March 16 (Bloomberg) -- JPMorgan Chase & Co., the second- largest U.S. bank, agreed to pay $2 billion to settle claims by investors that the lender should have known WorldCom Inc.'s books were fraudulent when it helped sell $5 billion in company bonds.

JPMorgan will pay 46 percent, or $630 million, more than it would have paid had it accepted an offer by investors last May of $1.37 billion. The New York-based bank is the last major lender among WorldCom's 17 underwriters to settle. Its accord, which requires court approval, permits the bank to avoid a March 24 trial that could have subjected it to even larger liability.

The settlement by JPMorgan is the second-largest following the $2.6 billion that Citigroup Inc. agreed to pay last year to resolve its WorldCom liability. The agreements by all 17 WorldCom underwriters total more than $6 billion, the largest securities- fraud settlement in U.S. history.

``I think this is very much in the public interest and the interest of all the settling parties,'' U.S. District Judge Denise Cote said after she was informed of the settlement by Max Berger, a lawyer for investors, at a hearing on the case in New York today.

By waiting until the week before trial and being one of the last banks to settle, investors insisted on ``some additional remuneration as a result of that delay,'' said New York state Comptroller Alan Hevesi, sole trustee of the New York State Common Retirement Fund, the second-largest U.S. pension fund and lead plaintiff in the class action. The next closest premium paid was 17.5 percent, to be paid by Deutsche Bank AG.

$3.7 Billion

JPMorgan set aside $3.7 billion in the second quarter to pay legal costs related to claims that it helped some companies defraud investors. That brought the bank's total pretax legal reserves to $4.7 billion. On a July 21 conference call with investors, Chief Executive William Harrison Jr. said a ``significant amount'' of the second-quarter reserves were earmarked for claims related to Enron Corp.'s collapse.

In a statement today, JPMorgan said the WorldCom settlement would trim this quarter's earnings by $900 million, on a pretax basis.

JPMorgan Chase & Co. President James Dimon said eight months ago that he saw no pressing need to settle the WorldCom lawsuit. The claims against JPMorgan were far different from those against Citigroup, he said.

`Guilt By Association'

``This guilt by association will eventually have to end,'' Dimon said during a July 21 meeting with analysts. ``It is not fair to say, `You are large, you know crooked parties, you did business with them, you are guilty.' It is not sufficient. It will destroy this country if we don't eventually fix some of that.''

Today's message from the bank was different.

``Given recent developments, we made a decision to settle rather than risk the uncertainty of a trial,'' Harrison said in a statement. ``We can now put this litigation behind us.''

With the JPMorgan settlement, investors will get more than a 50 percent payout on their losses. Approximately $1 billion is for WorldCom shareholders and $5 billion is for bondholders.

Berger also announced today that two small New York banks, Utendahl Capital Partners and Blaylock & Partners, settled their liability for $807,000. Utendahl agreed to pay $234,000 and Blaylock $572,000, he said. Berger said he hopes to revive a failed settlement with the former WorldCom directors this week. The directors and Arthur Andersen LLP remain as defendants.

Director Settlement

On Feb. 2, Hevesi canceled the $54 million settlement with the former WorldCom directors reached in January after Cote voided a provision that would have exposed banks to higher damages. Without any bank defendants, the provision is no longer needed, investor lawyers said.

The settlement was lauded by investors because it forced the board members to pay some money out of their own pockets.

The directors agreed to pay $18 million from their own pockets and $36 million from proceeds of a directors-and-officers liability insurance policy.

Outside the courthouse, Hevesi said the previous settlement ``will be the basis of our negotiations with the directors.''

Today, the January director settlement was met by skepticism by Cote, who scheduled a hearing on March 21 to discuss ``what parts of the director settlement I think might require change,'' she said.

The JPMorgan accord may signal the end to litigation stemming from an $11 billion fraud that brought down the long- distance company, which filed the largest bankruptcy in U.S. history in July 2002.

Last year, lawsuits by former employees of the company who lost their pensions when WorldCom collapsed concluded with a settlement.

