Judge Cote of the SDNY tried hard to coordinate the discovery and trial schedule in the consolidated WorldCom class action (the "Securities Litigation") with the handful of remanded state court actions against WorldCom, and came close to receiving full cooperation. One state case, however--Retirement Systems of Alabama, et al. v. J.P. Morgan Chase & Co., et al., No. CV 2002-1947(a)-PR (The Honorable Charles Price, Circuit Court, Montgomery County, Alabama)--would not fall in line. In that case, the plaintiffs consistently pressed the Alabama court to permit a trial in advance of the Securities Litigation. Although the defendants objected to any trial date prior to the trial in the Securities Litigation, plaintiffs argued that:

[The defendants] want us to participate in a so-called global settlement. You know what happens in global settlements? You get five to ten cents on the dollar. I believe we'll get a hundred cents on the dollar, not counting punitives. And we're under a statute. They don't have a statute in federal cases. We're under a statute here which gives us our attorneys fees on top, and prejudgment interest at 6 percent on top; neither of those are involved in any federal rule or statute....We don't care about global public interest. We care about the public interest here....We have fought from day one to get it to trial.

Judge Price ultimately agreed with the plaintiffs and, despite Judge Cote's personal appeal for coordination, set a trial date in the Alabama state court action of October 18, 2003, several months before the January 10, 2005 trial date in the Securities Litigation.

Undeterred, defendants applied under the All Writs Act, 28 U.S.C. Section 1651, for a stay of the Alabama trial for a period of "no earlier than sixty days following the conclusion of the consolidated class action trial" in the SDNY. Judge Cote observed that the All Writs Act provides federal courts with the power to "issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law," but is limited by the Anti-Injunction Act, which bars a federal court from enjoining a proceeding in a state court unless that action is "expressly authorized by Acts of Congress, or where necessary in aid of jurisdiction, or to protect or effectuate its judgments." 28 U.S.C. § 2283.

After analyzing the request in detail, Judge Cote granted the writ in this Order enjoining the Circuit Court of Alabama, finding that "an injunction has become necessary if this Court is to preserve its ability to control the scheduling of this MDL class action trial, and its power to move the Securities Litigation toward as expeditious a resolution as is feasible." Judge Cote added that:

Finally, it is worth observing that the Alabama Plaintiffs have not been able to articulate any valid reason why their action should be tried in 2004, particularly when such a trial date will necessarily disrupt the schedule in the federal litigation. Their first proffered reason--that Alabama's budget crisis requires a 2004 trial--was baseless and explicitly rejected by Judge Price. Their second proffered reason--that a 2004 trial will extort a larger settlement--is not a legitimate reason for a trial date, and particularly not for one that creates such friction between the state and federal courts. As the Alabama Plaintiffs acknowledged when describing their purpose, their desire to obtain a settlement that will benefit them at the expense of all of the other victims of the WorldCom fraud is at odds with the general public good.

Profiling the Corporate Fraudster

Somebody call the Pre-Crime Unit! According to this article on AccountingWeb.com, KPMG 's analysis of 100 fraud cases that it has investigated over the past two years has permitted it to create a corporate fraudster "profile." According to KPMG, the most typical perpetrator is a male director or senior manager between the ages of 36 and 45, who has worked in the finance department of a public company for more than 10 years.

Highlights from the study include:

--directors or senior managers committed almost two-thirds of the 100 cases surveyed;

--32% of the perpetrators were long-serving employees who had been working for their companies for between 10 and 25 years;

--in 51% percent of the cases, two to five parties were involved in the fraud;

--in 72 percent of cases, the fraudsters were found to be male-only. Female-only fraudsters were identified in just seven percent of cases;

--the age of the principal fraudster was typically between 36 and 45 (41 percent of cases); and

--the finance department is the most likely business area that the fraudster targeted or was responsible for (40 percent of cases).

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April 22, 2004

We Like Plain English

As I discussed in this article/post last month, as of Dec. 1, 2003, Federal Rule 23(c)(2) requires, for the first time, that class settlement notices “must concisely and clearly state in plain, easily understood language” certain information about the nature and terms of a class action and how it might affect potential class members’ rights.

