American Lawyer has a feature article (via a law firm website) in its Litigation 2005 supplement that lays out the events surrounding the WorldCom settlements. The settlements totaled over $6 billion.
Compliance Week has an article on the battle between counsel for the WorldCom class action plaintiffs and counsel for the WorldCom opt-out plaintiffs over who obtained a better settlement for their clients. The competing press releases can be found here (class action plaintiffs) and here (opt-out plaintiffs). Thanks to Securities Litigation Watch for the link.
Addition: An interesting sidenote to the $651 million settlement with the opt-out plaintiffs - Citigroup and J.P. Morgan agreed to join the plaintiffs in petitioning the SEC to toughen its disclosure rules for securities offerings.
The editors of the Jackson Clarion-Ledger are not pleased with the WorldCom settlements. Of course, they also appear to believe that Citigroup and JPMorgan Chase will be receiving, rather than providing, most of the settlement funds.
Quote of note: "But the settlement is top heavy: $2.58 billion to Citigroup and $2 billion to JPMorgan Chase & Co. with the rest divided among about 830,000 people and institutions. That's small solace to the small investor, including those in Mississippi who trusted Ebbers."
MarketWatch reports that U.S. District Judge Denise Cote (S.D.N.Y.) has given final approval to a series of settlements in the WorldCom case. The settlements were preliminarily agreed to earlier this year and total $3.6 billion.
Quote of note: "'Out of some 4 million potential class members, more than 830,000 of whom submitted proofs of claim, only seven filed timely formal objections to the 2005 settlements,' Judge Cote said in her opinion. 'The very low number of objections evidences the fairness of those settlements.'"
Addition: A New York Law Journal article (via law.com - free regist. req'd) discusses the related attorneys' fees award. In total (including earlier settlements), the two lead plaintiffs' firms will receive $335 million.
Corporate Counsel has a short article (via law.com - free regist. req'd) on the incentives some institutional investors are offering their counsel to obtain direct recoveries from individual defendants.
Quote of note: "Christopher Waddell, general counsel of the California State Teachers' Retirement System, said that he uses both bounty and sliding-scale fees in order to 'incentivize' his outside counsel to go after personal assets. CalSTRS, the nation's third-largest public pension fund, has promised its lawyers a 2.5 percent bounty, plus an undisclosed fee, in a pending suit against the former directors of WorldCom."
The Wall Street Journal had a feature article (subscrip. req'd) last week on the SEC's efforts, pursuant to Section 308 of Sarbanes-Oxley (the "Fair Funds" provision), to pay out some of the large civil penalties it has collected to investors. The article focuses on the logistical challenges of the WorldCom case, where tracking down all of the injured investors and sorting out their claims is expected to take close to two years.
Quote of note: "Regulators are looking for cheaper and faster ways to get money back to investors. While the Fair Funds program was set up to be separate from private class-action lawsuits, the SEC is moving to work more closely with trial lawyers and has hitched several of its Fair Fund efforts to related class-action settlements that cover a similar set of investors. SEC funds have been combined with class-action settlements in about a half-dozen cases, including the agency's $150 million settlement with Bristol-Myers Squibb Co. and its $25 million settlement with Lucent Technologies Inc."
The former CEO of WorldCom is forfeiting most of his assets in settlement of the securities class action claims against him. The Associated Press reports that Bernard Ebbers, who was convicted in March of criminal fraud, "will pay $5 million up front and place the rest of his assets in a trust that will be sold off for an estimated $25 million to $40 million." These sums will be added to the more than $6 billion paid by former WorldCom investment banks in settlement of the suit.
Arthur Andersen LLP, the last remaining defendant in the WorldCom securities class action, has agreed to settle the case. The settlement ends the the ongoing trial in the S.D.N.Y. According to a New York Times article, the settlement is for $65 million plus "20 percent of any amount [Arthur Andersen] paid to distribute its remaining capital to its present and former partners." The settlement also reportedly includes a "most favored nation clause" that guarantees the plaintiffs "the difference between the $65 million and any larger settlement in any other lawsuit [Arthur Andersen] may settle in the future."
