X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Palm Beach, Fla., socialite John A. Porter is one of 10 former WorldCom board members who agreed last week to pay a total of $18 million out of their own pockets as part of a settlement with WorldCom investors who claim they were bilked by accounting fraud at the telecommunications giant. But Porter, who was once WorldCom’s chairman, may not have to pay a penny himself. The man who once boasted a stock portfolio worth $700 million filed for personal bankruptcy last May. “My understanding is someone has stepped in and will help pay his portion,” said John Chartier, a spokesman for New York State Comptroller Alan Hevesi, who announced the settlement last Friday. Chartier said he did not know who that someone is. Even so, the trustee in Porter’s Chapter 7 bankruptcy case in Atlanta, trustee Neil Gordon says any settlement with Porter would have to be approved by the bankruptcy court — and that Porter has not yet presented any such request to the court. On top of that, some legal experts say it violates the spirit if not the letter of the bankruptcy code to have Porter — or someone on his behalf — pay a settlement to defrauded investor. “[It] demonstrates deficiencies in the bankruptcy codes that would permit a culpable party to shield assets that would be considered a fair contribution in this settlement,” said Anthony Alfieri, head of the Center for Ethics & Public Service at the University of Miami law school. Porter’s lawyer, Pamela Chipega, of Allen & Overy in New York City, declined to comment, as did Porter’s wife, Willa, reached at the Porters’ Palm Beach home. Last week, Hevesi announced a preliminary settlement with 10 WorldCom board members including Porter. The deal called for the board members to pay $18 million of their own money to the class of investors who sued the company and directors in U.S. District Court in Manhattan. The settlement also calls for WorldCom’s liability insurer to pay up $36 million under directors and officers coverage. The settlement was touted as the first in the history of class action securities lawsuits where an entire group of outside directors was required to dig into their own pockets to settle claims. Usually, directors’ insurance covers all liability claims. Hevesi said the settlement “sends a strong message to the directors of every publicly traded company that they must be vigilant guardians for the shareholders they represent. We will hold them personally liable if they allow management of the companies on whose boards they sit to commit fraud.” But as first reported in the Miami Daily Business Review last week, Porter, the co-founder and former chairman of WorldCom, filed for personal bankruptcy last May. On a motion by J.P. Morgan Chase, the filing was converted from Chapter 11 to Chapter 7, which requires liquidation of all nonexempt assets for repaying creditors. In his bankruptcy filing, Porter listed debts, among others, of $55 million to the Internal Revenue Service, $7 million to lender J.P. Morgan Chase, $7.5 million to Citicorp and $3.4 million to his wife, Willa, as part of a prenuptial agreement. Porter says he lost his fortune when WorldCom crashed and when the share prices of his other technology companies plummeted shortly after that. Some of Porter’s creditors, including J.P. Morgan Chase, have accused him of hiding assets, failing to disclose existing liens on his properties when borrowing against them, spending excessive amounts of money from the bankrupt estate, and improperly transferring wealth to his wife to shield assets. Porter “engaged in a pattern of misleading JPMC, fraudulently transferring assets, wrongfully encumbering assets in violation of the negative pledge provisions of the loan documents,” according to a court filing by J.P. Morgan Chase. The bank declined to comment. Even though Porter filed for bankruptcy in Georgia, he is claiming a homestead exemption for his 10,000-square-foot oceanfront mansion in Palm Beach, which is on the market for $17 million. An offer of $14 million has been made and a contract could be signed this week, Gordon said. Gordon, a partner at Arnell Golden Gregory in Atlanta, said he is investigating whether assets were improperly transferred to Willa Porter within the federal and state reachback periods. Gordon disputed the validity of the New York pension fund’s settlement as it relates to Porter. “They haven’t provided us with a settlement,” Gordon said. “Unless it’s approved by the bankruptcy court, it’s not a legitimate settlement. It’s void.” Anthony Alfieri criticized the ethics of having someone else pay Porter’s share. “The third-party payment on behalf of [Porter] is distressing because it undermines the larger purpose of this remedy by diluting the culpability and accountability that the parties and courts are seeking to vindicate,” he said. When asked if third-party payment would defeat Hevesi’s stated goal of making Porter bear personal responsibility, Chartier said “I can’t comment on that. I don’t know if the friend is going to pay and he has to pay them back.” From a strict legal standpoint, however, having a third-party pay Porter’s share might pass muster, one expert said. Chief Judge Emeritus A. Jay Cristol of the U.S. Bankruptcy Court for the Southern District of Florida said generally that if someone gives a bankruptcy filer a gift or loan after the person has filed, and it doesn’t affect the creditors, the bankruptcy court would not be concerned. “It sounds like it might work,” Cristol said. “Of course, if it were actually the bankrupt person’s money, that money would belong to creditors. But you can’t find fault with someone giving a gift or making a loan to someone in the person’s new life after bankruptcy.” Hevesi filed the lawsuit in December 2003 on behalf of the New York State Common Retirement Fund, which lost $300 million in WorldCom stock. Hevesi filed the suit along with a number of private attorneys, including lead counsel Sean Coffey of Bernstein Litowitz Berger & Grossman of New York City and Jeffrey Golan of Barrack Rodos & Bacine in Philadelphia. It is one of dozens of lawsuits filed against WorldCom by state pension boards and unions on behalf of investors who lost large sums when WorldCom’s stock tanked. WorldCom filed for bankruptcy in July 2002 in the largest corporate bankruptcy in U.S. history. The company merged with MCI Communications and left Chapter 11 proceedings in April 2004. It is now known as MCI Inc. Hevesi announced the settlement last Friday at a news conference but did not go into much detail about the terms. Under the settlement, which still must be approved by the court, each director would pay one-fifth of his or her personal wealth, excluding primary residences and retirement accounts. The directors provided sworn statements of their financial positions so that their net worths could be determined. The directors, who served between 1999 and 2002, neither admitted or denied wrongdoing. The 10 former directors have agreed to cooperate with the plaintiffs against the remaining defendants in the case, including Arthur Andersen, WorldCom’s auditing firm, and the banks that sold WorldCom bonds to the public, including J.P. Morgan Chase. Hevesi only announced the aggregate amount of the settlement, not how much each director would pay. In addition to Porter, the former directors who are settling include James C. Allen, Judith Areen, Carl J. Aycock, Max E. Bobbitt, Clifford Alexander, Jr., Stiles A. Kellett Jr., Gordon S. Macklin, the estate of the late John W. Sidgmore, and Lawrence C. Tucker. Two directors are still negotiating. Under the settlement, the plaintiffs’ attorneys will receive 4.75 percent of the total $54 million settlement. The settlement still must be approved by the U.S. District Court in New York. Jeffrey Golan, one of the lead plaintiff lawyers who filed suit on behalf of the retirement fund, said in an interview that the agreement calls for the former directors aggregately to pay the $18 million, and decide among themselves how much each person pays. Everyone is required to pay something, Golan said. The settlement was announced a month before the fraud case was scheduled to go to trial. And it came just two weeks before former WorldCom chief executive Bernard J. Ebbers Jr. is scheduled to stand trial in New York on criminal fraud charges. Ebbers is accused of orchestrating an $11 billion fraud that led to the company’s demise. Chartier said the timing of the settlement was unrelated to the upcoming criminal trial.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.