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Investment Bank Is Dismissed from WorldCom Lawsuits

The District Court for the Southern District of New York has granted a motion to dismiss an investment bank from the WorldCom class action that issued notes tracking the market price of WorldCom stock. The court ruled that the bank's accurate statements about the historical stock price could not support a claim under the securities laws even though those prices turned out to be fraudulently inflated. In re WorldCom Inc. Securities Litigation, No. Civ. 3288 (DLC), (Jan. 6, 2004).

The plaintiffs were investors who alleged that the bank was party to the WorldCom fraud and violated ' 11 of the Securities Act of 1933 because the historical stock price of WorldCom was artificially inflated through the perpetration of a monumental fraud. The bank had issued GOALs securities, which paid an annual interest rate of 12% over 2 years. The amount of the principal that was to be repaid as they matured was dependent on the performance of WorldCom stock.

In dismissing the bank from the class action, the district court noted that the prospectus supplement submitted to the bank's investors stated that it did not know whether WorldCom had disclosed all events that occurred before the date of the supplement, and warned investors to undertake their own independent investigation of the company. It also said that the bank had not participated in the preparation of any of WorldCom's public filings, nor had it performed due diligence in connection with the offering of the GOALs. The court stated that to be misleading under ' 11, a statement would have mislead a reasonable investor. The plaintiffs argued that because Section 11 is a strict liability statute, and the stock prices were artificially inflated by fraud and therefore materially false and misleading, the reporting of WorldCom's stock prices was also false and misleading as a misrepresentation of the true value of WorldCom's stock. The court rejected this argument, however, finding that the plaintiffs had not stated a claim under ' 11 despite the statute's “minimal” pleading requirements. The court noted that the plaintiffs “do not allege that the stock prices listed in the Prospectus Statement were not correctly reported.” Moreover, they could not identify any other statement offered by the bank making “any representation about WorldCom, the reliability of its financial statements, the accuracy of its public statements, or the utility of the historical stock prices as a predictor of future stock performance. To the contrary, the Prospectus Statement specifically disclaims that it is making any representations in this regard.” At a minimum, the court found, ' 11 requires that a plaintiff “identify an 'untrue statement of a material fact,' ” which was not the case here.

Investment Bank Is Dismissed from WorldCom Lawsuits

The District Court for the Southern District of New York has granted a motion to dismiss an investment bank from the WorldCom class action that issued notes tracking the market price of WorldCom stock. The court ruled that the bank's accurate statements about the historical stock price could not support a claim under the securities laws even though those prices turned out to be fraudulently inflated. In re WorldCom Inc. Securities Litigation, No. Civ. 3288 (DLC), (Jan. 6, 2004).

The plaintiffs were investors who alleged that the bank was party to the WorldCom fraud and violated ' 11 of the Securities Act of 1933 because the historical stock price of WorldCom was artificially inflated through the perpetration of a monumental fraud. The bank had issued GOALs securities, which paid an annual interest rate of 12% over 2 years. The amount of the principal that was to be repaid as they matured was dependent on the performance of WorldCom stock.

In dismissing the bank from the class action, the district court noted that the prospectus supplement submitted to the bank's investors stated that it did not know whether WorldCom had disclosed all events that occurred before the date of the supplement, and warned investors to undertake their own independent investigation of the company. It also said that the bank had not participated in the preparation of any of WorldCom's public filings, nor had it performed due diligence in connection with the offering of the GOALs. The court stated that to be misleading under ' 11, a statement would have mislead a reasonable investor. The plaintiffs argued that because Section 11 is a strict liability statute, and the stock prices were artificially inflated by fraud and therefore materially false and misleading, the reporting of WorldCom's stock prices was also false and misleading as a misrepresentation of the true value of WorldCom's stock. The court rejected this argument, however, finding that the plaintiffs had not stated a claim under ' 11 despite the statute's “minimal” pleading requirements. The court noted that the plaintiffs “do not allege that the stock prices listed in the Prospectus Statement were not correctly reported.” Moreover, they could not identify any other statement offered by the bank making “any representation about WorldCom, the reliability of its financial statements, the accuracy of its public statements, or the utility of the historical stock prices as a predictor of future stock performance. To the contrary, the Prospectus Statement specifically disclaims that it is making any representations in this regard.” At a minimum, the court found, ' 11 requires that a plaintiff “identify an 'untrue statement of a material fact,' ” which was not the case here.