In re Worldcom, Inc. Securities Litigation
| Decision Date | 19 May 2003 |
| Docket Number | No. 02 Civ. 3288(DLC).,02 Civ. 3288(DLC). |
| Citation | 294 F.Supp.2d 392 |
| Parties | In re WORLDCOM, INC. SECURITIES LITIGATION This Document Relates to: ALL ACTIONS. |
| Court | U.S. District Court — Southern District of New York |
David Wertheimer, Lyndon Tretter, Hogan & Hartson, New York City, for Defendant Bernard J. Ebbers.
Juliet Rotenberg, Arnold & Porter, Washington, DC, for Defendant Scott Sullivan.
N. Richard Janis, S. Robert Sutton, Janis Schuelke & Wechsler, Washington, DC, for Defendant David F. Myers.
Lisa F. Fishberg, David Schertler, Coburn & Schertler, Washington, DC, for Defendant Buford Yates, Jr.
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 LLP, New York City, for Defendants Arthur Andersen LLP, Melvin Dick and Mark Schoppet.
William R. Maguire, Derek J.T. Adler, Sarah K. Loomis, Hughes Hubbard & Reed LLP, New York City, for Defendant Andersen UK.
James J. Sabella, Sidley Austin Brown & Wood, New York City, William F. Lloyd, Jeffrey R. Tone, David A. Gordon, Sidley Austin Brown & Wood, Chicago, IL, for Defendant Andersen Worldwide Societe Cooperative.
Martin London, Richard A. Rosen, Paul Weiss Rifkind Wharton & Garrison, New York City, for Defendants Salomon Smith Barney, Inc., Citigroup Inc., and Jack Grubman.
WorldCom, Inc. ("WorldCom"), once a giant of the telecommunications industry, is now the subject of colossal litigation. On July 21, 2002, WorldCom filed the largest bankruptcy in United States history. WorldCom executives have pleaded guilty to violating the securities laws; WorldCom's stock and bondholders, including numerous state and private pension funds, have lost hundreds of millions of dollars in investments; state and federal governments have conducted investigations into WorldCom's ascent and collapse; and those associated with the company have been sued in venues across the country. This Opinion addresses the motions to dismiss the consolidated class action complaint filed in the multi-district securities litigation.
Plaintiffs contend that WorldCom officers, directors, auditors, underwriting syndicates, and its most influential outside analyst disseminated materially false and misleading information. The false information appeared in analyst reports, press releases, public statements, and filings with the Securities and Exchange Commission ("SEC") from April 1999 through May 2002, including registration statements issued in conjunction with WorldCom's May 2000 note offering ("2000 Offering") and May 2001 note offering ("2001 Offering," together the "Offerings"). Plaintiffs allege that as WorldCom faced growing pressure to satisfy increasingly unrealistic earnings expectations, the company engaged in a series of illegitimate accounting strategies in order to hide losses and inflate reported earnings. By concealing losses to exaggerate reported earnings, plaintiffs argue, WorldCom affected the price of its securities and misled investors regarding the true value of the company.1
On April 30, 2002, the first securities class action in connection with these events was filed in this district. At least twenty related class actions had been filed here by the end of the summer. By Order dated August 15, 2002, the actions were consolidated under the caption In re WorldCom, Inc. Securities Litigation ("Securities Litigation"). The New York State Common Retirement Fund ("NYSCRF") was appointed lead plaintiff, and filed a Consolidated Amended Complaint on October 11 ("Complaint") adding three more named plaintiffs. Plaintiffs filed suit on their own behalf and as a class action on behalf of all persons and entities who purchased or acquired publicly traded WorldCom securities between April 29, 1999 and June 25, 2002, including those who acquired shares of common stock in the secondary market or in exchange for shares of acquired companies pursuant to a registration statement and those who acquired WorldCom debt securities in the secondary market or pursuant to a registration statement. Plaintiffs allege violations of Sections 11, 12 and 15 of the Securities Act of 1933 ("Securities Act") and of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 promulgated thereunder.
Drawing from the allegations in the Complaint, Part I of this Opinion identifies the parties and Part II describes the alleged fraud. Part III describes the legal standards that apply to the motions to dismiss. Part IV addresses the merits of each defendant's motion.2 The defendants' motions are addressed in the following order: (1) Bernard J. Ebbers; (2) directors; (3) underwriters; (4) Jack Grubman, Salomon Smith Barney, and Citigroup, Inc.