The New York State Common Retirement Fund's (the "Fund") decision to act as lead plaintiff in the WorldCom securities class action has come under fire. The case has resulted in over $6 billion in settlements by the investment banks that underwrote WorldCom's bonds. Some commentators have argued, however, that the settlements actually lowered the value of the Fund's investments in those investment banks by more than the amount the Fund will receive from the settlements. In chronological order:
(1) Wall Street Journal editorial (subscrip. req'd) in the April 1 edition.
(2) Letter to the editor (subscrip. req'd) by Alan Hevesi, New York State Comptroller, in response to the Wall Street Journal editorial.
(3) New York Sun editorial in the April 12 edition.
(4) Forbes column in the April 25 edition.
Quote of note (Forbes): "Judging by a plaintiff expert's own estimate of shareholder losses, New York's claim of a $317 million hit would entitle it to 1.1% of the kitty, or a mere $11 million . . . . Hevesi's suit cost New York's pension fund by deflating the value of its investments in the banks it sued. The Hevesi fund owns stakes in J.P. Morgan, Citigroup and BofA. These three banks took aftertax charges totaling $3.2 billion for WorldCom settlement costs. The fund's pro rata share of these losses, and those of smaller-fry defendants, totes up to $13 million."
The Associated Press has a report on yesterday's opening statements in the trial of the securities class action against Arthur Andersen based on WorldCom-related claims. As previously posted, the other defendants in the case have settled.
Finding jurors that do not have strong feelings about the WorldCom corporate scandal may prove difficult for the company's former auditors. Arthur Andersen is the last remaining defendant in the WorldCom securities class action and the case is about to go to trial. According to a Bloomberg report, counsel for Arthur Andersen has informed the judge that many of the individuals in the jury pool "owned WorldCom stock while others displayed 'deeply felt' bias against Andersen and WorldCom." Jury selection begins on Monday and the trial is expected to last until the end of May.
As of today, all of the former directors sued in the WorldCom securities class action pending in the S.D.N.Y. have agreed to settle the case. The twelve board members will pay $60.75 million ($24.75 million in personal payments and $36 million from their insurers), bringing the total settlements in the case to slightly over $6 billion. The last remaining defendant is Arthur Anderson. The Associated Press has a report.
JPMorgan Chase & Co. (NYSE: JPM) has announced the preliminary settlement of the claims brought against it as part of the WorldCom securities class action pending in the S.D.N.Y. JPMorgan is accused of failing to engage in proper due diligence while acting as an underwriter for WorldCom bond offerings and is the last of the defendant banks in the case to settle. The settlement is for $2 billion.
Bloomberg reports that JPMorgan will pay a significant premium (more than 17.5%) over the formula used to establish Citigroup's related settlement. Taken together, the WorldCom securities class action settlements now total approximately $6 billion.
Three more banks have agreed to a preliminary settlement of the claims brought against them as part of the WorldCom securities class action pending in the S.D.N.Y. Deutsche Bank AG, WestLB AG, and Caboto Holding SIM Spa will pay a total of $437.5 million based on their roles as underwriters for WorldCom bond offerings.
Bloomberg reports that the premium over the formula used to establish Citigroup's settlement continues to rise as the case gets closer to trial. The current group of settling banks are paying a 13%-17.5% premium.
Taken together, the WorldCom securities class action settlements now total just under $4 billion.
Four more banks have agreed to a preliminary settlement of the claims brought against them as part of the WorldCom securities class action pending in the S.D.N.Y. ABN Amro, Mitsubishi Securities International, BNP Paribas Securities, and Mizuho International, who are accused of failing to engage in proper due diligence while acting as underwriters for WorldCom bond offerings, will pay a total of $428.4 million.
