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Almost one year after WorldCom Inc. Chairman Bernie Ebbers resigned, the course of one of the biggest stock fraud cases in history is being charted by Southern District Judge Denise L. Cote. Judge Cote is set to decide soon how the litigation stemming from the company’s multibillion-dollar accounting fraud and other maneuvers by its top executives will proceed and whether motions to dismiss have any merit. Cote is charged with handling hundreds of individual cases and class actions filed during the collapse and bankruptcy of the telecommunications giant. Her task has been complicated by the introduction of novel claims alleging the collapse was abetted by Salomon Smith Barney (which is now officially known as Citigroup Inc.) and its star telecommunications analyst Jack B. Grubman. In a series of rulings over the last three months, Cote has had to consider the interests and obligations of several categories of plaintiffs, as well as a host of others, including former WorldCom executives charged criminally in the accounting fraud, the U.S. Attorney’s Office, underwriters of the company’s securities, former WorldCom directors, the defunct accounting firm Arthur Anderson, Southern District of New York Bankruptcy Judge Arthur Gonzalez, the Securities and Exchange Commission, and a number of her colleagues who at one time or another have handled a set of cases called the “analyst actions.” The judge is weighing different proposals on how to proceed with the consolidated class action In Re WorldCom Securities Litigation, 02 Civ. 3288, and related cases charging fraud under � 10(b) of the Securities Exchange Act of 1934 and negligence under the Securities Act of 1933. The actions are driven by the collapse of WorldCom’s stock price in light of false or misleading statements made by company officers in public filings. “The two big issues are going to be the organizational structure of the cases and the motions to dismiss,” said Neil L. Selinger of Lowey Dannenberg Bemporad & Selinger, plaintiffs’ lawyer for the New York City Employees Retirement System and eight other city pension funds. PLAINTIFF CATEGORIES The first category of plaintiffs before Judge Cote are those in the consolidated class action representing more than 40 class actions filed since last April, with lead plaintiff the New York State Common Retirement Fund represented by Max W. Berger and John P. Coffey of Bernstein Litowitz Berger & Grossman, and Leonard Barrack, Gerald J. Rodos and Jeffrey Golan of Barrack, Rodos & Bacine of Philadelphia. A second category of plaintiffs consists of the nine New York City pension funds represented by Selinger, fellow firm members Stephen Lowey and David C. Harrison and the New York City Corporation Counsel’s Office. Third are individual actions brought throughout the country, and still being filed to this day, on behalf of private and out-of-state public pension funds, represented by William Lerach of Milberg Weiss Bershad Hynes & Lerach. Fourth are the WorldCom bondholders who purchased their bonds through SunTrust Bank, represented by New York’s Goodkind Labaton Rudoff & Sucharow. Another group, represented by Grant & Eisenhofer of Delaware, are the Ohio Retirement Systems, five funds that purchased both WorldCom stocks and bonds. The list of individual actions also includes the Mississippi Telecom Group, representing dozens of individual actions filed in Mississippi state court and, like the New York City pension funds, removed to federal court. There is also a series of class actions alleging breach of fiduciary duty under the Employment Retirement Income Security Act of 1974. Those cases have also been consolidated before Judge Cote under In re WorldCom, Inc. ERISA Litigation, 02 Civ. 4816. On behalf of the lead plaintiffs in the consolidated class action, Berger and Coffey have submitted a proposal arguing that all of the individual actions should be stayed and the class action allowed to proceed. Several groups of plaintiffs — the New York City pension funds, the bondholders and the Milberg Weiss plaintiffs — submitted a proposal calling for consolidation of all the cases for pretrial purposes only, with what one lawyer called a “dual-headed organizational structure.” Finally, another proposal for organizing the cases was submitted March 28 by the defense team representing former WorldCom directors and 18 underwriters named in the suit. Paul C. Curnin of New York-based Simpson Thacher & Bartlett represents the WorldCom directors. Jay B. Kasner and John L. Gardiner of New York’s Skadden, Arps, Slate, Meagher & Flom represent the syndicate of underwriters, co-led by Salomon, who handled $19 billion in WorldCom bonds. They request that the individual cases be consolidated for pretrial purposes, with discovery coordinated between a representative from the individual cases and the lead plaintiff in the consolidated class action. Once Cote selects a format for the pretrial phase, lawyers say the next step will be to decide the pending motions to dismiss. Resolution of those motions will clear the way for discovery to begin in earnest and, assuming that court-directed settlement talks do not bear fruit, a trial some time next year. While motions to dismiss have been briefed, Cote has yet to indicate whether she will hear oral argument. “You could accurately describe the WorldCom litigation as racing ahead,” one lawyer in the case said. “Cote is pushing it.” ANALYST ACTIONS Judge Cote’s task was made more difficult by the accusations that surfaced concerning Grubman and Ebbers. Currently before Southern District of New York Judge Gerard E. Lynch are the analyst actions, now 17 cases charging that Salomon slanted its coverage of the telecommunications industry, including WorldCom, in return for investment banking business from the companies. The problem for Cote is that the plaintiffs in her securities class action amended their complaint in October to add some of the same facts alleged in the analyst cases, which also claim violations of the anti-fraud provisions of the 1934 Act. The amended complaint charges that the illegal quid pro quo relationship between the company and Salomon Smith Barney led Salomon to “spin” hot initial public offering shares to senior WorldCom executives, and to loan Ebbers several million dollars. A motion to sever three of those claims and transfer them to Judge Lynch was made by the so-called “Salomon Group,” which includes Grubman and parent company Citigroup, by defense lawyers Martin London of Paul, Weiss, Rifkind, Wharton & Garrison, and Peter K. Vigeland of Washington, D.C.