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November 12, 2004.


The opinion of the court was delivered by: DENISE COTE, District Judge


Lead Plaintiff in the consolidated securities class action arising out of the collapse of WorldCom, Inc. ("WorldCom") petitions for final approval of a partial settlement of the class action. It seeks approval of a $2.575 billion settlement with Citigroup, Inc., Citigroup Global Markets Inc. f/k/a Salomon Smith Barney Inc. ("SSB"), Citigroup Global Markets Limited f/k/a Salomon Brothers International Limited, and Jack B. Grubman ("Grubman"), a former telecommunications analyst for SSB (collectively "Citigroup Defendants"). It also seeks approval of a proposed plan of allocation of the settlement fund, and an award of attorney's fees, reimbursement of expenses, and creation of a $3 million fund for the continuation of the litigation against the non-settling defendants.

For the reasons discussed below, the petition is approved. A separate Opinion issued today will address the application by Liaison Counsel for the WorldCom related securities actions filed by individual plaintiffs as opposed to a class ("Individual Actions"). Liaison Counsel seeks to be partially paid for its time and expenses as Liaison Counsel from the Citigroup Defendants' settlement fund and for a set-off order to be imposed against any recovery in any Individual Action to complete reimbursement of its fees and expenses.


  The WorldCom consolidated class action and the Individual Actions have been consolidated for pre-trial purposes in the Securities Litigation. The nature of the claims in the Securities Litigation and the course of the litigation have been the subject of many prior Opinions.*fn1 Only those events necessary to place in context the requests arising from the Citigroup Defendants' class action settlement are described here.

  On June 25, 2002, WorldCom announced a massive restatement of its financial statements. Government investigations and criminal indictments quickly followed.*fn2 On July 21, WorldCom declared bankruptcy.

  The first of many class action lawsuits arising from WorldCom's alleged massive manipulation of its financial reports was filed in this district on April 30, 2002, approximately two months before the dramatic June 25 announcement. The class actions alleged violations of federal securities laws in connection with the trading of WorldCom stock as well as the sale of WorldCom debt securities, including two massive WorldCom bond offerings: its sale of $5 billion of Notes in May 2000 ("2000 Offering"), and its sale of $11.8 billion of Notes in May 2001 ("2001 Offering"). The latter was the largest public debt offering in the nation's history.

  On August 15, 2002, the class actions were consolidated and the New York State Common Retirement Fund ("NYSCRF") was selected as Lead Plaintiff.*fn3 During the class period, NYSCRF lost over $300 million from its WorldCom investments. Lead Plaintiff is represented by Bernstein Litowitz Berger & Grossman LLP and Barrack, Rodos & Bacine (collectively "Lead Counsel"). Three named plaintiffs join NYSCRF in alleging claims on behalf the class. Fresno County Employees Retirement Association ("FCERA") purchased $3.5 million of Notes in the 2001 Offering, and lost over $11 million as a result of its investment in WorldCom securities; the County of Fresno, California ("Fresno") lost over $5.5 million as a result of its investment in the 2000 Offering; and HGK Asset Management, Inc. ("HGK"), a registered investment advisor and fiduciary to its union-sponsored pension and benefit plan clients, lost over $29 million as a result of purchases made in the 2000 and 2001 Offerings. Collectively, FCERA, Fresno, and HGK are referred to as the "Additional Named Plaintiffs."

  Lead Plaintiff filed a Consolidated Class Action Complaint (the "Complaint") on October 11. On May 19, 2003, the motions to dismiss made by most of the defendants named in that pleading were largely denied.*fn4 In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 431.

  Meanwhile, scores of Individual Actions had been filed in venues across the country. Individual Actions and class actions pending in other federal courts were transferred here by the Judicial Panel on Multi-District Litigation ("MDL Panel"), and consolidated with the WorldCom class actions for pre-trial purposes through an Order of December 23, 2002. See In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2002 WL 31867720 (S.D.N.Y. Dec. 23, 2002).