These are the latest in a string of settlements by defendant banks just prior to trial. While the earlier settlements were all calculated using a formula pioneered by Citigroup's settlement, Bloomberg reports that this group of banks is paying a 5%-13% premium.
On the eve of trial (set to begin on March 17), Bank of America (NYSE: BAC) has announced the preliminary settlement of the claims brought against it as part of the WorldCom securities class action pending in the S.D.N.Y. Bank of America is accused of failing to engage in proper due diligence while acting as an underwriter for WorldCom bond offerings. The settlement is for $460.5 million and was calculated, according to press reports, using the same formula applied by Citigroup in reaching its earlier settlement in the case.
Quote of note (New York Times): "A lawyer involved in the case said that a half-dozen smaller banks had expressed an interest in settling with the New York fund [which acts as lead plaintiff in the case]. This person said that the fund was likely to insist that at least some of the remaining banks pay a premium over the formula used by Citigroup and Bank of America in their settlements. J. P. Morgan Chase is perhaps the most vulnerable of the remaining defendants because it sold a large portion of the bonds offered by WorldCom in 2000 and 2001."
Addition: The settlements by defendant banks in the WorldCom case are now coming fast and furious. Today it was announced that Lehman Brothers Holdings, Inc., UBS AG, Goldman Sachs Group, Inc., and Credit Suisse Group have agreed to pay a combined $100.3 million to settle the claims against them. These settlements are also based on the Citigroup formula. Bloomberg has a report.
Less than a month after it was announced, the settlement by ten former WorldCom outside directors of the securities class action claims against them has collapsed. The settlement was for $54 million, but it was the fact that $18 million of that sum was to be paid personally by the directors that led to extensive media commentary. According to an article (subscrip. req'd) in the Wall Street Journal, District Judge Cote (S.D.N.Y.) "rejected a provision that relates to how much the remaining defendants in the suit might have to pay if they lose the case." Without that provision, the plaintiffs have chosen to withdraw from the settlement.
Ten former outside directors of WorldCom have agreed to a preliminary settlement of the WorldCom securities class action claims against them. The settlement is for $54 million. Notably, $18 million of that sum will be paid personally by the directors (with the rest covered by insurance). According to an article in the Washington Post, the $18 million figure represents more than 20% of the directors' combined net worth.
Quote of note: "'This is a watershed development by imposing personal liability on corporate directors beyond the scope of insurance coverage,' said WorldCom's court-appointed corporate monitor, Richard C. Breeden, former chairman of the Securities and Exchange Commission. 'It will send a shudder through boardrooms across America and has the potential to change the rules of the game.'"
Last week, Judge Denise Cote of the S.D.N.Y. denied most of the summary judgment motion brought by the underwriter defendants, including Bank of America Corp. and J.P. Morgan Chase & Co., in the WorldCom securities litigation. The banks had underwritten bond offerings made by WorldCom in 2000 and 2001. The Associated Press has a report on the lengthy decision, which can be found here.
Two interesting articles related to the WorldCom securities litigation:
(1) The Wall Street Journal reports (subscription only) on Bear Stearns' surprising decision to go to trial in Alabama state court over claims that it misled The Retirement Systems of Alabama (RSA) in connection with the sale of bonds from a WorldCom subsidiary. Citigroup, JPMorgan Chase, and Bank of America have already settled with RSA for $111 million.
Quote of note: "One reason Bear may be willing to have its day in court: The pension fund isn't seeking punitive damages, which are intended to punish the defendant and to discourage repeat behavior, so its exposure is capped at $16.2 million. And unlike Citigroup, Bear Stearns isn't named in the massive class-action suit that has been filed in New York by WorldCom stockholders and bondholders. So it doesn't have to worry that an award against it in Alabama will negatively affect its position in that suit."
