MCI: Directors' Payoff Establishes New Legal Precedent.
Case Study of the Impact
of Sarbanes-Oxley Act ("SOX")
to various published reports, 10 of 12 former board members of WorldCom Inc. have
tentatively agreed to pay $54 million to settle a class-action lawsuit brought
by investors who lost billions when the original company entered bankruptcy following
after admitting that it overstated profits by billions of dollars. The company
emerged from bankruptcy last year, changing its name to MCI .
The 10 settling
former outside directors are James C. Allen, Judith Areen, Carl J. Aycock, Max
E. Bobbit, Clifford L. Alexander, Stiles A. Kellett Jr., Gordon S. Macklin, John
A. Porter, Lawrence C. Tucker and the estate of John W. Sidgmore, (deceased 2003).
The settlement excludes Bert Roberts and Francesco Galesi, who remain defendants
in the lawsuit.
WorldCom's former CEO, Bernard Ebbers ("Bernie Ebbers"),
is scheduled to stand trial this month on criminal charges that he oversaw the
$11 billion fraud at the company, the largest corporate fraud in U.S. history.
10 directors agreed to pay a combined total of $18 million personally, with the
remaining $36 million to be paid by the directors' liability insurance carriers.
The specific allocation of each director's payment has not been determined.
a Board of Director, why agree to the settlement ?
If the lawsuit were
to proceed, the directors as defendants ran a high probability of being found
criminally liable by a jury. Under those circumstances, insurance carriers would
be not be responsible, leaving the directors facing complete responsibility of
any award by the jury. Using the current settlement as a minimum guideline, would
you rather be responsible for $18 million or $54 million? The directors clearly
cut their losses.
What are the implications of this agreement?
the Sarbanes-Oxley Act currently does not specifically mention liability for Board
of Directors, this settlement sets a legal precedent and a warning for all Board
of Directors across all industries. If you are getting paid to serve as a Board
of Director, you better take your job responsibilities seriously. While this may
deter some individuals from wanting to serve as a board member of a publicly traded
corporation, those that do choose to serve will be asking more questions and getting
more involved. From my viewpoint, it's a step in the right direction.
after February 3, 2005:
U.S. District Judge Denise Cote ruled that
settlement agreement was invalid as it would potentially limit any liability that
a jury award resulting from an ongoing trial would have against the directors.
jury also has the responsibility for assigning the percentage each defendent was
liable for the fraud. To illustrate, let's say the CEO, CFO and all the board
of directors were found liable for fraud with an award to the plantiffs for $100
Million. The jury could have assigned the board of directors 90% of the liability,
the CEO 5% and the CFO the remaining 5%. Using this formula, the board of directors
would pay a total of $90 million, the CEO $5 million and the CFO $5 million.
Under the original proposed settlement, the board of directors liability would
have been limited to $54 million instead of $90 million. This would have left
the CEO and CFO to be held accountable for the remaining $46 million to get to
the $100 million jury award to the plantiffs.
Based on this logic, Judge
Denise Cole dismissed the original settlement.
Ebbers faces $30 Million Fine and life in prison.
2005 Nelson Chin.
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