United States District Court, Southern District of New York
November 21, 2002
IN RE WORLDCOM, INC. SECURITIES LITIGATION THIS DOCUMENT RELATES TO: ALL ACTIONS
The opinion of the court was delivered by: Denise Cote, United States District Judge
OPINION AND ORDER
Lead plaintiff New York State Common Retirement Fund ("NYSCRF") moves
for an Order modifying the discovery stay imposed pursuant to Section
the Securities Exchange Act of 1934, as amended by the
Private Securities Litigation Reform Act of 1995 ("PSLRA"),
15 U.S.C. § 78u-4(b)(3)(B), to permit it to obtain copies of certain
documents and materials which related non-party WorldCom, Inc.
("WorldCom") has already produced to other entities. Specifically,
NYSCRF seeks copies of certain documents and materials which WorldCom
has produced to any committee of the legislative branch of the U.S.
government or to any entity of the executive branch, including the
Department of Justice and the Securities and Exchange Commission
("SEC"). NYSCRF also requests that copies of certain documents and
materials which WorldCom has produced to Wilmer, Cutler & Pickering
("Wilmer") in connection with Wilmer's representation of the Special
Investigative Committee of WorldCom's board of directors be made
available to NYSCRF after Wilmer has delivered its final report to
WorldCom's board. The WorldCom Director Defendants*fn1 submitted an
opposition on November 18, which certain Underwriter Defendants*fn2
joined. Defendant Arthur Andersen LLP ("Andersen") also submitted an
opposition on that date. NYSCRF submitted its reply on November 20. The
U.S. Attorney for the Southern District of New York ("U.S. Attorney"),
which is conducting a criminal investigation of WorldCom's accounting
and business practices, has submitted a letter to be considered in
connection with this motion. It does not oppose the production of
documents that is sought through this application. For the reasons
stated, NYSCRF's motion is granted.
This class action arises out of the recent collapse of what was, in
1998, the second largest telecommunications company in the world.*fn3 On
June 25, 2002, WorldCom announced that it would have to restate its
publicly-reported financial results for 2001 and the first quarter of 2002
because it had, among other things, improperly treated more than $3.8
billion in ordinary costs as capital expenditures, in violation of
generally accepted accounting principles. Since that date, WorldCom has
made further announcements and disclosures suggesting that all of its
financial results since at least as early as 1999 require restatement. On
July 21, WorldCom filed for bankruptcy in the Bankruptcy Court of this
Government Investigations of WorldCom
On June 26, 2002, the SEC filed a civil complaint against WorldCom. On
June 27, the U.S. House of Representatives ("House") Committee on Energy
and Commerce and the House Committee on Financial Services each launched an
On July 31, the U.S. Attorney filed a criminal complaint against
defendant Scott D. Sullivan ("Sullivan"), the former Chief Financial
Officer and a former Director of WorldCom, and defendant David F. Myers
("Myers"), the former Controller and a former Senior Vice President of
WorldCom, charging each of them with conspiracy to commit securities
fraud, securities fraud, and five false filings with the SEC.
On August 28, Sullivan and defendant Buford Yates, Jr. ("Yates") were
indicted on the same seven felonies. On September 26, Myers pleaded guilty
to a three-count criminal information charging him with conspiracy,
securities fraud, and filing false documents with the SEC. On October 7,
Yates also pleaded guilty to conspiracy and securities fraud. On October
10, two members of WorldCom's accounting department, Betty Vinson and
Troy Normand, pleaded guilty to conspiracy and securities fraud.
On November 14, the Honorable Jed S. Rakoff approved a settlement between
the SEC and Myers and Yates granting the SEC certain injunctive relief, but
deferring until a later date any judgment with respect to the amount in
fines, if any, that Myers and Yates will pay. At a hearing on November
13, Judge Rakoff stated, with respect to the SEC's action against
WorldCom, that because the parties were engaged in discussions looking to
resolve important portions of the action, he would briefly delay the case
management plan to facilitate the discussions.
Procedural History of In re WorldCom, Inc. Securities Litigation
and In re WorldCom, Inc. ERISA Litigation
The first securities class action filed against defendants in
connection with the above-referenced events was filed in this district on
April 30, 2002, under the caption Albert Fadem Trust and Bruce A. Fadem
v. Worldcom, Inc., et al. Thereafter, approximately twenty related class
actions were filed. On August 12, a conference was held to consolidate
Albert Fadem and its related cases (collectively, the "Albert Fadem
Cases") pursuant to Fed.R.Civ.P. 42(a) and to appoint lead counsel
pursuant to Section 78u-4(a)(3)(B)(i) of the PSLRA,
15 U.S.C. § 78u-4(a)(3)(B)(i). By Order dated August 15, 2002, the
Albert Fadem Cases were consolidated under the caption In re WorldCom,
Inc. Securities Litigation, NYSCRF was appointed lead plaintiff, and
NYSCRF was ordered to file a consolidated amended complaint no later than
October 11, 2002.