(2) An article in the November 2004 SCAS Alert has more background on the story. The article discusses the recent decision by the U.S. Court of Appeals for the Second Circuit to overturn the district court injunction that blocked RSA from pursuing its state court lawsuit. Judge Cote presides over the federal securities class action pending against WorldCom and others in the S.D.N.Y. and had ordered the Alabama court to delay its trial until 60 days after a verdict in the federal case. The Second Circuit found that a federal court has no protectable interest in being "the first court to hold a trial on the merits."
Quote of note (SCAS Alert article): "Traditionally, few institutional investors have litigated their claims in state court. The practice has become more common in the past two years. Last year, pension funds in Ohio and California opted out of a federal class action against AOL Time Warner to bring state court claims. Federal class counsel have argued that investor recoveries typically occur sooner and are more certain in federal court. Defense lawyers also have tried to discourage state litigation, preferring to negotiate a single federal class settlement that would cover all investors."
In settling a case, timing is important. Citigroup's settlement of the WorldCom litigation for $2.65 billion was the subject of a handshake agreement as of Thursday, May 6. According to press reports, Citigroup told analysts that the timing was influenced by the Second Circuit argument in the case scheduled for the following Monday.
At issue in that appeal was whether the district court had properly granted class certification for the claims against Citigroup based on analyst statements about WorldCom's securities. The district court had applied the fraud-on-the-market doctrine (i.e., reliance by investors on an alleged misrepresentation is presumed if the company's shares were traded on an efficient market) to help establish that common issues predominated over individual ones for the class members. Citigroup argued on appeal that the fraud-on-the-market doctrine could not be applied to claims based on analyst statements. Meanwhile, the SEC submitted an amicus brief to the court opposing Citigroup's position. Citigroup, in discussing its decision to settle the case before the appeal was heard, stated "to have the SEC come out against that obviously worsened the odds against us." But, with the benefit of hindsight, were the odds better than they appeared?
Although the Second Circuit had agreed to hear Citigroup's appeal, as of May 6 (the date of the handshake agreement) it had not issued an opinion explaining its ruling. That would come the next day, May 7, and the opinion certainly suggested that Citigroup's arguments would be considered carefully.
In Hevesi v. Citigroup Inc., 2004 WL 1008439 (2d Cir. May 7, 2004), the court explained that it had agreed to hear the appeal because the certification order "implicates a legal question about which there is a compelling need for immediate resolution." The question was "whether a district court may certify a class in a suit against a research analyst and his employer, based on the fraud-on-the-market doctrine, without a finding that the analyst's opinions affected the market prices of the relevant securities." In discussing its decision to address that question, the court expressed skepticism about the lower court's ruling. Among other indications that it might be favorably disposed to Citigroup's position, the court: (1) discussed a Seventh Circuit case in which the court had declined to apply the fraud-on-the-market doctrine on class certification; (2) noted that "the application of the fraud-on-the-market doctrine to opinions expressed by research analysts would extend the potentially coercive effect of securities class actions to a new group of corporate and individual defendants - namely, to research analysts and their employers;" and (3) cited a prominent Columbia Law School professor on the point that analyst opinions should be treated differently from issuer statements.
If that were not enough, just five days later the Fourth Circuit issued an opinion establishing that a district court must make a factual finding that the fraud-on-the-market doctrine is applicable before it can be used to support class certification. In Gariety v. Grant Thornton, LLP, 2004 WL 1066331 (4th Cir. May 12, 2004), the court addressed whether a district court could accept "at face value the plaintiffs' allegations that the reliance element of their fraud claims could be presumed under a 'fraud-on-the-market' theory." At issue was whether the relevant securities had been traded on an efficient market (one of the requirements for the application of the theory). The court concluded that because "the district court concededly failed to look beyond the pleadings and conduct a rigorous analysis of whether Keystone's shares traded in an efficient market, we must remand the case to permit the district court to conduct the analysis and make the findings required by Rule 23(b)(3)."
While there are undoubtedly many other factors that go into a settlement (especially one of this magnitude), would the Citigroup settlement have looked different just a week later based on these judicial developments? Maybe not, but it's interesting to speculate.
