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A federal judge Tuesday dismissed claims accusing the audit committee of WorldCom Inc.’s board of directors of abandoning their oversight responsibilities amid the telecommunication company’s massive fraud. Southern District of New York Judge Denise Cote, in the consolidated class actions brought by investors over the collapse of WorldCom’s stock price and ultimate bankruptcy, said allegations against four of the directors “reveal at most an Audit Committee that accepted too readily the reports given to it by management,” an internal audit committee, and outsider auditor, Arthur Andersen. The board’s audit committee was “anemic in its oversight function,” she said. “There is simply no adequate basis to infer from the allegations” that the directors themselves “were aware or must have been aware of the accounting fraud at WorldCom,” Cote said in In Re WorldCom, Inc. Securities Litigation, 02 Civ. 3288. She dismissed a claim of securities fraud brought against directors James C. Allen, Judith Areen, Francesco Galesi and audit committee chair Max E. Bobbitt. The charge, brought under � 10(b) of the Securities Exchange Act of 1934, alleged that WorldCom’s multibillion-dollar capital expenditure fraud would have been discovered at least eight months earlier if the directors had properly monitored the company’s financial reporting and the auditing of both Andersen and the internal audit committee. Cote said the director’s audit committee took its lead from top management, never established a “direct reporting relationship” with the company’s internal audit committee as required by company policy, and never ensured there was “meaningful communication between Internal Audit and Anderson.” Also, she said, instead of requiring Andersen to present annual management recommendation letters to it, the directors’ committee “relied instead on quarterly presentations by Anderson and pre-earnings discussions among Anderson, the Chair of the Audit Committee and the CFO,” Scott Sullivan, who now faces criminal charges in the Southern District. The plaintiffs had charged that absent the recklessness of the directors, the first in a series of capital expenditure discrepancies — amounting to $2.3 billion — would have been discovered in the fall of 2001. But Cote said the complaint failed to allege adequately the directors’ scienter, or intent to deceive, as required by the act. She said the plaintiffs could not point to any “specific obligation imposed” on the defendants “that they ignored such that it would be fair to infer that they either knew of the fraud or must have been aware of it.” “Instead, the Amended Complaint describes what the Audit Committee Defendants might have learned if they had done a better job or if they had been more aggressive or diligent,” she said. “Section 10(b), however, does not impose liability for negligence or impose obligations ex post facto.” LEAD PLAINTIFF The lead plaintiff in the action, the New York State Common Retirement Fund, had argued that scienter could be inferred in that the directors on the audit committee allowed the internal audit committee to report directly to the chief financial officer, Sullivan. But Cote said the fund had “identified no duty imposed on the Audit Committee, however to ensure that such direct reporting did not occur.” She said further that the lead plaintiff “has not described any documents or information in connection with the work of WorldCom’s outside auditor that the Audit Committee Defendants had a duty to review and failed to review.” Overall, the judge said, “The allegation that a defendant generally failed to perform a job well — is not a substitute for the particularized pleading that a defendant knowingly or recklessly engaged in fraud.” Bernstein Litowitz Berger & Grossman and Barrack, Rodos & Bacine appeared for the lead plaintiff. Simpson Thacher & Bartlett appeared for the director defendants.

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