When Manhattan federal judge Denise Cote last month gave final approval to the $6.1 billion class-action settlement with WorldCom investors, it seemingly closed the books on the largest fraud in US history. Not so fast.

According to several sources, a significant private settlement with WorldCom will be formally announced on or about Oct. 15.

The lawsuit involves about $1 billion in claims stemming from investments made in WorldCom bonds underwritten by a number of investment banks. These investors chose to “opt out” of the class-action and filed separate lawsuits, represented by Lerach Coughlin Stoia Geller Rudman & Robbins.

The plaintiffs in the pending settlement are said to include about 80 state and multi-employer pension funds and other institutional investors. They include CalPERS, CalSTERS, The Los Angeles City Employee Retirement Association, Northwest Mutual Life Insurance Co. and Standard Life, based in Scotland.

Details of the settlement are sketchy. One knowledgeable source says the agreement calls for a multi-hundred-million-dollar recovery and a large premium over what the “class” received in their recent $6.1 billion settlement.

Coffey

John Coffey, partner with Bernstein Litowitz Berger & Grossmann, the lead trial counsel in the WorldCom class action, however, disputes the notion that the settlement in the private suits will be more favorable than they were for the $6.1 billion class. “That’s not correct,” he asserts, referring to the notion of a large premium over what the class received. “We were assured by the banks that those who opted out are not doing better,” especially after taking into account lawyer fees.

Another individual who is knowledgeable about the settlement, however, warns that the numbers are actually hard to calculate. Investors represent many different issues of bonds, plus there are equity investors; he says it’s difficult to ultimately figure out the losses, so it’s therefore difficult to figure out the recovery base.

What’s more, it’s currently not clear yet what the claims filing rate will be; in other words, how many investors represented in the class will actually file claims for their part of the settlement. If there is a very low filing rate, the class investors who do file will fare better than those who opted out. However, if there is a high filing rate, the Lerach group could theoretically fare better.

One lawyer asserts that given the high-profile nature of the WorldCom case and the huge losses and settlement figure, one can assume the claims filing rate will be at the high end of the typical spectrum.

The Start Of An “Opt Out” Trend?

The firm of Lerach Coughlin Stoia Geller Rudman & Robbins also has claims pending against AOL Time Warner—now called Time Warner Inc.—in Ohio and Los Angeles Superior Court on behalf of a number of large investors, including the Regents of California, five Ohio pension systems, the Amalgamated Bank’s Longview Funds, and the Los Angeles City Employee Retirement Association, all of which opted out of the class.

Compliance Week also understands that Lerach represents as many as 125 additional institutions worldwide with billions of dollars of additional claims that are “opting out” and suing AOL Time Warner.

Back in August, Time Warner said it agreed to settle class-action lawsuits stemming from its merger with AOL and a related accounting scandal and set aside $3 billion in reserves to resolve litigation. Under the proposed settlement, Time Warner will pay $2.4 billion into a settlement fund related to the securities litigation. The company has also set up an added reserve of $600 million in connection with other related lawsuits, including the shareholder-derivative actions.

Williams

The question, of course, is whether there is a growing trend in which large institutional investors opt out of class-action lawsuits and sue companies directly. “Right now, they are anomalies,” asserts Richard Williams, partner with Holland & Knight. “But, you will see a lot more.”

Weiss

“I don’t think it is a tsunami at all,” agrees Melvyn Weiss, senior and founding partner of Milberg Weiss Bershad & Schulman. “They are being done very selectively.”

The seed for opting out stems from the Private Securities Litigation Reform Act of 1995, which said that the shareholder with “the largest financial interest” will serve as the lead plaintiff to represent the interests of class members; their attorney would serve as the lead attorney, as well.

This was a significant development; before then, shareholders raced to the courthouse—whoever was first to file a lawsuit served as the lead plaintiff, no matter how few shares they held. Since the '95 Act, the lead plaintiffs in such cases have typically been large institutions. For example, New York State Comptroller Alan Hevesi, the sole trustee of the New York State Common Retirement Fund, was the Court-appointed lead plaintiff in the lawsuit against WorldCom.

Frequently, however, the second- or third-largest investors suing a company are also large institutions with deep pockets and powerful attorneys. As a result, some of these large institutions seem to be opting out because they—or their lawyers—think they can recover more money in a separate suit that just being a part of a larger class.

Indeed, some lawyers privately sniff that Lerach Coughlin is aggressively trying to coax large institutions into abandoning class actions.

To Opt, Or Not To Opt (Out)

As is usually the case, there are advantages and disadvantages to joining a class or opting out.

For example, experts say that those who opt out invariably spend more on the litigation; in many cases, it will set them back millions of dollars. Also, plaintiffs who sue separately frequently have a tougher time gaining access to critical documents. “Opt outs will be put in the back of the bus in the discovery process,” Weiss insists.

They also must prove they relied on the defendant’s alleged misrepresentations, which is tougher to prove. If you are in a class, you don’t have to prove reliance: It is perceived, lawyers point out.

Lefler

That said, opting out can make sense in high-profile cases where institutional investors had very high losses. This is especially true if the defendant has deep pockets. But lawyers stress that there are few of these kinds of cases. Also, many high-profile cases involve defendants that are in bankruptcy or out of business altogether, with few assets remaining. Even so, if institutions can get their case in the jurisdiction of their choice, they can wind up with a larger recovery. “Some folks are doing it in state court, where it is easier to satisfy anti-fraud claims than in federal court,” asserts Daniel Lefler, partner with Irell & Manella in Los Angeles.

Lefler also points out that in major class-action cases, the total award can be huge, but on an investor-by-investor basis, it doesn’t wind up working out to that much money. “In a way, the scale of claim works to the opt-out investor’s benefit,” he adds.

A major vendor also may find it advantageous to opt out because as part of the settlement they may be able to work out an arrangement for the future, says Williams at Holland & Knight. Also, an individual plaintiff may choose to opt out because they know something about the defendant that the other plaintiffs don’t know. “They can get a premium for that special knowledge,” Williams explains.

Defendants, of course, generally don’t like it when plaintiffs opt out. That's for many reasons, including the fact that it becomes harder for them to anticipate future monetary exposure. This could also make it difficult for the defendant to figure on how much to agree to, based on its officer and director insurance coverage. Concedes Lefler: “It is tough dealing with these [opt out] cases.”

However, he and others may be dealing with more of them in the near future.

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