Two Notices of Pendency of Class Action that we recently circulated to our clients illustrate the significant difference between a "Plain English" notice and an old-school notice written in traditional legalese. The first notice, available here, was circulated in In re: Providian Financial Corp. Securities Litigation. The second notice, available here, was circulated in In re: Nortel Networks Corp. Securities Litigation. I don't think I need to identify which is which.

Even (or particularly??) after more than a decade of reading legal documents, I much prefer the new Plain English style, which allows the reader to quickly identify the important points, understand why he or she has received the document, and decide what, if anything, must be done.

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April 20, 2004

WorldCom Emerges From Bankruptcy, Wires $500 Million to SEC

WorldCom completed its reorganization today, emerging from the protection of Chapter 11 of the bankruptcy laws. In this press release, the company announced that that its "plan of reorganization, confirmed on October 31, 2003, by the U. S. Bankruptcy Court for the Southern District of New York is now effective and the company has begun to distribute securities and cash to its creditors. With the Chapter 11 process behind it, the company is now officially known as MCI, Inc."

Apparently first in line to receive cash from MCI was the SEC, which reportedly received a wire in the amount of $500 million from MCI on Monday pursuant to the Final Judgment settling the SEC's civil case against WorldCom. To complete the settlement, MCI must still transfer "as soon as practicable" following today's reorganization common stock of the reorganized company having a value of $250 million.

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April 19, 2004

E&Y Won't Appeal Six-Month Suspension on New Audit Clients

USA Today reports that Big Four accounting firm Ernst & Young will not appeal a six-month bar on signing new audit clients obtained by the SEC. The suspension was part of a 69-page decision by Chief Administrative Law Judge Brenda P. Murray, who called E&Y "reckless," "highly unreasonable" and "negligent" in forming a business venture with an audit client, PeopleSoft, in the 1990s. A copy of the decision is available here.

In her decision, Judge Murray concluded that E&Y would likely commit future violations absent an explicit directive to cease and desist, and added that "the evidence shows that [E&Y] has an utter disdain for the Commission’s rules and regulations on auditor independence."

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April 16, 2004

Investors Win First Arbitration Awards Directly Against Grubman

The Miami Herald reports that for the first time, two investors have prevailed directly against former Citigroup telecommunications analyst Jack Grubman (as well as the company) in NASD arbitration hearings alleging flawed and conflicted research. The amounts of the awards--$23,000 and $205,000--are relatively minor. According to the article, the $205,000 award was issued jointly against Grubman and Citigroup, and Grubman was ordered to pay only a quarter of the $23,000 award, plus attorneys fees (total: $7,000). A copy of the $205,000 award is available here.

The article further notes that under Grubman's severance agreement with Citigroup, the firm must pay "without limitation" all his legal costs, and that it remains unclear whether Grubman actually will pay any money in these proceedings.

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April 13, 2004

Time Warner May Face Sanctions for Non-Cooperation with SEC

The Washington Post, which first broke the AOL "questionable advertising revenue" story back in 2002, reported today that the SEC is preparing documents alleging that Time Warner Inc. booked more than $400 million in questionable advertising revenue following the company's January 2001 merger with America Online.

According to the article, the most prominent single item is a $400 million ad deal with the German company Bertelsmann AG. The article notes that in a recent SEC filing, Time Warner explained that "in the view of the [SEC's] Office of the Chief Accountant, the Company should have allocated some portion of the $400 million . . . as a reduction in the purchase price for Bertelsmann's interest in AOL Europe, rather than as advertising revenue. . . . The Company and its auditors continue to believe its accounting for these transactions is appropriate."

Also of note in the article is the ominous information from "people familiar with the probe" that the SEC is considering seeking financial sanctions against the company for allegedly failing to cooperate sufficiently with the investigation. According to an unnamed "government official familiar with the SEC's dealings with Time Warner," the company has been "dragging their feet and fighting every inch of the way, not only on the issues but on cooperation.... The commission has made it unmistakably clear that lack of cooperation has a cost."

As seen recently in the Banc of America ($10 million) and Lucent ($25 million) cases, perceived lack of cooperation can carry a steep price tag in settlement discussions with the SEC. If today's article is correct, it will be interesting to see what that price tag may be in this case.

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April 2, 2004

SLW Signing Off Through April 9

SLW is signing off briefly, through April 9, 2004. Please check back then!

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