Pension Funds Ordered to Take WorldCom Case to Federal Court

May 11, 2004 ( - A federal appeals court has beaten back an effort by state pension funds to recover damages for WorldCom Inc. bondholders in state court rather than the more demanding federal court.

The U.S 2 nd  Circuit Court of Appeals ruled that the California Public Employees’ Retirement System (CalPERS) and other state pension funds had tried to circumvent the federal court system, Bloomberg reported.

The ruling effectively means that lawyers for CalPERS and other plaintiffs must either link arms with the pending federal class action case – losing control of their cases to shareholder lawyer Sean Coffey – or wait until the class action goes through the system before they can strike out on their own.

There are now are 33 separate WorldCom lawsuits other than the class action. Coffey represents the lead, the New York State Common Retirement Fund, the nation’s second largest public pension after CalPERS.

CalPERS had tried to stay out of slower-paced federal courts to recover bond losses from WorldCom’s bond underwriters by invoking a 1933 law holding underwriters strictly liable for issuers’ misstatements and allowing resulting litigation to be battled out at the state level. A lower court had ruled the fund had to sue in federal court because WorldCom filed a bankruptcy petition in that forum, and bankruptcy law trumped the 1933 law.

The appeals court ruling is a victory for investment banks, such as Citigroup Inc., and a setback for CalPERS lead counsel William Lerach and other lawyers who have tried to pursue bondholder claims for pension funds and others against underwriters in state courts, which impose a lower burden of proof.

Citigroup Settlement Approved

In another development in the WorldCom litigation, the federal judge overseeing WorldCom Inc.’s investor lawsuits told the lawyers that the case has reached a “watershed moment” after this week’s $2.65 billion Citigroup Inc. settlement.

U.S. District Court Judge Denise Cote tentatively approved the settlement by ordering Citigroup’s case severed from those of other defendants and by granting a three-week delay in pre-trial exchange of evidence. WorldCom renamed itself MCI Inc. after it emerged from bankruptcy last month.

Citigroup Inc. agreed to pay $2.65 billion to settle claims by investors who lost money on securities issued by the long-distance company. The bank did not admit any wrongdoing in the  memorandum of understanding it filed with the SEC.

Lawyers for WorldCom investors have given the other defendants, including a dozen investment banks that advised WorldCom, 45 days to decide whether they want to settle under the same terms as Citigroup. The banks include J.P. Morgan Chase & Co. and Goldman Sachs Group.

In granting the three-week delay, Cote said the parties “need to reflect on what’s happened here and what they want to have happen going forward.”

WorldCom filed the largest bankruptcy in U.S. history in July 2002 after engaging in an $11 billion accounting fraud, called by the SEC the largest financial fraud in the agency’s history. WorldCom co-founder and ex-Chief Executive Officer Bernard Ebbers was indicted in March for securities fraud related to the company’s collapse. He has pleaded not guilty in New York federal court.

The case is California Public Employees’ Retirement System v. WorldCom Inc., 04-0219, U.S. Court of Appeals for the Second Circuit (New York). A full ruling is available  here .