Ebbers Verdict

Yesterday a federal jury in New York found former WorldCom chairman Bernard Ebbers guilty of conspiracy and securities fraud for his role in the crime. He faces as much as 25 years in prison when he is sentenced June 13.

WorldCom investors claimed in their lawsuit that the banks should have known that WorldCom's finances were fraudulent before they helped it sell securities.

Today's settlement came after a ruling by Cote March 14 in which she denied JPMorgan's request to keep other bank defendants from settling. A footnote in Cote's ruling suggested JPMorgan could be held liable at trial for more than the $5.1 billion in bonds it helped sell.

The bank helped sell 37.5 percent of WorldCom's 2000 bond sale and 32.11 percent of the 2001 sale, according to Cote's ruling.

Artificially Reduced

Investors say in court papers that WorldCom artificially reduced expenses in 2001 and 2002 to meet expectations of Wall Street analysts. Seventeen banks and Arthur Andersen signed off on the fraud by underwriting stocks and certifying the company's finances, investors said.

The banks claimed they couldn't have been expected to uncover the fraud hidden in WorldCom's books.

WorldCom, the second-largest U.S. long-distance company, lost $184.6 billion in market value between its high in June 1999 and July 2002. It emerged from bankruptcy in April as Ashburn, Virginia-based MCI.

Federal securities laws make underwriters liable for misstatements by companies in any regulatory filing connected to a prospectus. Underwriters can assert a ``due diligence'' defense if they can show that there was no way they could reasonably have known a bond issuer's financial statements were false.

Last Minute Settlements

In the past two weeks, 16 of WorldCom's 17 former underwriters reached settlements with the investors. The banks haven't admitted any wrongdoing.

Cote granted preliminary approval to all of the bank settlements except for the three announced today. She approved the Citigroup accord last year. A preliminary approval hearing on today's settlements is scheduled for March 18.

The judge urged lawyers for Arthur Andersen and WorldCom directors to continue settlement negotiations before the trial, now scheduled to begin March 24. Cote said she expected the trial to last as long as 10 weeks.

Hevesi declined to discuss the status of negotiations with Arthur Andersen or the director defendants.

Paul Curnin, a lawyer for the directors, didn't immediately return a call seeking comment.

On March 10, Deutsche Bank, the third-largest European bank, agreed to pay $325 million to settle its liability. Also that day, WestLB AG and Caboto Holding SIM SpA agreed to pay $112.5 million.

Settlements

On March 9, ABN Amro, Mitsubishi Securities International, BNP Paribas Securities Corp. and Mizuho International agreed to pay $428.4 million.

On March 4, Lehman Brothers Holdings Inc., UBS AG, Goldman Sachs Group Inc. and Credit Suisse First Boston agreed to pay $100.3 million.

On March 3, Bank of America Corp., the third-biggest U.S. bank, agreed to pay $460.5 million. Bank of America owns FleetBoston Financial Corp., which was also a defendant in the case.

New York-based Verizon Communications Inc., the largest U.S. local-telephone company, has agreed to buy MCI for $6.7 billion. Qwest Communications International Inc., the No. 4 U.S. local- phone carrier, has made a competing $8 billion bid.

Hevesi declined to say whether yesterday's verdict in the Ebbers trial may have influenced JPMorgan's decision today to settle. Sean Coffey, Hevesi's lawyer, said settlement negotiations had been under way long before Ebbers went to trial.

``If a jury doesn't believe that someone with a degree in physical education could've missed a fraud this size, what do you think a jury is going to do when these masters of the universe shrug their shoulders and say 'aw shucks'?'' Coffey said.

JPMorgan shares were unchanged at $36.25 at 4:16 p.m. in New York Stock Exchange Composite trading.

The case is In Re WorldCom Securities Litigation, 02-3288, U.S. District Court for the Southern District of New York.

To contact the reporter on this story: David E. Rovella in New York at drovella@bloomberg.net.

Last Updated: March 16, 2005 18:40 EST