The opinion of the court was delivered by: Denise Cote, United States District Judge
Defendants Salomon Smith Barney, Inc. ("SSB"), Citigroup, Inc. ("Citigroup"), and Jack Grubman ("Grubman") (collectively, the "SSB Group") have moved to sever three of the five claims against them in the Amended Consolidated Complaint filed on October 11, 2002 ("Complaint") in this securities litigation ("Securities Litigation"). They request that the three claims be transferred to the Honorable Gerald E. Lynch of this district for consolidation with the many actions that have been brought against the SSB Group arising out of the recommendations made by SSB analysts to purchase nine telecommunications companies' stocks. For the following reasons, the motion is denied.
The Complaint brings claims against certain former WorldCom executive officers, WorldCom's directors (and former directors), accountants, and eighteen underwriters ("Underwriter Defendants"), including SSB, as well as against Citigroup and Grubman. The claims in the Complaint arise from the alleged manipulation of the financial statements of WorldCom and the alleged false and misleading statements made to the investing public as a result of that manipulation.
The Complaint also alleges that an illegal quid pro quo relationship existed between the SSB Group and WorldCom in which SSB received investment banking business in return for agreeing to issue positive analyst reports about WorldCom, including false and misleading reports, to provide senior WorldCom executives with valuable IPO shares, and to loan WorldCom's Chief Executive Officer, Bernard J. Ebbers, several hundred million dollars. The Complaint contends that the registration statements issued in connection with certain of WorldCom's bond offerings were false and misleading in part because they failed to disclose conflicts of interest that permeated the WorldCom/SSB relationship. Five counts in the Complaint state claims against members of the SSB Group.
Counts IV and V of the Complaint state claims against the Underwriter Defendants, including SSB, under Sections 11 and 12(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77k and 771(a)(2), for material misstatements in connection with the registration statements for, and sale of, public debt offerings by WorldCom. Among other claims, these Counts allege that the Underwriter Defendants failed to perform a reasonable investigation in connection with the public debt offerings and thus are liable for any material misrepresentations or omissions contained in the registration statements. In addition, Count IV alleges that SSB's conflicts of interest tainted its ability to handle certain public debt offerings as the lead underwriter, and that SSB and the other underwriters failed to disclose SSB's conflicts and to perform the requisite due diligence. SSB does not move to sever counts IV and V.
The claims that are the subject of this severance motion are Counts IX through XI. Count IX alleges a violation of Section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78(j) ("Section 10(b)"), against SSB and Grubman based in part on the same registration statements that are the subject of Counts IV and V. Among other claims, Count IX alleges that as part of their quid pro quo relationship, SSB, Grubman and WorldCom deceived investors and artificially inflated the price of WorldCom stock and debt. Count X alleges violations of Section 10(b) by SSB and Grubman in connection with analyst reports regarding WorldCom. Among other things, Count X alleges that the analyst reports misrepresented or failed to disclose material facts regarding WorldCom and the nature of SSB's relationship with WorldCom. Count XI alleges violations of Section 20(a) of the 1934 Act, 15 U.S.C. § 78t, against Citigroup and SSB as control persons in connection with both the registration statements and the analyst reports.
The actions consolidated before Judge Lynch are referred to as the Analyst Actions. The Analyst Actions consist of over sixty actions that relate to SSB's analyst coverage of nine different telecommunications companies, including WorldCom, and that name as defendants two or more members of the SSB Group. Actions against SSB relating to its coverage of the telecommunications industry were filed in numerous venues, but the bulk of the analyst litigation against the SSB Group has been consolidated before Judge Lynch or is in the process of being consolidated before him. The common denominator in these Analyst Actions is the allegation that the recommendations of SSB's analysts to purchase these stocks lacked any reasonable factual basis, omitted material, neglected adverse information, and/or failed to disclose SSB's significant conflicts of interest arising from its effort to obtain investment banking business.
The Analyst Actions do not name as defendants the telecommunications companies that were the subject of the analyst reports, their officers, directors, or auditors.
Prior to the transfer of the Analyst Actions to Judge Lynch, they had been before the Honorable Barbara S. Jones. On January 24, 2003, Judge Jones issued an order consolidating each of the actions according to the identity of the securities issuer. Thus, the analyst litigation against the SSB Group consists not of a single action, but of nine separately consolidated Analyst Actions. For example, the actions that relate to the recommendations to purchase WorldCom stock were consolidated into one action ("WorldCom Analyst Action").
The nine Analyst Actions are now proceeding before Judge Lynch. On March 20, 2003, Judge Lynch issued a case management order appointing lead plaintiffs for each of the nine consolidated Analyst Actions. The lead plaintiff in the Securities Litigation, New York State Common Retirement Fund, was appointed as lead plaintiff in the WorldCom Analyst Action. In addition to appointing lead plaintiff, the March 20 Order set schedules for the filing of consolidated complaints in each of the Analyst Actions. For the WorldCom Analyst Action, however, the Order provides that should this Court deny this severance motion, further proceedings in the WorldCom Analyst Action shall be stayed pending further order of the court.
Also before Judge Lynch is a securities action against various defendants associated with Global Crossing, In re Global Crossing, Ltd. Securities Litigation, No. 02 Civ. 910 (GEL) ("Global Crossing Securities"), an action that is similar to the Securities Litigation before this Court. Judge Lynch appointed as presumptive lead plaintiff for the Analyst Action concerning Global Crossing the same plaintiff who had been appointed as lead plaintiff in Global Crossing Securities. Instead of allowing the plaintiffs to pursue Global Crossing-related claims against the SSB Group in both Global Crossing Securities and the Global Crossing Analyst Action, the March 20 Order ensures that such claims will continue in only one action. As with the WorldCom Analyst Action, the Order provides two alternatives for the Global Crossing Analyst Actions. The parties were directed to meet and confer and to advise the Court whether "plaintiff (a) agrees to stay proceedings in SSB Global Crossing [the Global Crossing Analyst Action] and to proceed with the claims against the Salomon Smith Barney defendants in the Global Crossing Securities matter; or (b) agrees to sever and dismiss the claims against those defendants in Global Crossing Securities and to proceed with those claims by filing a consolidated complaint" in the Global Crossing Analyst Action.
The Arguments The SSB Group contends that the Court should exercise its discretion to sever Counts IX through XI and to transfer them to Judge Lynch to be consolidated with the WorldCom Analyst Action. The SSB Group argues that severing the claims is warranted because the inclusion of Counts IX through XI in the Complaint (1) is an effort to circumvent the division of business of this district court undertaken by the judges in this district and the Judicial Panel on Multidistrict Litigation ("MDL Panel"), (2) is an effort by the lead plaintiff before this Court to obtain improperly appointment as the lead plaintiff in the WorldCom Analyst Action, and (3) will best serve the interest of judicial economy.
Plaintiff argues that the motion should be denied because the claims the SSB Group seeks to sever, and the underlying facts at issue with respect to each of those claims, are inextricably intertwined with the remainder of the Securities Litigation. Plaintiff contends that it is not barred from asserting Counts IX through XI in this action, ...