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Securities Regulation, Keyed to Choi
In re WorldCom, Inc. Securities Litigation
Citation:
346 F. Supp. 2d 628 (2004)Facts
WorldCom, once the second-largest telecommunications company globally, conducted two major bond offerings in May 2000 and May 2001, raising $5 billion and $11.9 billion respectively. The registration statements for these offerings incorporated WorldCom’s financial statements, which contained massive fraudulent misstatements. Beginning in the first quarter of 2001, WorldCom senior management secretly capitalized approximately $771 million in line costs as capital expenditures, violating GAAP. Prior to this, WorldCom had manipulated its financial appearance by improperly releasing reserves. The fraud was concealed from Arthur Andersen, WorldCom’s auditor, and was only discovered in May 2002 by WorldCom’s internal audit department. WorldCom ultimately restated its financials with approximately $76 billion in adjustments. The underwriters, led by Salomon Smith Barney and J.P. Morgan, conducted limited due diligence consisting primarily of telephone calls with management, review of board minutes and SEC filings, and reliance on Andersen’s audit opinions and comfort letters. Several underwriters had internally downgraded WorldCom’s credit rating in February 2001 and engaged in hedging strategies to reduce their own exposure to WorldCom debt, yet proceeded with the May 2001 offering without disclosing these concerns or conducting enhanced due diligence.
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