There is extensive press coverage today of Citigroup's $2.65 billion settlement in the WorldCom case. Some highlights:
Additional Settlements - The Wall Street Journal (subscrip. req'd) reports that the lead plaintiff has given the other defendant banks in the WorldCom litigation 45 days to settle under the same formula used by Citigroup. If the banks agree, they would pay about $2.8 billion to bond investors.
Allocation - The Associated Press reports that, according to the lead plaintiff in the case, Citibank's payment will be allocated with $1.45 billion to bondholders and $1.2 billion to shareholders.
Attorneys' Fees - The Wall Street Journal (subscrip. req'd) and the London Evening Standard report that the complex attorneys' fees arrangement in the case may result in fees of around $140 million for the plaintiffs' firms handling the litigation.
Citigroup Inc. (NYSE: C) has announced a settlement of the claims against the company in the WorldCom litigation. Citigroup will make a payment of $2.65 billion, or $1.64 billion after tax, to be allocated between class period purchasers of WorldCom stock and WorldCom bonds. According to the press release, the path to settlement became easier last Thursday when New York State Comptroller Alan Hevesi, who oversees the lead plaintiff in the case, agreed to face-to-face discussions. Citigroup also announced that after settling the WorldCom claims it will have a "litigation reserve" of $6.7 billion on a pre-tax basis to address other legal matters, including the Enron securities class action.
Quote of note (Bloomberg): "Chief Executive Officer Charles Prince said Citigroup faced claims seeking $54 billion in the WorldCom lawsuit. 'We made a $1.64 billion insurance policy to avoid a roll of the dice in front of a jury,' Prince said on a conference call with investors. 'We want to put the entire era behind us.'"
Quote of note II (Bloomberg): "Saudi Prince Alwaleed bin Talal, Citigroup's largest individual shareholder, said Prince and Citigroup Chairman Sanford Weill called him this morning and he told them 'I'm backing them all the way. If this was to go to court it would be so big, God help us,' Alwaleed said. 'The trend in the U.S. and New York is against corrupt practices. Look at Martha Stewart.'"
Last Friday, the SEC filed an amicus brief in support of the plaintiffs in the WorldCom securities class action. Two of the defendants, Salomon Smith Barney and its former telecommunications analyst, Jack Grubman, have appealed the district court's grant of class certification to the United States Court of Appeals for the Second Circuit. (The district court's decision is discussed in this post.) At issue is whether the district court properly determined that the fraud on the market theory was applicable to analysts.
The New York Times has an article on the SEC's brief. The district court held that it "comports with both common sense and probability" to find that Grubman's analyst reports affected the price of WorldCom securities and therefore to presume that WorldCom investors relied on those statements pursuant to the fraud on the market theory. The SEC reportedly supports this holding. The Second Circuit is scheduled to hear oral argument in the case on May 10.
Quote of note: "There is no reason to believe that Mr. Grubman's opinions, which relied on WorldCom's disclosures, had any distinct price impact 'over and above the price consequences of WorldCom's massive ongoing fraud,' Citigroup's [the parent company of SSB] lawyers said in their brief. As such, each investor should have to prove that he was harmed by Mr. Grubman and Salomon in individual cases, not as a class action. But lawyers at the S.E.C. countered that economic studies showed that analysts' reports affect securities prices and that their very purpose was to provide information upon which investors base their decisions."
The issue of loss causation is proving to be difficult for the S.D.N.Y. as it addresses the numerous research analyst cases. The general theme of the cases is straightforward: the defendants committed fraud by disseminating research reports that they knew to be overly optimistic. A key question, however, has been whether the subsequent decline in the company's stock price was caused by the research reports.
