Bank of America Settles in WorldCom Suit

The spectacular crash of WorldCom in 2002 was not, despite what may be said in the trial of Bernie Ebbers, the world of a single individual, A financial catastrophe of that magnitude required many participants. Yesterday, Bank of America became the second respondent to settle for its role in the incident. A good trader knows when to cut his losses, and BofA is doing just that.

The cost to BofA is $460.5 million, much less than the $2.58 billion Citigroup paid to settle its part of the case. The suit alleges that the respondents, which include other financial institutions like JPMorgan Chase, Deutsche Bank, Lehman Brothers, Credit Suisse First Boston, Goldman Sachs and UBS Warburg, should have been aware of the mess WorldCom had made of its accounts. Their sales of WorldCom bonds were dune under false pretenses according to the plaintiffs, led by the New York State Common Retirement Fund overseen by New York State Comptroller Alan Hevesi

BofA said that it was "in the best interests of the company to resolve these claims and put this litigation behind it and focus efforts on creating greater value for the shareholder." The bank has set aside the money already and hopes "to eliminate the uncertainties, expense and distraction" that the trial would have meant. The BofA subsidiaries, Banc of America Securities and Fleet Securities (which it acquired when it bought FleetBoston in April of last year), underwrote WorldCom bonds in May of both 2000 and 2001. Citigroup was the lead underwriter, but the BofA entities will pay under the same formula.

For BofA, which had revenues last year of $48.9 billion, and its net income was $14.1 billion, $3.69 per fully diluted share. It can afford to pay $460.5 million, and since it did underwrite the bonds, it is hard to see how a court could hold that there was no liability. Shareholders were so pleased that BofA stock opened up 12 cents, before turning negative. By the end of trading, the price was off 24 cents, 0.52%. This is as good as unchanged give the news.

While some of the market reaction, or lack thereof, is the result of the settlement having been discounted already, there is a valuable lesson as well for American business. Not every lawsuit is frivolous, and not every settlement is an admission of terrible wrongdoing. This was a payment made to get rid of a major distraction. The settlement was good business. And if anyone in the Bush White House is watching, this is how lawsuits are supposed to work, and usually do.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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