The opinion of the court was delivered by: DENISE COTE, District Judge
This Opinion addresses a motion to dismiss claims brought in one of the
many actions arising from the collapse of WorldCom, Inc. ("WorldCom"). On
June 25, 2002, WorldCom made the first of several announcements that it
would restate publicly filed financial reports; since then, WorldCom has
admitted that its financial reports filed with the SEC from 1999 through
the first quarter of 2002 were overstated by approximately $9 billion. A
host of lawsuits have been filed alleging claims in connection with
WorldCom's collapse, and have been assigned to this Court by the Judicial
Panel on Multi-District Litigation ("MDL Panel").
Defendant UBS AG ("UBS") has moved to dismiss the Consolidated Amended
Class Action Complaint ("Complaint") filed on behalf of purchasers of 12%
GOALs() securities issued by UBS (the "GOALs"). The GOALs are notes that
referred to the performance of the stock of WorldCom, and this lawsuit
has been consolidated with the securities litigation arising from the
collapse of WorldCom (the "Securities Litigation").
This motion raises the issue of whether the accurate description of
historical prices for a company's stock can support a claim for a
violation of Section 11 of the Securities Act of 1933, when those prices
were artificially inflated through another party's fraud. Finding that an
accurate description of stock prices cannot support such a claim, the
motion to dismiss brought by UBS is granted.
The initial class action complaint in the GOALs litigation, Tuttelman
v. Ebbers, 03 Civ. 1052, was filed on February 14, 2003, against former
WorldCom officers and directors. It pleaded violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") in
connection with the GOALs.
The GOALs are notes issued by UBS that paid an annual interest rate of
12% over two years, payable semi-annually. The GOALs matured on January
24, 2003. The amount of the investor's
principal to be repaid at maturity depended on the performance of
WorldCom common stock during the term of the notes. In brief, if the
price of WorldCom common stock rose, investors would be repaid their full
principal in cash at maturity; if it fell below certain trigger points,
they would be repaid their principal in a pre-set number of WorldCom
shares. The GOALs were listed on the American Stock Exchange and traded
in the secondary market.
On March 18, a second class action, Sky v. Ebbers, 03 Civ. 1897, was
filed in connection with the GOALs. The Sky complaint named former
officers and directors of WorldCom and included UBS as a defendant,
alleging that UBS had violated Section 11 of the Securities Act of 1933
("Securities Act"). An Order of August 8 consolidated the two actions as
the In re Paine Webber GOALs Securities Litigation ("GOALs Litigation")
and consolidated the the GOALs Litigation with the Securities Litigation
for pretrial purposes.
On August 22, the Complaint for the GOALs Litigation was served. The
Complaint names former officers and directors of WorldCom and Worldcom's
former outside auditor, Arthur Andersen LLP, as defendants, and alleges
that they violated the Exchange Act. It also names UBS as a defendant.
The Complaint alleges that UBS violated Section 11 of the Securities Act
based on the recitation of the historical prices for WorldCom's common
stock contained in the Prospectus Supplement of January 17, 2002. The
chief allegations in the Complaint relevant to UBS and to this motion to
dismiss include the following.
UBS issued $19.5 million of GOALs pursuant to a Registration Statement
and Prospectus dated May 17, 2001, and a Prospectus Supplement of January
17, 2002 (collectively "Prospectus"). UBS received the balance of the
proceeds from the offering after an underwriting discount was subtracted.
The class period was defined as beginning on January 17, 2002, the date
of the Prospectus Supplement for the GOALs, through and including June
25, 2002, the date on which WorldCom first announced that it would
undertake a massive restatement of its financial statements.
The Prospectus Supplement, which is incorporated by reference in the
Complaint, listed historical stock price information for WorldCom,
including its common stock closing prices for each quarter for the years
1998 through 2001, and as of January 17, 2002, under the heading
"Historical Performance of WorldCom Shares." It advised that it had
obtained the trading price information "from Bloomberg L.P., without
independent verification," and warned that "YOU SHOULD NOT TAKE THE
HISTORICAL PRICES OF WORLDCOM SHARES AS AN INDICATION OF FUTURE
The Complaint alleges that
The trading prices of WorldCom's stock listed in the
Prospectus Supplement were artificially inflated as a
result of the wrongdoing of the non-UBS defendants,
and were therefore materially false and misleading. .
. . The value of the GOALs(), which was based on
WorldCom's common stock prices, declined substantially
during the Class Period as a result of UBS's
violations of the securities laws.
The Prospectus Supplement also informed investors that UBS did not
"know whether WorldCom, Inc. has disclosed all events occurring before
the date of this prospectus supplement including events that
would affect the accuracy or completeness of" WorldCom's public filings,
or "the market price of WorldCom Shares, and therefore, the exchange rate
the calculation agent uses to determine the number of WorldCom shares you
will receive. . . ." It advised that investors "SHOULD UNDERTAKE SUCH
INDEPENDENT INVESTIGATION OF WORLDCOM, INC. AS IN YOUR JUDGMENT IS
APPROPRIATE TO MAKE AN INFORMED DECISION WITH RESPECT TO AN INVESTMENT IN
GOALS()." It gave directions on how to locate WorldCom's public filings.
It represented that it had "not participated in the preparation of any"
of WorldCom's public filings or made any "`due diligence' investigation
or any inquiry of ...