The following was published in the October 2003 edition of the SCAS Alert, Securities Class Action Services' monthly client newsletter:

State-Federal Conflict and the WorldCom Quagmire
By Bruce Carton, Executive Director

Oklahoma Attorney General Drew Edmonson filed criminal charges on Aug. 27 against WorldCom Inc. (renamed MCI) and six of its former executives, including former CEO Bernie Ebbers. Oklahoma alleged that WorldCom and the individual defendants' conduct with respect to the company's now well-publicized accounting irregularities constituted criminal violations of the Oklahoma Securities Act.

Such conduct, of course, is the same that has been under investigation by the U.S. Attorney's Office for the Southern District of New York (SDNY) and the U.S. Securities and Exchange Commission (SEC) since June 2002. Predictably, the SDNY and the SEC were quick to express their displeasure. Both immediately issued press releases making it clear that Oklahoma's action had blindsided them and expressing hope that their ongoing cases would not be jeopardized.

Neither the SDNY nor SEC provided any real specifics on how Oklahoma's case might negatively impact their own cases, leading some, including members of Congress, to speculate that their protests were largely "P.R.-related;" i.e., motivated by a concern that Oklahoma was stealing their thunder. Indeed, when SEC Chairman Donaldson recently told the House Committee on Financial Services that Oklahoma's actions were "dangerous," he was confronted by Rep. Barney Frank (D-Mass.). The ranking Democrat on the committee challenged the SEC chairman to name instances where state action had hurt federal action and asked Donaldson to send him a list. Frank then commented, "I think the list is going to be very short."

In this instance, however, Oklahoma's decision to proceed with its own case does appear to be a poor one that may well do harm to the existing federal cases. Oklahoma brings nothing unique to the table here. It is bringing this case merely in its capacity as one of the dozens of states with citizens affected by the fraud at WorldCom. Asked why his office was bringing the case, Edmonson reportedly cited a "lack of accountability," and stated that "the lack of any serious sanction against WorldCom, either corporately or its individual officers is the most compelling reason." Now, Edmonson predicted, "somebody's going to go to prison."

Edmonson also makes no apologies for his failure to coordinate with the Feds, reportedly stating that he wrote to the SDNY prior to taking action but never received a response. Edmonson is even more abrupt with respect to the efforts of the SEC. The New York Times quoted him as saying, "I haven't seen much of that so I don't think there is much to interfere with."

Notwithstanding Edmonson's cavalier attitude toward the existing federal cases, Oklahoma's decision may have a significant impact on the SDNY and SEC. Several prominent attorneys who spoke to me about the case gave compelling examples of how that could happen.

Damaged witnesses. From all reports, Oklahoma and the SDNY/SEC are pursuing the same company and the same individuals for the same conduct under the same theories. Thus, Oklahoma will soon be bringing common witnesses to testify before its own grand jury and at trial. Attorney Alex Bourelly noted that such testimony will effectively "lock in" the testimony of these witnesses, facilitating cross-examination by counsel for the defendants in any later federal action. Bourelly is special counsel with the law firm Baker Botts in Washington, D.C., and is a former assistant U.S. attorney in the Fraud and Public Corruption Section in the U.S. Attorney's Office for the District of Columbia.

Bourelly points out that because the Oklahoma prosecutors have not been immersed in the case and the millions of documents produced to the SDNY and SEC over the past 15 months, testimony may be locked in that does not take full advantage of facts and theories developed by the federal prosecutors. This possibility places the Feds in the difficult position of deciding whether to devote substantial resources to coordinating with and educating Oklahoma, or to decline to do so and risk damage to their own cases.

Adverse Rulings. The "double jeopardy" doctrine will not bar a subsequent prosecution by the federal government following a possible acquittal in the Oklahoma case because they are different "sovereigns." Nonetheless, David B. Irwin, a former assistant U.S. attorney in Maryland, and now a partner with Irwin, Green & Dexter in Baltimore, points out that adverse evidentiary or other rulings in the Oklahoma case could still harm the federal cases because a federal trial court might well give weight to such rulings in reaching its own decision on the issue.

Immunity Tangles. If Oklahoma gives immunity to witnesses asserting the Fifth Amendment privilege, the existence of such immunity may taint and hinder the Feds' ability to present related evidence in a subsequent case. Irwin notes that similar immunity issues arose in the federal case against Oliver North that followed a congressional inquiry, and the state case against Linda Tripp that followed the Whitewater grand jury investigation.

Deterrence to Settlement. State enforcement actions like the one brought by Oklahoma have the potential to significantly hinder the SEC's ability to settle its cases. Michael J. Rivera, a former attorney in the SEC's Enforcement Division, and now a partner with the law firm Fried, Frank, Harris, Shriver & Jacobson, believes that defendants facing an SEC enforcement action may be inclined to litigate rather than settle if they have a reasonable fear that any one of 50 states may decide to file its own enforcement action based on the allegations or findings contained in the defendant's settlement agreement with the SEC. Defendants seeking to resolve an SEC investigation crave comfort that an SEC settlement will resolve all potential government actions against them, Rivera added.

These reasons are all in addition, of course, to the inefficiency of having federal prosecutors and one or more states prosecuting the same defendants for the same conduct.

The furor over Oklahoma's actions has produced one positive development. The SEC and the North American Securities Administrators Association announced on Sept. 14 that they will form a joint initiative to develop best practices for the coordination of federal and state enforcement activities. The stakes are high: preventing a repeat of the WorldCom quagmire.