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Press reports concerning widespread conflicts among Wall Street stock analysts during the booming market that ended in 2000 were not enough to put investors on notice about the allegedly “illicit relationship” between WorldCom, Salomon Smith Barney and its star telecommunications analyst Jack Grubman, a federal judge ruled Tuesday. Rejecting motions to dismiss claims in a case brought on behalf of an Ohio pension fund, Southern District of New York Judge Denise Cote said the press reports cited by the Salomon defendants “are simply too vague to support,” as a matter of law, the conclusion that plaintiffs were on notice as to possible claims that Salomon’s financial reporting on WorldCom was tainted. The ruling was the latest in a flurry of decisions issued by Cote in the largest securities fraud case in the nation’s history — one triggered by WorldCom’s multibillion-dollar balance sheet manipulation and its subsequent collapse into bankruptcy. Before Cote is the consolidated class action In re WorldCom, In Securities Litigation, which 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. Chief among those investment banks is 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. Salomon has been singled out in amended complaints as having an incestuous relationship with the company. 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. Cote’s ruling Tuesday came in one of the dozens of individual actions filed against Salomon in Public Employees Retirement System of Ohio v. Ebbers. Seeking to have some of the claims against the investment bank dismissed, 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. Judge Cote said the attorneys relied, in part, on a recent decision by her colleague in the Southern District, Judge Milton Pollack in the case In re Merrill Lynch & Co. Research Reports Securities Litigation. Judge Pollack dismissed suits against Merrill Lynch for failure to plead loss causation, saying investors who speculated in the market and were exposed to ongoing press coverage of Wall Street analyst conflicts could not blame the drop in their share price on Merrill. Judge Cote, however, said Tuesday that the facts of the Salomon case were very different. “The revelations in the press that were sufficient in Merrill Lynch to support dismissal of those claims for failure to plead loss causation are of no assistance to the [Salomon] Defendants here,” Cote said. The Salomon defendants argued that many of the claims were time-barred 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 said, 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.” She added, “It should be noted that it was not until July 2002 that the IPO allocations at [Salomon] became the focus of government investigations.” None of the earlier press reports, she said, discussed the allocation of hot public offerings by Salomon to Ebbers and other WorldCom executives. It was not until October 2002, she said, that it was revealed Ebbers received hundreds of millions of dollars in loans from Salomon “that were secured by WorldCom stock and that gave [Salomon parent Citigroup] an additional financial stake in WorldCom’s stock price.” In rejecting the motions to dismiss, Cote said, “It is ironic that the [Salomon] Defendants now contend that the conflicts of interest that they have so vigorously argued are insufficient to sustain fraud allegations were sufficiently reported in the business press to put plaintiffs on notice of their fraud claims as early as 2000.” Grant & Eisenhofer of Wilmington, Del., represents the plaintiffs. Paul, Weiss, Rifkind, Wharton & Garrison and Wilmer, Cutler & Pickering represent Citigroup Inc., Salomon and Grubman.

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