Official Committee Of Unsecured Creditors Of Worldcom, Inc. v. SEC

467 F.3d 73 (2nd Cir. 2006)

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Nature of the Case

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Facts

D restated its financial results for all four quarters of 2001 and the first quarter of 2002 because of accounting irregularities. P filed a civil complaint against D under 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a); sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act of 1934 ('Exchange Act'), 15 U.S.C. §§ 78j(b), 78m(a), 78m(b)(2); and regulations promulgated thereunder. D had overstated its income by $9 billion between 1999 and the first quarter of 2002. On July 21, 2002, D filed for bankruptcy under Chapter 11. The Committee was appointed to represent D's unsecured creditors. On July 7, 2003, the district court approved a final settlement between D and P under which the company would pay a civil penalty of $ 750 million. It included a $1 disgorgement which triggered the Fair Fund provision, 15 U.S.C. § 7246(a), allowing the civil penalty to be added to the disgorgement fund and distributed to defrauded investors. The district court remarked that the settlement was 'not only fair and reasonable but as good an outcome as anyone could reasonably expect in these difficult circumstances.' The bankruptcy court approved the settlement on August 6, 2003. After D emerged from bankruptcy, P sought the district court's approval of its plan to distribute the funds. The plan excluded investors who recovered thirty-six cents or more on the dollar under the Chapter 11 reorganization plan or through the sale of their securities, and investors who made a net profit on their combined purchases or sales of D securities during the period in which the fraud occurred. The court found the plan 'fair and reasonable,' and the district court approved it. The committee appealed even though they did not intervene at any time below. The Committee challenges the exclusion of creditors who recovered more than thirty-six cents on the dollar and creditors who made a net profit on the sale of their D securities.