Judge OKs $6.1B in WorldCom Settlements

NEW YORK – A U.S. judge on Wednesday gave final approval to a $3.6 billion legal settlement between more than a dozen investment banks and WorldCom Inc. (search) investors stemming from the telecommunications company's collapse three years ago.

Together with an earlier settlement by Citigroup Inc. (C) worth nearly $2.6 billion, investors in total are expected to recover more than $6.1 billion. The payouts will be spread out among the more than 830,000 individual and institutional investors who are part of the class-action case.

The settlement, approved by Manhattan federal judge Denise Cote in a written ruling, involves banks including JP Morgan Chase & Co (JPM) and Bank of America Corp. (BAC). Cote approved the Citigroup settlement last November.

The latest settlements "are, in virtually each instance, of historic proportions," Cote wrote.

Former WorldCom directors and the company's ex-auditor, Arthur Andersen LLP, also were part of the pact, as were former Chief Executive Bernard Ebbers (search) and former financial chief Scott Sullivan (search).

Both Ebbers and Sullivan have been sentenced to prison for their roles in the accounting fraud that led to WorldCom's bankruptcy and they agreed to forfeit most of their assets in the settlement with investors.

The case was brought by New York State Comptroller Alan Hevesi on behalf of WorldCom stock and bond holders who lost billions when WorldCom descended into bankruptcy in July 2002 after an $11 billion accounting fraud was uncovered.

The investment banks settled the case as a way to close the door on potential legal liabilities they faced.

Under the settlement, about $5 billion of the more than $6 billion total recovery would go to WorldCom bond holders, while stock investors would get more than $1 billion. The class-action case accused investment banks of helping WorldCom sell bonds when they should have known the company was concealing its true financial condition.

The banks that settled the case "obviously have the financial resources to pay more than they have, but (their) settlements have contributed to a total recovery that goes a long way toward making bondholders whole," Cote wrote.

It's not yet known how much each individual investor would receive under the settlement. The deadline for claims has passed, but an administrator is still processing all of the claims and deciding which ones are valid.