In the Merrill Lynch decision, the court found that there was no alleged connection between the research reports and the companies' financial troubles or the collapse of the overall market. (See this post.) In distinguishing that case, other S.D.N.Y. judges have pointed to additional facts linking the research reports to the alleged loss. In the Robertson Stephens decision, for example, the court noted that there was "evidence that disclosure of defendants' scheme caused a further decline in the price of [the] stock, even after the overall bubble had burst." (See this post.) While in the WorldCom decision, the plaintiffs had alleged that the analyst was aware of and concealed the accounting irregularities that led to the loss. (See this post.)
This week has seen the issuance of another research analyst decision from the S.D.N.Y., with what appears to be a new take on loss causation. In DeMarco v. Lehman Brothers, Inc., 2004 WL 602668 (S.D.N.Y. March 29, 2004), the plaintiffs allege that a Lehman analyst made buy recommendations for RealNetworks, Inc. stock during the class period (July 11, 2000 to July 18, 2001) while secretly holding negative views of the stock. In October 2000, the stock price declined, allegedly causing plaintiffs' losses. Investors did not discover that the Lehman analyst had misled them about his opinion on RealNetworks until the release of certain e-mails by the SEC in April 2003.
On the issue of loss causation the court made the following holding:
"[A]ssuming arguendo that plaintiffs must plead that their losses proximately resulted from the marketplace's reaction to the revelation of the truth that defendant's actionable statements concealed (as contrasted to independent market forces), the Complaint adequately alleges that in or around October 2000, the market was finally apprised of the negative information concerning RealNetworks that had earlier led [the Lehman analyst] to take a secretly negative view of the stock and that, as a result of these revelations, the stock declined, causing the losses on which plaintiff here sues."
The decision leaves a number of questions unanswered:
(1) Did the plaintiffs allege any facts demonstrating that the analyst knew about negative information that was not available to the market? (This factual scenario is suggested by the holding, but there is nothing in the decision to support it.)
(2) If the answer to Question 1 is no, what about the Merrill Lynch decision, which would appear to have reached the opposite conclusion on loss causation (but is not discussed by the court)?
(3) If the loss occurred in or around October 2000, how can the class period extend until July 18, 2001?
Things are getting interesting. Here's a final question: what is the Second Circuit going to say about all of this and when?
Holding: Motion to dismiss denied.
Addition: As to when the Second Circuit is going to deal with the issue of loss causation and the research analyst cases, a good guess is as part of the Merrill Lynch appeal. The scheduling order for the appeal states that briefing will be completed on May 24, with argument to be heard as early as the week of July 12. Thanks to Adam Savett for passing along this information.
Over forty individual actions have been brought by WorldCom bondholders pleading '33 Act claims based on alleged misrepresentations. Last November, the WorldCom court dismissed the claims brought by two Alaska plaintiffs involving a $6 billion bond offering in 1998 (Section 11 claim was time-barred) and a $2 billion bond offering in 2000 (no cause of action under Section 12(a)(2) for private placement). The 10b-5 Daily has posts discussing the decision and the solicitation dispute over the individual bondholder actions.
The defendants asked the court to dismiss similar claims brought in thirty-six of the cases. In an opinion issued January 20, Judge Cote granted the motions. The Associated Press has an article on the decision.
The solicitation dispute in the WorldCom case pending in the S.D.N.Y. has a new development. As previously reported in The 10b-5 Daily, the WorldCom court has found that Milberg Weiss engaged in an "active campaign" to encourage pension funds to file individual actions related to the main securities class action against WorldCom and is running the individual actions as "a de facto class action." Moreover, the firm's communications resulted in "some confusion and misunderstanding of the options available to putative class members."
As a result of this determination, on November 17 the court ordered that a curative notice be sent to all investors who have filed individual WorldCom actions. Since that ruling, the court also has dismissed a Securities Act claim (based on a 1998 bond offering) brought by an individual investor because it was time-barred under the applicable statute of limitations. (The 10b-5 Daily has posted a summary of the decision in the State of Alaska Dept. of Revenue v. Ebbers case.)