The Complaint is lengthy and detailed. The descriptions that follow summarize the allegations that are most relevant to the motions addressed in this Opinion.
NYSCRF invests the assets of the New York State and Local Employees' Retirement System and the New York State and Local Police and Fire Retirement System and is the second largest public pension fund in the United States. During the class period, NYSCRF purchased WorldCom stock and WorldCom MCI tracking stock, and lost over $300 million in its investments.
Three entities have joined the action as named plaintiffs. The Fresno County Employees Retirement Association ("FCERA"), a California entity, purchased WorldCom stock and debt, including at least $3 million of notes offered in WorldCom's 2001 Offering. The County of Fresno, California ("Fresno") purchased over $6 million of notes in WorldCom's 2000 Offering. HGK Asset Management ("HGK") is a registered investment advisor and acts on the behalf of union-sponsored pension and benefit plan clients pursuant to ERISA, 29 U.S.C. § 1001 et seq. During the relevant period, HGK purchased nearly $130 million of WorldCom debt securities, including approximately $43 million of notes in the 2000 Offering and over $29 million of notes in the 2001 Offering.
Four of WorldCom's former executive officers are named as defendants. Bernard J. Ebbers ("Ebbers") was the President, Chief Executive Officer and a WorldCom Director during the class period. He resigned from the company under pressure on April 29, 2002. Ebbers has not been indicted on criminal charges relating to WorldCom. The Complaint pleads claims under Sections 11, 15, 10(b), and 20(a) against Ebbers (Counts I, II, VI, and VII). Ebbers moves to dismiss all claims against him.
Scott D. Sullivan ("Sullivan") was WorldCom's Chief Financial Officer and a Director during the class period. After Ebbers's resignation, Sullivan served as Executive Vice President from April 30, 2002 until June 25, 2002, when WorldCom terminated his employment. In a criminal complaint dated July 31, 2002, Sullivan was charged with felonies in connection with his activities at WorldCom, including securities fraud, conspiracy to commit securities fraud and making false filings with the SEC. He was arrested on August 1, and indicted on August 28, 2002. The Complaint pleads Section 11, 15, 10(b), and 20(a) claims against Sullivan.3
David F. Myers ("Myers") was WorldCom's Controller and a Senior Vice President. He resigned from the company on June 25, 2002. On September 26, 2002, Myers pleaded guilty to charges of conspiracy, securities fraud, and the filing of false documents with the SEC. The Complaint pleads Sections 15, 10(b), and 20(a) claims against Myers.4
Buford Yates, Jr. ("Yates") was WorldCom's Director of General Accounting. On October 7, 2002, Yates pleaded guilty to securities fraud and conspiracy to commit securities fraud. The Complaint pleads Sections 15, 10(b), and 20(a) claims against Yates.5
The WorldCom Directors consist of Clifford Alexander, Jr., James C. Allen, Judith Areen, Carl J. Aycock, Max E. Bobbitt, Francesco Galesi, Stiles A. Kellett, Jr., Gordon S. Macklin, John A. Porter, Bert C. Roberts, Jr., John W. Sidgmore, and Lawrence C. Tucker ("Director Defendants").6 The Complaint pleads Section 11, 15, and 20(a) claims against all Director Defendants. All Director Defendants move to dismiss the Sections 15 and 20(a) claims (Counts II and VII); none have moved to dismiss the Section 11 claim (Count I).
Director Defendants Allen, Areen, and Galesi were members of the Audit Committee of the Board, and Bobbitt its Chair, during the class period ("Audit Committee Defendants"). Count VI pleads a Section 10(b) claim against the Audit Committee Defendants. They move to dismiss the claim.
Director Defendant Kellett was the Chairman of the Compensation Committee of WorldCom's Board. Count VI pleads a Section 10(b) claim against Kellett. He moves to dismiss this claim.
The Complaint pleads claims against WorldCom's outside auditors and accountants, Arthur Andersen LLP, Andersen UK, Andersen Worldwide SC, and Andersen partners Mark Schoppet and Melvin Dick ("Andersen Defendants"). Plaintiffs claim that the Andersen Defendants are liable for violations of Sections 11 and 10(b) (Counts III and XIII).
The Complaint pleads Sections 11 and 12(a)(2) claims against underwriters consisting of Salomon Smith Barney, Inc. ("SSB"), J.P. Morgan Chase & Co., Banc of America Securities LLC, Deutsche Bank Securities Inc., now known as Deutsche Bank Alex. Brown Inc., Chase Securities Inc., Lehman Brothers Inc., Blaylock...
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