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Press Reports Did Not Put Investors on Notice of Potential Fraud at WorldCom
The District Court for the Southern District of New York has refused to dismiss the claims of an Ohio pension fund in the WorldCom case based on the argument of defendant, Salomon Smith Barney, that investors were placed on notice of the alleged fraud by virtue of press reports about the allegedly “illicit relationship” between WorldCom, Salomon Smith Barney and telecommunications analyst Jack Grubman. The court reasoned that as a matter of law, the press reports are simply too vague to support the conclusion that plaintiffs were on notice as to possible claims that Salomon's financial reporting on WorldCom was tainted. Public Employees Retirement System of Ohio v. Ebbers (In re WorldCom, Inc. Securities Litigation), No. 02cv03288 (Nov. 25).
In this consolidated class action, WorldCom and its former chief executive, Bernie Ebbers, allegedly committed massive accounting fraud and violated securities laws by making false statements and filings. Among the other defendants are investment banks, such as Salomon, who were responsible for handling WorldCom's bond offerings. Salomon, specifically, has been singled out as having an improper 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. In its attempt to have some of the claims dismissed, lawyers for Salomon and Grubman argued that a series of news articles about conflicted analysts amounted to “storm warnings” that should have alerted a reasonable investor as to the conflicts.
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