The curative notice has been signed by the court and can be found here. The notice discusses: (1) the court's findings concerning Milberg Weiss's solicitation of individual investors; (2) the potential negative impact on individual actions of the State of Alaska decision (in addition to the statute of limitations decision concerning the 1998 bond offering, the court made other rulings that might discourage the bringing of individual actions); and (3) some of the additional burdens and costs that could result from bringing an individual action.
Addition: The controversy is evidently causing some of the individual investors to rethink their strategy. According to a Dow Jones Newswires article (subscrip. required) from late last week, the Asbestos Workers Local 12 Annuity fund has instructed Milberg Weiss to voluntarily dismiss its individual suit and is requesting that the court not prevent the fund from joining the main class action.
Quote of note (Dow Jones): "[District Judge] Cote has not yet been called on to formally decide whether funds that want to opt back into the class would be permitted to recover through the class action, lawyers involved in the case said. In the notice being sent to individual action plaintiffs, Cote said that defendants in the case have contended that even if claims are dismissed without prejudice, such investors shouldn't be allowed to recover funds under established legal doctrine."
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.
The New York Law Journal has an article (via law.com - free registration req.) on Judge Cote's opinion & order in the WorldCom solicitation dispute. (The 10b-5 Daily has previously posted about the court's decision and the underlying dispute.)
As previously reported in The 10b-5 Daily, Milberg Weiss and Bernstein Litowitz are in the midst of a dispute over the recruitment of individual bondholders to bring securities fraud claims against WorldCom and related parties. Bernstein Litowitz, who represents the lead plaintiff in the main investor action against WorldCom, has complained in a series of submissions to the court that Milberg Weiss provided "misleading solicitations'' to WorldCom bondholders suggesting that they would not obtain a fair share of any settlement obtained in the main investor action and should bring their own individual actions.
Yesterday, District Judge Cote issued an opinion & order concerning this matter. The court found that Milberg Weiss has engaged in an "active campaign" to encourage pension funds to file individual actions and is running the individual actions as "a de facto class action." Moreover, the firm's communications have resulted in "some confusion and misunderstanding of the options available to putative class members."
The court ordered that a separate notice (in addition to the normal class certification notice) be sent to each plaintiff who has filed an individual action, with the initial draft to be written by Bernstein Litowitz. The requests for relief made by Bernstein Litowitz in its November 4 submission to the court were denied, but leave was granted for the firm to bring a formal motion on the subject.
Two prominent plaintiffs' firms, Milberg Weiss and Bernstein Litowitz, are in the midst of a dispute over the recruitment of individual bondholders to bring securities fraud claims against WorldCom and related parties. Bernstein Litowitz represents the lead plaintiff in the main investor action against WorldCom, which has been brought on behalf of both common shareholders and bondholders in the S.D.N.Y.
In an October 29 letter to the court, Bernstein Litowitz complains that Milberg Weiss provided "misleading solicitations'' to WorldCom bondholders suggesting that they would not obtain a fair share of any settlement obtained in the main investor action and should bring their own individual actions. According to a Reuters article, Milberg Weiss "strongly denied the accusations, which will be aired at a hearing [today] in New York before U.S. District Judge Denise Cote." (As posted in The 10b-5 Daily, class certification was recently granted in the WorldCom case.)
Class certification in the WorldCom securities class action has been granted for all purchasers of the company's stock from April 29, 1999 to June 25, 2002. In a 91-page ruling, District Judge Cote of the S.D.N.Y. rejected numerous arguments by the defendants against class certification, including an argument by Salomon Smith Barney ("SSB") and its telecommunications analyst, Jack Grubman, that a Rule 10b-5 claim "cannot apply to expressions of opinion by a research analyst since it is not probable or likely that such opinions would affect the market price for WorldCom securities."
