340 F.3d 238 (5th Cir. 2003), 02-60322, Goldstein v. MCI WorldCom

Docket Nº:02-60322
Citation:340 F.3d 238
Party Name:Goldstein v. MCI WorldCom
Case Date:July 28, 2003
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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340 F.3d 238 (5th Cir. 2003)

Harriet GOLDSTEIN; et al., Plaintiffs,

Michael Sabbia; Wayne County Employees Retirement System; David Klein; Simms Family, Plaintiffs-Appellants,


MCI WORLDCOM; Bernard J. Ebbers; Scott D. Sullivan, Defendants-Appellees.

Nos. 02-60322, 03-60248.

United States Court of Appeals, Fifth Circuit

July 28, 2003

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        Kenneth J. Vianale, Melvyn I. Weiss (argued), Maya S. Saxena, Christopher S. Jones, Milberg, Weiss, Bershad, Hynes & Lerach, Boca Raton, FL, John William Barrett, Richard R. Barrett, Barrett Law Office, Lexington, MS, Robert I. Harwood, Frederick William Gerkens, Wechsler Harwood, New York City, Jesse Martin Harrington, Harrington Law Firm, Ridgeland, MS, for Plaintiffs-Appellants.

        Paul C. Curnin, Simpson, Thacher & Bartlett, New York City, for MCI Worldcom.

        R. David Kaufman, Martin Patrick McDowell (argued), Brunini, Gratham, Grower & Hewes, Jackson, MS, for Defendants-Appellees.

        Robert Engelbrecht Hauberg, Jr. (argued), William Davis Frye, Baker, Donelson, Bearman & Caldwell, Jackson, MS, for Sullivan.

        Appeals from the United States District Court for the Southern District of Mississippi.

        Before KING, Chief Judge, and REAVLEY and STEWART, Circuit Judges.

        KING, Chief Judge:

        Shareholders of WorldCom Corporation (now known as MCI WorldCom) appeal from the dismissal with prejudice of their consolidated amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) and the Private Securities Litigation Reform Act, 15 U.S.C. §§ 78u-4, and from the district court's denial of their Federal Rule of Civil Procedure 60(b) motion for relief from judgment. We agree with the district court that the plaintiffs' complaint against the defendants Bernard J. Ebbers and Scott D. Sullivan does not adequately plead scienter in conformity with the Reform Act, Rule 9(b) of the Federal Rules of Civil Procedure and controlling case law interpreting each, and we affirm the district court's judgment insofar as it dismissed the complaint against Ebbers and Sullivan. We also affirm the denial of the plaintiffs' Rule 60(b) motion for relief from the judgment in favor of Ebbers and Sullivan.



        Now a global telecommunications company with operations in sixty-five countries, MCI WorldCom ("WorldCom") began as a small Mississippi company, Long Distance Discount Services, Inc., formed in 1983 and licensed from 1983 to 1985 to provide long distance services only to Mississippi businesses and residents. Beginning in 1984, under the direction of its chief executive officer, defendant Bernard

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J. Ebbers, this local long distance company acquired other telecommunications companies at a phenomenal pace, making over sixty acquisitions in just fifteen years. In line with a strategy of growth by acquisition, in September 1998, WorldCom purchased MCI Communications Corporation in what was then the largest corporate merger ever, valued at approximately $40 billion. With this acquisition, WorldCom became the second largest telecommunications company in the world, behind only AT&T. Relevant for the purposes of this controversy, in October 1999, WorldCom announced its plan to enter into a stock-for-stock merger with Sprint, then the third largest telecommunications company in the United States, in a deal valued at $129 billion; however, on July 13, 2000, WorldCom announced that federal regulators had rejected the planned merger.

        Further adverse developments ensued, and by late April 2002, the independent members of the board of directors had called for Ebbers' resignation. Additionally, on June 25, 2002, WorldCom publicly disclosed that it had discovered substantial accounting irregularities that would require it to restate financial statements for 2001 and the first quarter of 2002. On this same date, WorldCom's board of directors also terminated its former chief financial officer and then executive vice president, defendant Scott D. Sullivan. Approximately four weeks later, on July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection.

