In Re Worldcom, Inc. Securities Litigation

346 F. Supp. 2d 628 (2004)

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Nature of the Case

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Facts

It is undisputed that at least as of early 2001 D1 executives engaged in a secretive scheme to manipulate D1's public filings concerning D1's financial condition. Because those public filings were incorporated into the registration statements for two bond offerings, Ds are liable for those false statements unless they can show that they were sufficiently diligent in their investigation of D1 in connection with the bond offerings. D1 announced a massive restatement of its financials on June 25, 2002. It was determined that certain transfers from line cost expenses to capital accounts during this period were not made in accordance with generally accepted accounting principles (GAAP). The amount of transfers was then estimated to be over $3.8 billion. Without the improper transfers, D1 estimated that it would have reported a net loss for 2001 and the first quarter of 2002. A restatement finally issued in 2004 included approximately $76 billion in adjustments, which reduced D1's net equity from approximately $50 billion to approximately minus $20 billion. Ps' class action complaint alleged that Ds violated not just the strict liability statutes governing securities offerings, but also the securities statutes that forbid fraud, including Section 10(b) of the Securities Exchange Act of 1934. P has moved for partial summary judgment, and Ds have moved for complete summary judgment. Ps move for summary judgment on its Sections 11 and 12(a)(2) claims with respect to certain statements in D1's financial filings that P contends are indisputably false and material. Ds move for summary judgment on the Sections 11 and 12(a)(2) claims against them with the argument that it is undisputed that they conducted reasonable due diligence with respect to D1's financial statements that were incorporated into the registration statements for the 2000 and 2001 Offerings. Ds argue they were entitled to rely on D1's audited financial statements and had no duty to investigate their reliability unless they had reasonable grounds to believe that they were not accurate and that they were also entitled to rely on the 'comfort letters' from D1's auditor for the interim unaudited D1 financial statements. Andersen had been the auditor for D1 or its predecessors for almost twenty years. It issued an unqualified or 'clean' opinion for the WorldCom annual financial statements for 1997 through 2000 After the public disclosure of the accounting fraud, Andersen withdrew its support for the WorldCom 2001 Form 10-K, but it never withdrew its audit opinions for the 1999 or 2000 Form 10-Ks.