By Order dated September 18, the Court consolidated Gail M. Grenier v.
WorldCom, Inc., et al., 02 Civ. 4816 (DLC), and John T. Alexander v.
WorldCom, Inc. et al., 02 Civ. 5140 (DLC), both of which allege breaches of
fiduciary duty under the Employment Retirement Income Security Act of 1974
("ERISA"), 29 U.S.C. § 1001, et seq., by WorldCom and certain WorldCom
fiduciaries in connection with the WorldCom 401(k) Salary Savings Plan (the
"Plan"), under the caption In re WorldCom, Inc. ERISA Litigation.
By letter dated September 30, NYSCRF requested a sixty-day extension of
time in which to file the amended complaint in In re WorldCom, Inc.
Securities Litigation. By letters dated October 2, the WorldCom Director
Defendants, the Underwriter Defendants, and Andersen objected to any
extension of time greater than ten days, noting that if NYSCRF's request
were granted, it "will have had more than seven months from the date of the
first complaints to file an amendment." By Order dated October 3, NYSCRF's
request for an extension of time was denied and, in accordance with
numerous stipulations to which the parties had agreed in the individual
cases prior to consolidation, defendants were ordered to answer or move
with respect to the complaint no later than December 13, 2002.
By Order dated October 8, pursuant to 28 U.S.C. § 1407, the
Judicial Panel on Multidistrict Litigation ordered the centralization of
approximately forty WorldCom-related class action cases in this Court,
which included both securities and ERISA class actions. On October 11,
NYSCRF filed its consolidated amended complaint.
By Order dated November 18, Stephen Vivien ("Vivien"), Gail M. Grenier,
and John T. Alexander were appointed lead plaintiffs in In re WorldCom,
Inc. ERISA Litigation and Keller Rohrback, L.L.P. ("Keller Rohrback") was
appointed lead counsel. Vivien had filed suit in the Northern District of
California on March 18, 2002, and one of the causes of action in that
lawsuit has already survived a motion to dismiss. In an Order dated July
26, 2002, Vivien v. WorldCom, Inc., No. 02-01329 WHA (N.D.Cal. July 26,
2002), the Honorable William Alsup denied in part defendants' motion to
dismiss for lack of personal jurisdiction and failure to state a claim.
Judge Alsup held that the plaintiffs' complaint adequately alleged that
defendants Ebbers and Sullivan acted in a fiduciary capacity with respect
to WorldCom's ERISA Plan and that they breached that fiduciary duty. Vivien
has since been transferred to this Court and centralized under In re
WorldCom, Inc. ERISA Litigation pursuant to the October 8 Order of the
Judicial Panel on Multidistrict Litigation.*fn4
The November 18 Order in In re WorldCom, Inc. ERISA Litigation also
ordered plaintiffs to file a consolidated amended complaint by December
20, 2002, and defendants were ordered to answer or move with respect to
the complaint by January 17, 2003. At a conference on November 18, Keller
Rohrback was ordered to develop a protocol with lead counsel in In re
WorldCom, Inc. Securities Litigation to coordinate discovery with
plaintiffs' counsel in the securities class actions to the extent
appropriate and feasible.
Bankruptcy Court's Order to Modify the Automatic Stay
On October 2, 2002,NYSCRF filed a motion with the Bankruptcy Court in
In the Matter of WorldCom, Inc., Case No. 02-B-13533, seeking a
modification of the bankruptcy stay to permit NYSCRF to obtain copies of
documents and materials that WorldCom had produced in connection with
governmental and internal investigations and that it may have produced to
WorldCom's Creditors' Committee. On October 29, ruling from the bench,
the Honorable Arthur J. Gonzalez granted NYSCRF's motion. He stated:
"I don't see how the Debtor would suffer significant
inconvenience or hardship since the work to be done in
terms of responding to any subpoena is done by
attorneys who do not appear, and there is no evidence
that they are directly involved in the reorganization
After the October 29 hearing, the U.S. Attorney and the SEC contacted
NYSCRF to request that certain changes be made in the proposed Bankruptcy
Court Order in order to protect their ongoing investigations. NYSCRF
agreed to make the changes requested. By Order dated November 8, Judge
Gonzalez modified the automatic stay to allow NYSCRF to obtain copies of
documents and materials that WorldCom produced in connection with
governmental investigations of its accounting and business practices, and
in connection with Wilmer's internal investigation after Wilmer has
delivered its final report, provided that this Court subsequently lift
the PSLRA stay. Pursuant to an agreement with the U.S. Attorney and the
SEC, NYSCRF did not seek, and Judge Gonzalez did not order, the
production of any witness interview notes.
