Category Archives: WorldCom

WorldCom News

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.”

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Monday Morning Settling (Another Look At Citigroup)

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.

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Filed under Appellate Monitor, Settlement, WorldCom

More On The Citigroup Settlement

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.

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“We Want To Put The Entire Era Behind Us”

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.

News coverage can be found in Bloomberg, Reuters, and the New York Times.

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.'”

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SEC Files Amicus Brief In WorldCom Appeal

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. 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.”

Addition: The SEC’s amicus brief can be found here (thanks to Bruce Carton for the link) and here (thanks to Paul Mackey for the link).

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Things Are Getting Interesting

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. 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.” 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.

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.

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WorldCom Bondholder Claims Dismissed

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.

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Curative Notice In WorldCom Case Approved

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.”

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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.

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Filed under Motion To Dismiss Monitor, WorldCom

NYLJ Article On Solicitation Dispute

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.)

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