal to provide any large degree of restitution to investors, Mr. Hevesi was instrumental in pursuing settlement payments from investment banks connected with WorldCom, including $2.575 billion from Citigroup and $2 billion from JPMorgan Securities Inc.
Mr. Hevesi also sought a measure of restitution from Mr. Ebbers. As part of the settlements, Mr. Ebbers will relinquish substantially all of his personal assets which, instead of paying fines in the government's criminal case, will go to WorldCom shareholders and bondholders harmed by the fraud.
The investors could get $5 million in cash plus between $18 million and $28 million in proceeds from the sale of his non-cash assets. Lawyers in the litigation have agreed to forgo any fees from this part of the settlement, even though they were involved in the negotiation.
"Mr. Ebbers was the person most responsible for the biggest corporate fraud in history and it is appropriate that he surrender most of his personal wealth to the stockholders and bondholders he betrayed," Mr. Hevesi said in a statement.
The settlements are the biggest demonstration of the power of the Private Securities Litigation Reform Act of 1995. The act encouraged institutional investors, those with the most money at stake, to take the lead in such litigation, previously initiated mostly by individuals. The premise of the law is that, as big investors, pension funds and other involved institutional investors bring more credibility to a case and could negotiate better settlements and better legal fees for shareholders.
That law proved timely, given the torrent of corporate scandals in the early 2000s. Mr. Hevesi has been a leader in seizing the initiative provided by the Private Securities Litigation Reform Act.
Cendant Corp. in 2000 agreed to pay more than $3.4 billion in cash to shareholders to settle claims arising from financial irregularities at two predecessor companies. The co-lead plaintiffs in the Cendant litigation were the New York Common Retirement Fund, New York City pension funds and California Public Employees' Retirement System. Mr. Hevesi was New York City comptroller then. That case represented the first time any of the three funds had been a lead plaintiff. The Cendant settlement then was the highest ever.
Pension plan participants should be glad pension funds like the New York state fund have been taking the lead in many of these cases. That is what should be expected of the trustees of the largest pools of money in the world. They have, in general, the most at risk in corporate fraud. Corporate management, and pension fund financial well-being, are the better for such efforts.