-based Wilmer Cutler & Pickering. Cote denied the motion on March 24, disagreeing with Salomon that a “clear line can be drawn” between allegations over its analyst reports and Salomon’s “role as an underwriter,” which she indicated was a factor considered in the assignment of dozens of cases being channeled to the Southern District by the Panel on MultiDistrict Litigation. “The MDL panel and this district have taken steps to centralize, coordinate, and efficiently proceed with actions arising from the collapse of WorldCom and the allegations of widespread misrepresentation in [Salomon's] analysis of the telecommunications industry as a whole,” Judge Cote said. “Given the complex chains of connection between WorldCom, the WorldCom defendants in the Securities Litigation and the [Salomon] Group, however, it is not surprising that overlap should occur between this action and the Analyst Actions.” Cote further noted that the Salomon group faces a “significant number of lawsuits,” and she urged “able counsel” for the group to work with other attorneys to suggest economies and “avoid unnecessary duplication of effort.” “The ruling is a very significant one because it allows the class and [New York State Comptroller Alan G.] Hevesi [on behalf of the state Retirement Fund] to bring all of their claims for securities fraud in this one action,” Golan said. “We would have had to bring certain claims in one case requiring discovery of all of the interrelationships between WorldCom, Salomon, Ebbers, Grubman and other Salomon affiliates, but then prosecute some of the claims in another case before another jury.” In re Salomon Analyst Litigation, 02 Civ 3687, has been stayed by Judge Lynch while the cases before Judge Cote move forward. The complexity of the WorldCom litigation was also illustrated on March 3, when Cote denied a motion by the city pension funds to remand their cases to state court, saying the cases were “related to” the company’s bankruptcy proceeding before Judge Gonzalez and should therefore remain in the Southern District, or in the federal district where they were originally brought, until pretrial proceedings have been completed in New York. Cote’s decision did not bode well for the Milberg Weiss plaintiffs or the other individual actions. Briefs on why those cases should or should not stay in federal court were submitted last Friday. CRIMINAL CASES Judge Cote has also had to deal with the interplay between the criminal cases and the securities litigation, either by staying civil actions against criminal defendants or weighing whether to block civil depositions that might complicate prosecutions by the U.S. Attorney’s Office. Former WorldCom Chief Financial Officer Scott Sullivan is awaiting a September trial for securities fraud and filing false statements with the SEC in connection with the hiding of billions of dollars in line costs — the fees paid to local telephone companies for carrying WorldCom subscribers — as capital costs. Ex-Controller David Myers has pleaded guilty to similar charges and is cooperating with the government while he awaits sentencing. He is one of four executives with the company who were charged criminally and are cooperating with the government. Both men are named as defendants in the securities cases, and on Jan. 2, Judge Cote granted in part a stay of the civil proceedings as against Myers and Sullivan. In deciding the motion to stay civil proceedings against these two officers, everyone from the defendants in the ERISA actions to Southern District U.S. Attorney James B. Comey to lawyers for Ebbers weighed in. Another interested party was the SEC, which signaled trouble for the company and Ebbers as far back as March 2002, when it submitted a wide-ranging request for documents from the company. The SEC filed suit against the company in June and a separate suit against Myers and WorldCom executive Buford Yates in September. Southern District of New York Judge Jed Rakoff, who conducted an unusual joint hearing in the SEC/WorldCom case with Judge Gonzalez, approved a settlement of the WorldCom action and settlements with Myers and Yates on separate dates in November. The amount of fines to be paid has yet to be determined. Cote made another ruling in November that involved weighing the interests of disparate parties in the WorldCom litigation. Over the objections of the defendant directors and WorldCom’s auditor, the now-defunct Arthur Anderson, Cote ruled that documents produced for congressional committees, federal prosecutors and an internal company committee investigating the fiasco could be provided to the New York State Common Retirement Fund. This amounts to an exception to the stay in discovery normally required under the Private Securities Litigation Reform Act until a motion to dismiss is made. With billions of dollars at stake in the litigation and so many parties seeking relief, Cote said that if the Common Retirement Fund were forced to wait until motions to dismiss are filed “it faces the very real risk that it will be left to pursue its action against defendants who no longer have anything or at least much to offer.” Related chart: Keeping Track of the WorldCom Actions

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