        This suit involves the alleged conduct of WorldCom, Ebbers and Sullivan during only a small (and somewhat early) period (the "class period") in WorldCom's demise--February 10 to November 1, 2000--when the plaintiffs purchased WorldCom stock. Further, on appeal, we are called upon to address only one claim of fraud--that Ebbers and Sullivan knowingly or with severe recklessness failed to direct the write-off of millions of dollars worth of uncollectible accounts, resulting in material misrepresentations and omissions in WorldCom's financial statements and communications with shareholders and the investing public in violation of the Securities Exchange Act of 1934 (the "1934 Act"), all in order to inflate WorldCom's stock price artificially for the pending Sprint merger. Bearing this limited scope in mind, we briefly set forth the procedural background to this case.



        On October 26, 2000, WorldCom issued a press release reporting, for the first time, that due to bankruptcies by seventeen of its wholesale customers, WorldCom had decided to write off $685 million pre-tax ($405 million after-tax) in receivables--a write-off that plaintiffs allege was stalled fraudulently to inflate WorldCom's financials. The announcement resulted in a drop in the stock price from $25.25 (on trading volumes of approximately 40 million) to $21.75 (on trading volumes of nearly 67 million).

        Following this announcement, on November 7, 2000, several lawsuits were filed in Mississippi, New York and Washington D.C. These actions were consolidated with this case (in Mississippi) on March 27, 2001. Lead plaintiffs were thereafter selected, notice to potential class claimants was provided, and on June 1, 2001, the lead plaintiffs filed the consolidated amended complaint (the "complaint") on behalf of all persons who purchased or otherwise acquired the securities of WorldCom during the class period, i.e., between

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February 10 and November 1, 2000. 1

        The 110-page, 285-paragraph complaint makes numerous allegations of corporate malfeasance on the part of WorldCom, Ebbers and Sullivan, together with violations of Section 10(b) of the 1934 Act, Securities and Exchange Commission ("SEC") Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5), and Section 20(a) of the 1934 Act.

        Relevant for the purposes of this appeal are the allegations that WorldCom's uncollectible receivables "skyrocketed" during the class period, in part, because the defendants allowed over $500 million of "worthless" accounts receivable to remain on the books, and, consequently, to be inaccurately reflected in WorldCom's financials and public statements. This alleged modus operandi of failing to write off clearly uncollectible accounts receivable during the class period resulted from the defendants' desire to avoid attracting negative attention while federal regulators considered the Sprint merger and to ensure that the stock-for-stock deal was completed on the most favorable terms possible to WorldCom.

        On August 8, 2001, the defendants filed a motion to dismiss the plaintiffs' complaint. In their motion, the defendants argued that the plaintiffs' "puzzle pleading" was insufficient to satisfy the "rigorous" pleading requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. §§ 78u-4 and 78u-5 (2000), as interpreted by this court. Although the plaintiffs defended their complaint as compliant with applicable pleading standards, they reflexively sought leave of the court to amend their complaint to cure pleading deficiencies.

        On March 29, 2002, the district court granted the defendants' motion and dismissed the plaintiffs' complaint with prejudice. On this same date, it entered final judgment in favor of the defendants. On April 5, 2002, the plaintiffs timely filed an appeal of the judgment to this court; however, while the appeal was pending, WorldCom, but not Ebbers and Sullivan, voluntarily filed for Chapter 11 bankruptcy protection. After receipt of a "suggestion of bankruptcy," this court determined that the bankruptcy stay of proceedings (11 U.S.C. § 362) extended only to WorldCom and not to Ebbers and Sullivan. Goldstein v. MCI WorldCom, No. 02-60322, at *4 (5th Cir. October 28, 2002).

        In consideration of the bankruptcy filing and the events leading up to the bankruptcy filing, on August 23, 2002, the plaintiffs filed, in the district court, a motion for relief from judgment based on certain "newly discovered" evidence. On March 5, 2003, the district court denied the plaintiffs' Rule 60(b) motion. The plaintiffs thereafter timely appealed this denial. We granted the plaintiffs' motion to expedite this appeal and consolidated the two WorldCom appeals pending before us.

        It bears emphasizing that because of the stay applicable to proceedings against WorldCom, these appeals proceed only as to claims against Ebbers and Sullivan.



        The only claim against Ebbers and Sullivan the plaintiffs seek to salvage on appeal is that claim related to misrepresentations and omissions in WorldCom's financial statements and other statements to the public resulting from Ebbers' and Sullivan's alleged severe recklessness in failing to write off over $500 million of uncollectible

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accounts receivable. As to this claim, the district court ruled that the plaintiffs had not pleaded facts giving rise to a "strong...

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