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In re WorldCom, Inc. Securities
Litigation - Background on the Litigation
(United States District Court for
the Southern District of New York)
WorldCom Main Page |
Case Highlights |
Background on the Litigation
On paper, WorldCom, Inc. was the second-largest long-distance telephone company
in the United States.
On June 25, 2002, WorldCom rocked Wall Street when it revealed that it
had overstated billions of dollars in earnings. The Company
admitted that it had booked billions in line cost expenses as capital
investments, an accounting gimmick that hid expenses, inflated cash flow and
allowed the Company to falsely report profits instead of losses. This improper
and fraudulent accounting treatment, which constitutes a blatant violation of
Generally Accepted Accounting Principles ("GAAP"), boosted cash flow because
it improperly treated costs as an asset that could be written down over time,
not immediately.
On July 21, 2002, WorldCom filed for bankruptcy. The revelations of WorldCom's overstatements continued. Additional
misstated results were related to WorldCom's accounting reserves - monies set
up to fund future liabilities which may be reversed when management believes
they are no longer needed.
Multiple securities lawsuits were filed
in numerous jurisdictions against certain former WorldCom directors and officers,
WorldCom's former auditor, and numerous investment banks that
underwrote WorldCom securities. These cases were consolidated before the
Honorable Denise Cote of the United States District Court for
the Southern District of New York in August 2002. On August 12,2002. Judge Cote
appointed the New York State Common Retirement Fund as Lead Plaintiff
for the Class in In re WorldCom, Inc. Securities Litigation,
and also appointed BLB&G, the Common Retirement Fund's choice,
as Co-Lead Counsel for the Class.
One of the largest securities cases in history, this action was prosecuted on
behalf of a court-certified class of all individuals or entities (excluding
defendants and related parties) (the "Class") who purchased or acquired
publicly traded securities of WorldCom, Inc. during the period from April 29,
1999 through and including June 25, 2002 (the "Class Period") and who were
injured thereby.
JUDGE COTE LIFTS THE PSLRA DISCOVERY STAY
On November 21, 2002, the Judge
Cote granted the request of Lead Plaintiff the Common Retirement
Fund for a partial lifting of the PSLRA discovery stay in the
action which allowed. Judge Cote's opinion required WorldCom
to produce the approximately one million pages it had previously
produced to Congress, the SEC, and the grand jury in the government's
criminal investigation into the alleged fraud surrounding the
Company's bankruptcy.
THE COMPLAINT
As discussed in more detail below, the consolidated complaint of
Lead Plaintiff, the New York State Common Retirement Fund, was filed on
behalf of the Class - investors who purchased or acquired publicly traded
shares, bonds or notes of WorldCom, Inc. between April 29, 1999 and June 25, 2002 -
in the fall of 2002 (the "Class Action Complaint" or the "Initial Complaint"),
and updated in August 2003 (the "First Amended Class Action Complaint"), and in December
2003 (the "Corrected First Amended Class Action Complaint").
The Class
Action Complaint was filed on October 11, 2002 and asserted on behalf of the Class claims
for violations of federal securities laws against members of WorldCom's Board of Directors
and/or senior executives, including former CEO Bernard J. Ebbers, former CFO Scott D. Sullivan,
former Controller David F. Myers, and former accounting supervisor Buford Yates; investment
banks which acted as WorldCom's underwriters and financial advisors during the Class Period,
including Salomon Smith Barney, Inc.; Jack Grubman, a former Salomon Smith Barney telecommunications
analyst who issued numerous analyst reports about WorldCom during the Class Period; and Arthur
Andersen LLP, which acted as WorldCom's auditors during the Class Period, Andersen's former
partners Melvin Dick and Mark Schoppet and two entities affiliated with Andersen. WorldCom is
not a defendant in this action because it is in bankruptcy. For a list of all current defendants
in this action, click on Parties .
