In re Worldcom, Inc. Securities Litigation

• Decision Date: 03 March 2003
• Docket Number: No. 02 Civ. 3288(DLC).,No. 02 Civ. 8981(DLC).,02 Civ. 3288(DLC).,02 Civ. 8981(DLC).
• Citation: 293 B.R. 308
• Parties: In re WORLDCOM, INC. SECURITIES LITIGATION. New York City Employees' Retirement System, et al., Plaintiffs, v. Bernard J. Ebbers, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

293 B.R. 308

In re WORLDCOM, INC. SECURITIES LITIGATION.

New York City Employees' Retirement System, et al., Plaintiffs, v. Bernard J. Ebbers, et al., Defendants.

No. 02 Civ. 3288(DLC).

No. 02 Civ. 8981(DLC).

United States District Court, S.D. New York.

March 3, 2003.

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Max W. Berger, John P. Coffey, Bernstein Litowitz Berger & Grossman LLP, New York City, Leonard Barrack, Gerald J. Rodos, Jeffrey W. Golan, Barrack Rodos Bacine, Philadelphia, PA, for Lead Plaintiff in Securities Litigation.

Stephen Lowey, David C. Harrison, Neil L. Selinger, Lowey Dannenberg Bemporad & Selinger P.C., White Plains, NY, Michael A. Cardozo, Corporation Counsel of the City of New York, New York City, for Plaintiffs in New York City Employees' Retirement System, et al.

William S. Lerach, Darren J. Robbins, Michael J. Dowd, Milberg Weiss Bershad Hynes & Lerach LLP, San Diego, CA, for Intervenors.

Paul Curnin, Simpson Thacher & Bartlett, New York City, for Director Defendants.

Jay B. Kasner, John Gardner, Skadden Arps Slate Meagher & Flom LLP, New York City, for Underwriter Defendants.

Eliot Lauer, Curtis Mallot Prevost Colt & Mosley, New York City, for Defendant Arthur Andersen LLP.

David Wertheimer, Lyndon Tretter, Hogan & Hartson, New York City, for Defendant Bernard J. Ebbers.

Juliet Rotenberg, Arnold & Porter, Washington, DC, for Defendant Scott Sullivan.

Martin London, Richard A. Rosen, Paul Weiss Rifkind Wharton & Garrison, New York City, for Defendants Salomon Smith Barney, Inc., CitiGroup Inc., and Jack Grubman.

Jennifer L. Kroman, Cleary Gottlieb Steen & Hamilton, New York City, for Securities Industry Association, Amicus Curiae.

OPINION AND ORDER

COTE, District Judge.

On October 29, 2002, New York City Employees' Retirement System and other New York City pension systems filed suit in New York state court against defendants connected to the telecommunications giant WorldCom, Inc. ("WorldCom"). The suit alleges federal securities law and state law claims but does not state claims against WorldCom, which had filed for bankruptcy several months earlier.

Defendants removed this action, and those like it, on the basis of the litigation's relationship to WorldCom's bankruptcy. That relationship is the focus of this Opinion. This Opinion examines the propriety of removal and addresses whether the New York state court action is so related to the WorldCom bankruptcy that there is federal subject matter jurisdiction over it pursuant to Title 28, United States Code, Section 1334(b).

Having pleaded their complaint to avoid both removal to federal court and the inevitable consolidation with the other civil litigation brought in the wake of WorldCom's financial disclosures in 2002, plaintiffs have moved to remand their action to state court pursuant to 28 U.S.C. § 1447 for lack of subject matter jurisdiction or on equitable grounds pursuant to 28 U.S.C. 1452(b). In the alternative, plaintiffs move for the Court to abstain pursuant to 28 U.S.C. §§ 1334(c)(1) or (c)(2). For the reasons stated below, plaintiffs' motion, brought in the New York City Employees' Retirement System action, is denied. Plaintiffs in the other removed actions will be given an opportunity to show why the analysis in this Opinion does not control any motion to remand filed in their cases.

Background

On June 25, 2002, WorldCom, once the second largest telecommunications company in the world, announced that it had, among other things, improperly treated more than $3.8 billion in ordinary costs as capital expenditures in violation of generally accepted accounting principles and would have to restate its publicly-reported financial results for 2001 and the first quarter of 2002. Since its June announcement, WorldCom has made further disclosures suggesting that all of its financial results since at least 1999 must be restated.