In a conference on November 20, lead counsel for plaintiffs in In re
WorldCom, Inc. ERISA Litigation stated that it would be filing a similar
motion with the Bankruptcy Court to request a partial lifting of the
automatic stay, and if successful, also petition this Court for access to
The Schedule for Settlement Discussions in In re WorldCom, Inc.
In a conference on November 5, and by Order dated November 7, the
parties in In re WorldCom, Inc. Securities Litigation were ordered to
contact the chambers of Magistrate Judge Michael H. Dolinger no later
than November 15, 2002, to arrange to pursue settlement discussions under
his supervision in December. The parties in In re WorldCom, Inc. ERISA
Litigation have been advised to expect a similar order and to prepare for
settlement discussions before Judge Dolinger to be coordinated with the
settlement discussions in the securities litigation to the extent
The PSLRA contains the following stay of discovery provision:
In any private action arising under this chapter, all
discovery and other proceedings shall be stayed during
the pendency of any motion to dismiss, unless the
court finds upon the motion of any party that
particularized discovery is necessary to preserve
evidence or to prevent undue prejudice to that party.
15 U.S.C. § 78u-4(b)(3)(B) (emphasis supplied). The legislative
history of the PSLRA indicates that Congress enacted the discovery stay
in order to minimize the incentives for plaintiffs to file frivolous
securities class actions in the hope either that corporate defendants
will settle those actions rather than bear the high cost of discovery,
see H.R. Conf. Rep. No. 104-369, at 37 (1995), reprinted in 1995
U.S.C.C.A.N. 730, 735, or that the plaintiff will find during discovery
some sustainable claim not alleged in the complaint, see S. Rep. No.
104-98, at 14 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 693. See also
In re Lernout & Hauspie Sec. Litig., 214 F. Supp.2d 100, 106
Neither rationale underlying the PSLRA's discovery stay provision is
contravened by plaintiffs' application. NYSCRF has clearly not filed the
complaint to initiate a "fishing expedition" in search of sustainable
claims or to force defendants to settle an otherwise frivolous class
Based upon the unique circumstances of this case, the documents requested
by NYSCRF must be produced in order to prevent undue prejudice to the
interests of the putative investor class it represents. All of the
investigations and proceedings concerning WorldCom are moving apace.
Without access to documents already made available to the U.S. Attorney,
the SEC, and in whole or in part to the WorldCom's Creditors Committee
and the documents that will in all likelihood soon be in the hands of the
ERISA plaintiffs, NYSCRF would be prejudiced by its inability to make
informed decisions about its litigation strategy in a rapidly shifting
landscape. It would essentially be the only major interested party in the
criminal and civil proceedings against WorldCom without access to
documents that currently form the core of those proceedings. This is
especially troubling given the likelihood that settlement discussions
will begin in
December and involve both the securities plaintiffs and the
ERISA plaintiffs. The former would be severely disadvantaged in those
discussions if they are denied access to the documents they now request.
If NYSCRF must wait until the resolution of a motion to dismiss to obtain
discovery and formulate its settlement or litigation strategy, it faces
the very real risk that it will be left to pursue its action against
defendants who no longer have anything or at least as much to offer.
Defendants argue that plaintiffs' discovery request is not sufficiently
"particularized" to justify a partial lifting of the stay. Yet plaintiffs'
request has already been pared down to address the concerns of the U.S.
Attorney and involves a clearly defined universe of documents,
specifically certain documents which WorldCom has already produced in
connection with other identified proceedings. Where, as here, plaintiffs
are not in any sense engaged in a fishing expedition or an abusive strike
suit and do not thereby act in contravention of the fundamental
rationales underlying the PSLRA discovery stay, and where plaintiffs
would be substantially prejudiced by the maintenance of the stay,
defendants cannot call upon the ambiguous notion of "particularized"
discovery to bend Section 78u-4(b)(3)(B) to a purpose for which it was
Finally, it is customary to consider whether a production request
places an undue burden on the party from which it is requested. For easily
understood reasons, defendants have not raised this as an obstacle. The
documents requested are sought from a non-party*fn5 and have already been
compiled. Cf. Newby v. Enron Corp., No. H-01-3624, at 3 (S.D.Tex. Aug.
15, 2002) (order granting motion for limited production) ("In a sense
this discovery has already been made, and it is merely a question of
keeping it from a party because of the strictures of a statute designed
to prevent discovery abuse.").
Conclusion While none of the above-stated circumstances may alone be
sufficient to justify a lifting of the statutory stay in order to prevent
undue prejudice, their collective weight tips the scale by a considerable
measure in favor of plaintiffs' request.
Plaintiffs' motion for an Order partially lifting the PSLRA discovery
stay is granted.