On December 13, 2002, certain defendants moved to dismiss either all or parts of the claims
asserted against them in the Class Action Complaint. On January 24, 2003, Lead Plaintiff filed
its opposition to defendants' motions to dismiss. On May 19, 2003, Judge Cote denied, in major
part, those defendants' motion to dismiss the Class Action Complaint, finding that the Complaint
for the most part adequately pleaded claims asserted therein, and granting Lead Plaintiff leave
to re-plead certain dismissed claims. On June 24, 2003, the Court denied the separate motion to
dismiss the Class Action Complaint filed by Arthur Andersen LLP and granted motions to dismiss
brought by Arthur Andersen (United Kingdom), Andersen Worldwide Societe Cooperative, and former
Arthur Andersen partners Melvin Dick and Mark Schoppet.
On August 1, 2003, Lead Plaintiff filed the
First
Amended Class Action Complaint on behalf of the
Class. The First Amended Class Action Complaint re-pleaded with more specificity or corrected certain
factual allegations against certain defendants. On September 5, 2003, the Salomon Defendants (Salomon
Smith Barney, Inc., Citigroup, Inc., and Jack Grubman) and the Audit Committee Defendants (James Allen,
Judith Areen, Max Bobbitt and Francesco Galesi) moved to dismiss the Amended Complaint; the other
defendants did not move against the Amended Complaint. On October 24, 2003, Judge Cote denied
Salomon's motion to dismiss the Amended Complaint finding that Lead Plaintiff adequately pleaded
claims against the Salomon Defendants. On December 1, 2003, Judge Cote granted the Audit Committee
Defendants' motion to dismiss the Section 10(b) securities fraud claim asserted against them.
On December 1, 2003, Lead Plaintiff filed a
Corrected
First Amended Class Action Complaint to
name six foreign affiliates of certain underwriter defendants as additional underwriter defendants
in Securities Act claims arising from the May 2001 public offering of WorldCom's bonds. The
Corrected First Amended Class Action Complaint also clarifies the relationship between defendants
JP Morgan Chase & Co. and JP Morgan Securities, Inc.
The Complaint alleges that WorldCom and others disseminated false and misleading statements
to the investing public regarding the Company's earnings and financial condition,
artificially inflating the value of WorldCom's securities, in violation of federal
securities laws. WorldCom accomplished this fraud, in part, by manipulating and, later
in the class period, fabricating its accounting, in violation of generally accepted
accounting principles.
The Complaint further alleges a nefarious relationship between Salomon Smith Barney and
WorldCom, carried out primarily by Salomon employees involved in providing investment
banking services to WorldCom (most notably, Jack Grubman, Salomon's star telecommunications
analyst), and by WorldCom's former CEO and CFO, Bernard J. Ebbers and Scott Sullivan,
respectively.
Additionally, based on information made publicly available through various congressional and other
investigations, the Complaint alleges that Salomon Smith Barney, Grubman, WorldCom, Ebbers
and Sullivan all had vested interests in maintaining WorldCom's high stock price and ability
to raise capital with its "investment grade" credit rating, Worldcom's ability to make
acquisitions of other telecommunications companies, and Salomon's position as manager of
WorldCom's employee stock option plan. Moreover, the Plaintiffs' investigation has led to
the discovery that in the fall of 1999, a unit of Citigroup, the parent company of Salomon
Smith Barney, lent approximately a half billion dollars to an entity controlled by former
WorldCom CEO Bernard Ebbers several months before WorldCom selected Salomon as lead
underwriter for the issuance of $17 billion in WorldCom bonds.
Back to the WorldCom Main Page
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Firm partners Max Berger, Sean Coffey, Steven Singer, Chad Johnson, and John Browne, Senior Counsel Beata Gocyk-Farber and associate Patricia Gillane are responsible for prosecuting
WorldCom Securities Litigation.
Detailed up-to-the minute status
and complete documentation of this litigation is available at
the WorldCom Securities Litigation website at
www.worldcomlitigation.com.
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