July 6 (Bloomberg) -- MCI Inc., former WorldCom Inc. Chief Executive Officer Bernard Ebbers and 18 ex-WorldCom officials agreed to pay about $51 million to settle a suit by employees who lost hundreds of millions of dollars when the long-distance telephone company collapsed, lawyers for the employees said.
The pact, which must be approved by U.S. District Judge Denise Cote, leaves 401(k) fund trustee Merrill Lynch Trust Co., a subsidiary of Merrill Lynch & Co., as the only active defendant. A suit against ex-WorldCom Chief Financial Officer Scott Sullivan is suspended until after he is sentenced Nov. 8 for his role in accounting fraud at the company.
The employees of WorldCom, which emerged from bankruptcy in April as MCI, are seeking about $100 million from Merrill, their lawyers said.
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,'' Lynn Sarko, a lawyer for the employees with Seattle's Keller Rohrback LLP, said. ``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?''
The agreement follows the $2.65 billion settlement in May of a fraud suit by WorldCom investors against Citigroup Inc. The investors, who said Citigroup sold WorldCom securities at inflated prices, have claims against a dozen other WorldCom underwriters.
Bankruptcy Priority
MCI will pay about $19.5 million as part of the settlement, Sarko said. He said MCI's share of the settlement 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, employee lawyer Gary Gotto, also with Keller Rohrback, said.
``Employees should be treated as general unsecured creditors, not simple shareholders,'' Gotto said. ``If they are treated as simple shareholders, no money comes from MCI.''
William Halldin, a spokesman for Merrill, denied the allegations.
``Plaintiffs want to rewrite the law and invent a responsibility that simply does not exist,'' Halldin said. ``Merrill Lynch acted appropriately and consistent with the plan agreement.''
Ebbers's lawyer David Kaufman of Jackson, Mississippi, declined to comment.
MCI spokeswoman Brittany Hoff said the settlement ``is a positive step toward putting our past behind us once and for all.''
Ebbers's Payment
The suit was brought under the Employee Retirement Income Security Act. Employees claimed that the defendants breached their fiduciary duty to workers by obtaining and retaining WorldCom stock.
The settlement includes 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, Pennsylvania, has agreed to pay $10 million, subtracting for its legal defense costs, Sarko said.
AIG spokesman Joseph Norton didn't return a call seeking comment.
The fund's excess insurers, who deny liability because their policies were allegedly 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.
Losses
Ebbers will pay as much as $4 million, depending on how much he eventually pays MCI for debts owed it, Sarko said. Beyond a $450,000 minimum payment to the employees, Ebbers will pay one percent of whatever sum he eventually pays to MCI, up to a combined total of $4 million to the employee class, Sarko said.
All of the defendants are cooperating with lawyers for the employees, Sarko said.
Merrill and employees at WorldCom tasked with guiding the company's 401(k) fund investments left 46 million shares of WorldCom stock in the fund even as analysts issued two negative reports about WorldCom stock in the spring of 2002, said Gotto.
``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.
Sarko added: ``I can't imagine any defense where your own analysts tell you to sell and you do nothing.''
Insurers' Challenge
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 as well as Ebbers and others to recover money their 401(k) accounts lost by investing in company stock. The suit claimed WorldCom caused employees to keep WorldCom stock in their 401(k) accounts while knowing the company was overstating income.
In a similar suit involving bankrupt energy trader Enron Corp., a federal judge in Texas granted preliminary approval June 4 to an $86.5 million settlement between former Enron employees and some of the Houston-based company's former directors.
Enron employees accused the company's managers of encouraging them to add Enron shares to their 401(k) retirement accounts while executives sold company stock. Enron filed for bankruptcy in December 2001 after disclosures that billions of dollars in debt was hidden in off-the-books partnerships.
In Enron's case, the company's insurers didn't challenge the validity of insurance policies on the grounds that they were voided by the fraud at the company, Gotto said.
Ex-Officers Settle
In WorldCom, the insurers challenged the validity of their polices because the company's application for insurance coverage included financial data about the company that was later found to be false and ``restated significantly,'' Gotto said.
Former WorldCom officers and investment banks still face billions in potential liability in the investor class action pending in New York federal court. That case is scheduled for trial in January.
The criminal prosecution of Ebbers for securities fraud, also in New York federal court, is scheduled for Nov. 9.
Besides Ebbers, among those settling are former WorldCom Chairman Bert Roberts and the estate of former Vice Chairman John Sidgmore, who died last year, as well as officials who administered the employee benefit plan.
Trial for Merrill and Sullivan for breach of fiduciary duty in the employee suit is scheduled for March 2005.
Ashburn, Virginia-based WorldCom filed the largest bankruptcy in U.S. history in July 2002 after an $11 billion accounting scandal left the company unable to pay its debts.
Merrill Lynch is a passive minority investor in Bloomberg LP, the parent company of Bloomberg News.
The case is: In re WorldCom Inc. ERISA, 02-CV-4816, U.S. District Court, Southern District of New York.
To contact the reporter on this story: David E. Rovella in U.S. District Court for the Southern District of New York or drovella@bloomberg.net. To contact the editor responsible for this story: Patrick Oster at or poster@bloomberg.net.