The SSB defendants appear to have relied on Judge Pollack's decision in the Merrill Lynch research analyst cases in making their reliance/loss causation arguments. In that decision (referred to as the Merrill Lynch III opinion by Judge Cote), Judge Pollack found that because there was no alleged connection between the Merrill Lynch analyst reports and the companies' financial troubles or the collapse of the overall market, the plaintiffs failed to meet their pleading burden. (The 10b-5 Daily has previously discussed Judge Pollack's ruling at length.)
According to Judge Cote, however, the SSB defendants "neglect to mention that . . . the Merrill Lynch III opinion distinguishes between the analyst report allegations in the WorldCom Securities Litigation and the inadequate allegations in the Merrill Lynch III complaint." In particular, Judge Pollack had noted that the WorldCom plaintiffs "alleged that the analyst, among other things, was aware of and concealed the alleged accounting irregularities that directly led to the losses incurred by plaintiffs." Under these circumstances, Judge Cote evidently did not find the SSB defendants' reliance on the Merrill Lynch decision persuasive.
Quote of note: "Nothing in the defendants' briefs addressed why Grubman was paid approximately $20 million a year in compensation by SSB to be its telecommunications analyst if his analyst reports were irrelevant to the market."
Addition: According to a Reuters report, the lead plaintiff in the case, the New York State Common Retirement Fund, has asked the judge to set the case for trial in October 2004.
The Jackson Clarion Ledger reports that the U.S. Court of Appeals for the Fifth Circuit has upheld the dismissal of a securities class action against WorldCom former executives Bernie Ebbers and Scott Sullivan. The decision can be found here.
It is important to note, however, that this suit was not based on the accounting irregularties that led to WorldCom's recent bankruptcy. Instead, it was based on the failure of WorldCom to write-off certain receivables in 2000.
Quote of note: "In the original complaint, shareholders claimed Ebbers and Sullivan withheld information about $685 million in write-offs of uncollectible receivables. The ruling said, 'the plaintiffs simply ignore evidence that WorldCom frequently took large write-offs and that, indeed, a $768 million write-off had been taken in 1999.'"
Quote of note: "Rakoff said killing the company 'would unfairly penalize its 50,000 employees, remove a major competitor from a market that involves significant barriers to entry, and set at naught the company's extraordinary efforts to become a model corporate citizen.'"
CorpLawBlog has posted a persuasive critique of the settlement. No word on how the settlement will effect the pending securities class actions.
The Washington Post reports that WorldCom has sweetened its settlement with the SEC, offering $500 million in cash and $250 million in company stock. The 10b-5 Daily has commented on the proposed settlement here.
Reuters reports that the S.D.N.Y. has denied Arthur Anderson's motion to dismiss a WorldCom-related securities class action pending against the defunct accounting firm. The suit "accuses Andersen of failing to properly review and investigate WorldCom's adjustments and journal entries in its books and argues the firm should have discovered the $11 billion accounting fraud at the telephone company."
In case anyone thought that the issues noted by The 10b-5 Daily here were merely theoretical, along comes the motion to dismiss decision in In re WorldCom Inc. ERISA Litigation (S.D.N.Y.). As reported yesterday in the New York Law Journal (via law.com), the court made two rulings of note: 1) it dismissed the ERISA claims against directors and employees who it found were not fiduciaries under ERISA; and 2) it held that ERISA claims could be brought against WorldCom's former CEO both for failing to disclose material facts about the company's financial condition and for making affirmative missrepresentations concerning the prudence of investing in the company's stock in SEC filings. The second ruling was made despite the former CEO's argument that his duty to disclose arose under the securities laws and not ERISA. Benefitsblog has a full summary of the opinion.
Quote of note (from the opinion): "When a corporate insider puts on his ERISA hat, he is not assumed to have forgotten adverse information he may have acquired while acting in his corporate capacity."
Quote of note (from the opinion): "Ebbers' potential liability to employees who invested in WorldCom stock through the Plan for violations of the federal securities laws cannot shield him from suit over his alleged failure to perform his quite separate and independent ERISA obligations."