Court Grants Class Certification In 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.

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