December 2, 2003

WorldCom & The Statute of Limitations

The WorldCom securities litigation continues to generate judicial decisions at an impressive rate. The past ten days have turned up two opinions addressing the application of the statute of limitations for securities fraud to various claims.

1) In State of Alaska Dept. of Revenue v. Ebbers, 2003 WL 22738546 (S.D.N.Y. Nov. 21, 2003), one of the forty-seven individual actions brought on behalf of public pension funds, the court addressed whether the extended statute of limitations created by the Sarbanes-Oxley Act of 2002 is applicable to claims brought under Section 11 of the '33 Act. (Click here for a recent post on The 10b-5 Daily describing the new statute of limitations.)

Section 11 creates liability for false or misleading statements in registration statements. To avoid the heightened pleading standards for pleading fraud, the State of Alaska plaintiffs expressly disavowed that their claims were based on a theory of fraud, instead styling them as pure negligence or strict liability claims. By its terms, however, the extended Sarbanes-Oxley statute of limitations only applies to claims that involve "fraud, deceit, manipulation, or contrivance" in contravention of the "securities laws."

The court explained the results of the plaintiffs' Faustian bargain: "There are advantages to bringing solely strict liability and negligence claims: the pleading and proof thresholds are far lower than for claims asserting securities fraud, and liability is 'extensive.' One of the disadvantages of bringing negligence claims, however, is a more narrow window of time in which to sue. Because Section 13 [of the '33 Act] and not Section 804 [of Sarbanes-Oxley], applies to the Section 11 claim arising from the 1998 Offering, that claim expired in August 2001 and is time-barred."

Having found that the extended Sarbanes-Oxley statute of limitations did not apply, the court noted "it is unnecessary to consider whether the statute could be retroactively applied." It also made additional statute of limitations rulings on other claims in the case.

2) Statute of limitations arguments based on inquiry notice (i.e., plaintiffs were aware of the probability of fraud but failed to bring their claim in a timely manner) are often difficult for defendants because there is a fine, but distinct, line between arguing that plaintiffs were aware of the probability of fraud and conceding that a fraud was committed. In a different individual action in the Worldcom securities litigation, Public Employees Retirement System of Ohio v. Ebbers, No. 03 Civ. 338 (S.D.N.Y. November 25, 2003), the court addressed a statute of limitations defense raised by Salomon Smith Barney ("SSB") and its telecommunications analyst, Jack Grubman. (The 10b-5 Daily has posted previously about the defenses raised by the SSB defendants at the class certification for the main securities class action.)

The court found that the plaintiffs were not put on inquiry notice of the alleged fraud because the cited press reports were "simply too vauge" to support a conclusion that an illicit relationship between SSB and WorldCom was tainting Grubman's reports. In a rather unfair bit of piling on, however, the court also stated that it was "ironic" that the SSB defendants "now contend that the conflicts of interest that they have so vigorously argued are insufficient to sustain fraud allegations were sufficiently reported in the business press to put plaintiffs on notice of their fraud claims as early as 2000." No arguing in the alternative allowed?

The New York Law Journal has an article (via law.com - free regist. req.) on the Ohio decision.

Posted by Lyle Roberts at December 2, 2003 6:30 PM | TrackBack
Email this entry to:


Your email address:


Message (optional):