WorldCom's announcements provoked responses from a variety of public and private quarters. On June 26, 2002, the SEC filed a civil complaint against the company. The next day, the U.S. House of Representatives Committees on Energy and Commerce and on Financial Services initiated investigations of the company. And in July and August, the United States Attorney for the Southern District of New York filed criminal charges against various former officers of WorldCom.¹

Even before WorldCom's June 25 announcement, on April 30, 2002, the first securities class action in connection with these events was filed in this district. By August, at least twenty related class actions had been filed here. By Order dated August 15, 2002, they were consolidated under the caption In re WorldCom, Inc. Securities Litigation ("Securities Litigation"). The New York State Civil Retirement Fund was appointed lead plaintiff, and filed a Consolidated Amended Complaint ("Complaint") on October 11. Two actions alleging that WorldCom and certain WorldCom fiduciaries breached fiduciary duties under the Employment Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001, et seq., were consolidated by Order dated September 18, under the caption In re WorldCom, Inc. ERISA Litigation.

Meanwhile, numerous class actions — including securities or ERISA claims — were being filed around the country. On October 8, the Judicial Panel on Multi-District Litigation ("MDL") ordered WorldCom-related class action cases centralized in this Court pursuant to 28 U.S.C. § 1407. In addition, lawsuits asserting individual as opposed to class claims were filed by a number of pension funds, among others, in venues across the country. Many of these lawsuits, referred to herein as the Individual Actions, were filed in state court.

WorldCom took refuge under the federal bankruptcy laws by filing for Chapter 11 bankruptcy in the Bankruptcy Court of this District on July 21, 2002. Once WorldCom filed for bankruptcy, the automatic stay provisions of the bankruptcy laws took effect, preventing litigation against WorldCom itself from going forward. Thus, the Securities Litigation before this Court is proceeding against certain former WorldCom executive officers,² underwriters of WorldCom's bond offerings ("Underwriter Defendants"),³ WorldCom's directors (or former directors) ("Director Defendants"),⁴ WorldCom's accountants ("Andersen Defendants"),⁵ and those associated with Salomon Smith Barney who issued or are responsible for financial analyst reports regarding WorldCom ("SSB Defendants").⁶ WorldCom, Inc. is identified by the Complaint, however, as a "related non-party."

In addition to staying litigation, the bankruptcy statute, 28 U.S.C. § 1452 ("Section 1452"), provides for the removal from state court to federal court of actions "related to" a bankruptcy. Actions that had been commenced in state court were removed pursuant to Section 1452(a) as "related to" the WorldCom bankruptcy and transferred to this Court pursuant to order of the MDL panel. Thus far, over forty actions have been transferred by the MDL panel and, with the exception of any ERISA cases, will be consolidated for pretrial purposes pursuant to the Order of December 23⁷ in the Securities Litigation. Some, if not all, of the plaintiffs in the Individual Actions that were removed have moved to remand their actions to the state courts from which they came.

Pursuant to the MDL Order, cases continue to be transferred to and consolidated in this Court. Meanwhile, the litigation is moving forward. As noted, the Securities Litigation was consolidated and plaintiffs' counsel was appointed in August. By Order dated November 21, the discovery stay imposed pursuant to Section 21D(b)(3)(B) of the Securities Exchange Act of 1934 ("1934 Act"), as amended by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b)(3)(B), was modified to permit plaintiffs in the Securities Litigation to obtain copies of certain documents and materials that WorldCom had already produced to governmental authorities and certain documents produced in connection with WorldCom's internal investigation. By Opinion and Order dated December 5, motions for stays of litigation and discovery regarding certain individual defendants were decided. SSB Defendant's motion to sever Counts IX, X and XI of the Complaint is fully briefed and was argued on February 13, 2003. At the same hearing, the Court heard argument on discovery issues regarding the confidentiality of the documents to be produced pursuant to the November 21 Order. Motions to dismiss the Securities Litigation Complaint, or parts thereof, were fully briefed by certain defendants on January 31. The ERISA Litigation is moving forward at a similar tempo. Motions to dismiss the ERISA Litigation were fully submitted on February 28, 2003.⁸

A motion to remand one of the Individual Actions is addressed in this Opinion. New York City Employees' Retirement System ("NYCERS") and eight other New York City pension funds,⁹ filed an action in New York state court on October 29, 2002, alleging violations of the Securities Act of 1933 ("1933 Act") and common law fraud arising out of their purchase of WorldCom stocks and bonds from 1999 through June 25, 2002. NYCERS's complaint states four causes of action: (1) against all defendants for violation of Section 11 of the 1933 Act, 15 U.S.C. § 77k ("Section 11") based on false and misleading statements in connection with the May 2000 and May 2001 WorldCom bond offerings; (2) against its officer and director defendants for violations of Section 11 while acting in their alleged capacities as "controlling persons" as defined by Section 15 of the 1933 Act, 15 U.S.C. § 77o ("Section 15"); (3) for common law fraud against certain defendants for making false or misleading statements in connection with WorldCom securities; and (4) against certain defendants for aiding and abetting that common law fraud.

With the exception of the underwriters, there is a substantial overlap between the...