Judge Refuses To Throw Out Salomon WorldCom Charges

December 1, 2003 (PLANSPONSOR.com) - Shareholders suing WorldCom and its investment banks won a legal victory when a federal judge ruled that news reports about Salomon Smith Barney's WorldCom research were not enough to notify investors of potential problems.

>With the ruling, US District Judge Denise Cote turned aside requests by Salomon Smith Barney lawyers to throw out some of the claims against the investment bank for its role in WorldCom’s financial collapse, according to the New York Law Journal. Cote ruled that the press reports cited by the Salomon defendants “are simply too vague to support,” a conclusion that shareholders were aware that Salomon’s financial reporting on WorldCom was tainted.

The ruling came in a case brought on behalf of an Ohio pension fund in the largest securities fraud case in the nation’s history — one triggered by WorldCom’s multibillion-dollar balance sheet manipulation and its subsequent filing for bankruptcy (see  Ohio Will Stay Close to Home With Enron, WorldCom Claims ).

The case of In re WorldCom, In Securities Litigation , a class action, charges that the company and former WorldCom Chief Executive Bernie Ebbers committed massive accounting fraud and violated securities laws by making false statements and filings to hide mounting financial woes.

Also among the defendants are investment banks responsible for handling WorldCom bond offerings – chiefly Salomon Smith Barney, which had a prominent role in the 2000 and 2001 WorldCom bond offerings, issued research reports on the company’s financial health and prospects, and managed WorldCom’s stock options plan (see  WorldCom Suit to Also Name Salomon Smith Barney ).

Salomon has been singled out in amended complaints as having an incestuous relationship with the company. According to charges, s
tar telecommunications analyst Jack   Grubman allegedly worked in tandem with Ebbers to disguise WorldCom’s troubles, and in return, Salomon, as well as Grubman, were rewarded handsomely with tens of millions of dollars in fees.

In their request to have some of the claims against Salomon thrown out, lawyers for Salomon and Grubman charged that a series of news articles about conflicted analysts amounted to “storm warnings” that should have alerted a reasonable investor as to the conflicts.

The Salomon defendants also argued that many of the claims were filed too late because investors had plenty of notice about problems with Grubman’s WorldCom reports as of September 2000, but did not file their complaint until more than two years later.

“One serious flaw,” in their argument, Cote responded, was that none of the claims at issue were based solely on analyst reports. The Ohio plaintiffs, she said, are also seeking to hold the Salomon defendants liable for representations made in registration statements for the public offerings.

Turning to the analyst reports, Cote said many of the press accounts “address the conflicts which existed on Wall Street generally, and do not discuss WorldCom and [Salomon] in particular.”