Bernie Ebbers appears headed to jail for fraud. Does that mean
, the main holdout in an investor class action targeting WorldCom underwriters, is headed to the bargaining table?
To be sure, the Ebbers conviction is not the kind of the headline that J.P. Morgan's lawyers want to see just days before jury selection begins in a lawsuit filed by WorldCom's disgruntled investors. The trial is set to begin Thursday in the same federal courthouse where Ebbers was convicted of fraud and false filings for his role in the giant telecom's collapse.
It's never a good thing when the CEO of a bank's big client is on the verge of spending the rest of his life in a prison. Ron Geffner, a securities attorney with Sadis & Goldberg, said the conviction is one piece of evidence for the jury in the class action to consider.
Still, the nation's second-biggest bank has contended it was fooled, along with everyone else. J.P. Morgan maintains it knew nothing about the massive $11 billion accounting fraud at WorldCom when it arranged billions of dollars in loans and bonds for the telecom. With Ebbers on the record as a crook, the claim arguably holds more water.
To date, the investors have negotiated nearly $4 billion in settlements with roughly a dozen other banks that were originally named as defendants in the lawsuit. The biggest payout so far is the $2.65 billion agreed to by Citigroup a year ago. Many legal observers suggest J.P. Morgan could wind up paying just as much if the jury rules for the investors.
"In theory, the conviction should have no bearing,'' said Michael Perino, a professor at St. John's University Law School and an expert on securities class actions.
One way or the other, it's unlikely that J.P. Morgan, the last big bank not to reach a settlement in the class action, was holding out for an Ebbers acquittal. Bill Singer, a New York securities lawyer, said most observers expected Ebbers to be convicted, especially after the former CEO took the stand and offered his "I know nothing" defense.
"I don't know too many people who thought he was going to get off,'' said Singer.
Singer is quick to add that legal issues facing J.P. Morgan are much different from those of the Ebbers situation.
No one is accusing J.P. Morgan or the other remaining bank defendants of orchestrating the fraud, as was the case with Ebbers. Rather, the investors, led by a New York State pension fund, claim the banks were either aware of or should have been aware of the massive financial accounting fraud.
More significantly, whereas Ebbers was fighting for his liberty, all that's at stake for J.P. Morgan is money. Of course, a jury verdict in favor of the investors won't be pocket change.
That's why many legal observers believe it's unlikely that J.P. Morgan, at the end of the day, will let the class action go to a verdict. Most expect the bank to let the investors present testimony and evidence, in an attempt to gauge the strength of their case.
If the case appears weak, J.P. Morgan will have more leverage in negotiating a smaller settlement. And if the investors put on a strong case, the bank can probably settle by agreeing to pay a little bit more than whatever was the investors' last offer on the table.
"It's unlikely this goes to trial or at least to verdict,'' said Perino. "It's just the way litigation goes. Usually you settle at some point.''