Sprint Corp.’s planned merger with WorldCom Inc. earlier this year was a “scheme” by executives at Sprint to milk the company out of hundreds of millions of dollars in stock options, according to a lawsuit filed on behalf of The Amalgamated Bank’s Longview Collective Investment Fund against Sprint. The fund holds more than 600,000 shares of Sprint stock in retirement funds for thousands of investors.
According to the lawsuit, filed in Jackson County Circuit Court, Missouri, the defendants-including Sprint Chief Executive Officer William Esrey, Chief Operating Officer Ronald Lemay, former Sprint PCS President and COO Andrew Sukawaty, WorldCom CEO Bernard Ebbers and 20 other Sprint executives-withheld information about Sprint’s proposed merger with WorldCom from shareholders prior to the shareholders voting to approve the merger. By approving the merger, stock options held by many of Sprint’s executives and management vested early due to a “secret clause” installed in company rules.
“Despite the fact that this merger was essentially dead in the water from the beginning, it was used as a vehicle to make winners out of the management and losers out of the shareholders,” said Bill Lerach, partner at Milber Weiss Bershad Hynes & Lerach L.L.P., the firm representing Amalgamated’s investors. “In fact, the shareholders suffered a double loss. Their company is stuck paying out a big pot of cash simultaneous with experiencing a `brain drain.’ “
The suit claims Amalgamated and its investors were “left holding an empty bag while Sprint executives are rewarded with millions for a merger that failed,” explained Dail St. Claire, spokesperson for Amalgamated Bank. “Worse yet, this merger was designed to benefit insiders at the expense of workers, shareholders and the company.”
The lawsuit alleges that even though the merger between Sprint and WorldCom failed last July due to antitrust and regulatory problems, the accelerated stock plan went forward, rendering Sprint shareholders liable for a companywide total of $1.7 billion in options held by employees. Since then, Sprint has suffered a management loss, with two of the five executives, including Sukawaty, and at least three other senior managers leaving the company after receiving stock options early. Since April, when the accelerated stock plan took effect, the lawsuit claims more than 200 Sprint employees, who were not fired or had their positions changed or eliminated, left the company.
Since the April shareholder vote, St. Claire noted that Sprint and its tracking stock, Sprint PCS, have lost more than $80 billion in market capitalization.
Robin Carlson, group manager of national media issues and corporate issues for Sprint, said the company’s board had to look at the lawsuit before making comments, but noted that the law firm representing Amalgamated was “notorious for filing baseless suits.”
Milber Weiss Bershad Hynes & Lerach also is representing a class action lawsuit against AT&T Corp. and its CEO Michael Armstrong alleging securities laws violations.
According to the lawsuit, the plan arose in 1998 when Sprint executives were faced with not being able to realize the value of their options, which were due to vest over several years. Due to the recent merger between WorldCom and MCI, Sprint executives knew the government would not allow another mega-merger between telecom companies in the near future.
After obtaining options to purchase millions of shares of Sprint common and wireless stock at below-market prices earlier in the decade, the executives were bound by company rules to wait several years before the shares vested and could be sold. Although the value of the shares had increased during the time frame, the lawsuit claims the executives had reason to fear a severe downturn in prices unless they could shorten the waiting period.
In late 1998, the executives “secretly altered” the company rules to create new terms for an early acceleration of their options, the lawsuit alleges. Previously the company rules had defined a “change of control,” which was necessary for the stock options to vest early, as either a turnover of a majority of directors within a two-year period or as the acquisition of more than 20 percent of the company’s outstanding shares by an outside company. Under the new terms-which the lawsuit claimed were altered without shareholder approval-early vesting could occur if the shareholders only voted to approve a proposed merger, irrespective of the eventual outcome.
“Altering corporate policy to allow for stock options to accelerate based only on shareholder approval of a merger is like having a fire insurance policy that pays off, not because the house burned down, but because an arsonist is reported to be somewhere in the vicinity,” said Graef Crystal, an executive compensation consultant.
Sprint’s Carlson said the amendment to the company rules allowing early vesting of options had been in place since 1986, and that the changes made in 1998 were simple administrative corrections to help simplify the books. Carlson also noted that shareholders were made aware of the accelerated vesting in a proxy statement sent to all shareholders prior to the April vote.
The suit continues that after the reworded definition was put in place, Sprint and WorldCom announced plans for the largest merger in corporate history. While the lawsuit says WorldCom’s Ebbers did not benefit personally from the proposed merger, it does say he so “desperately wanted to get Sprint’s wireless unit” that he went along with the merger announcement even though he had earlier declared at a PainWebber Inc. investor conference that he expected U.S. and European antitrust regulators to oppose such a merger.
The lawsuit also alleges that during this time, both WorldCom and Sprint knowingly altered financial results to show positive growth for both companies in an attempt to soothe investor fears.
More than a week before the shareholder vote was scheduled to take place, officials with the Federal Communications Commission gave Sprint management “a clear sign the merger was in trouble” by putting a procedural hold on the merger application, according to the lawsuit. Even with the hold, Sprint executives went forward with the shareholder vote, eight months before required under terms of the merger deal.
Carlson said the vote went forward at an accelerated rate at the request of WorldCom.
“WorldCom wanted us to hold the shareholder meeting as soon as possible to shut out any competing bids for Sprint,” Carlson explained.
At Sprint’s annual meeting in June, Esrey stated, “it remains unclear if we will or will not get the necessary government clearances to implement the merger.” The suit notes that for months prior Esrey had been assuring Sprint’s shareholders that Sprint would get the necessary governmental approvals for the merger, and that his admission that it “remains” unclear showed that those prior statements were false.
Prior to the Justice Department’s filing a lawsuit blocking the merger, which was soon called off by Sprint and WorldCom, several of Sprint’s executives began cashing in their now-vested options and leaving the company, including Sukawaty, who unexpectedly left in early June. Before Sukawaty left, Lerach noted that he cashed in million of dollars of his options, and is suspected of cashing in the rest after leaving the company.
By July, Sprint’s stock began a steep decline, falling from the mid-$60s to the $20 range. This drop, which the lawsuit attributed to the financial drain placed on the company by the accelerated vesting of executive stock options and Sprint revealing its accounting errors made earlier in the year, cost Amalgamated’s fund nearly $20 million.
“Sprint executives and their board established a new low in manipulating corporate policy to their advantage,” Lerach said. “The irony of Sprint’s definition of `change of control’ is that it requires no `change’ at all-except in compensation of compan
y insiders.”