  The Amended Complaint

  On August 1, 2003, Lead Plaintiff filed the First Amended Class Action Complaint. On December 1, 2003, Lead Plaintiff filed a Corrected First Amended Class Action Complaint (the "Amended Complaint").*fn5 The defendants named in the Amended Complaint are WorldCom directors;*fn6 executives,*fn7 including Ebbers; WorldCom's outside auditor and accountant, Andersen; the underwriters for the 2000 and 2001 Offerings (the "Underwriter Defendants");*fn8 and the Citigroup Defendants. SSB is listed here as both an Underwriter Defendant and one of the Citigroup Defendants. SSB was the co-lead underwriter with J.P. Morgan for the 2000 and 2001 Offerings. SSB was the book running manager for the 2000 Offering and the joint book runner with J.P. Morgan for the 2001 Offering.

  A summary of allegations in the Amended Complaint relevant to this motion follows. The Lead Plaintiff alleges that WorldCom and those affiliated with it misled investors by engaging in a host of illegitimate accounting strategies that obscured losses and inflated the company's earnings. Lead Plaintiff alleges that investors were misled by false information regarding WorldCom's financial state that appeared in analyst reports, press releases, public statements, and filings with the Securities and Exchange Commission ("SEC") during the Class Period, including the registration statements and prospectus statements issued in connection with the 2000 and 2001 Offerings ("Registration Statements").

  WorldCom has admitted that its financial statements were overstated by more than $9 billion from 1999 through the first quarter of 2002. WorldCom's disclosures in 2002 had a disastrous effect on the price of its shares and the value of its Notes. The Lead Plaintiff alleges that Underwriter Defendants failed to conduct proper due diligence in connection with the 2000 and 2001 Offerings. It also alleges that the Citigroup Defendants engaged in securities fraud. The center of its allegations against the Citigroup Defendants is that SSB and Grubman on one hand, and WorldCom and Ebbers on the other, had a close and self-serving relationship from which both sides derived substantial benefit. Lead Plaintiff alleges that WorldCom's securities prices were artificially inflated by Grubman's analyst reports. He was SSB's most prominent telecommunications analyst and consistently encouraged investors to acquire WorldCom securities. The Lead Plaintiff asserts that SSB and Grubman issued the aggressively positive analyst reports despite SSB's knowledge that the integrity and objectivity of its research department was compromised by the department's drive to serve the needs of the firm's investment banking division, despite Grubman's knowledge or reckless disregard of the substantial financial problems at WorldCom, and despite the material misstatements or omissions contained in the reports. The Lead Plaintiff has asserted that Grubman modified his valuation model in order to obscure WorldCom's deteriorating finances. The Lead Plaintiff alleges that in exchange for WorldCom's lucrative investment banking business, SSB provided Ebbers and other WorldCom senior executives with valuable IPO shares, and an SSB corporate sibling secretly loaned Ebbers hundreds of millions of dollars, which were secured at least in part by Ebbers's WorldCom stockholdings.*fn9

  The Amended Complaint asserts claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 ("Securities Act"), and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"). The Securities Act claims address the 2000 and 2001 Offerings and their Registration Statements. The Lead Plaintiff pleads Securities Act claims against the Officer Defendants, the Director Defendants, Andersen, and the Underwriter Defendants.

  The Exchange Act claims arise from alleged misrepresentations and omissions in WorldCom's filings with the SEC, press releases, and Registration Statements for the 2000 and 2001 Offerings, and the SSB analyst reports. The defendants named in the Exchange Act claims include Ebbers, Sullivan, Myers, Yates, Kellett, the Director Defendants who were members of WorldCom's Board of Directors Audit Committee, Andersen, Citigroup, SSB, and Grubman.

  Class Certification

  A class was certified under Rule 23(b)(3), Fed.R. Civ. P., on October 24, 2003. See In re WorldCom, Inc. Sec. Litig., 219 F.R.D. 267. The opt out period for the class was set to close on February 20, 2004.*fn10 The certified class consists of all persons and entities who purchased or otherwise acquired publicly traded securities of WorldCom during the period beginning April 29, 1999 through and including June 25, 2002, and who were injured thereby. This includes all persons or entities who acquired shares of WorldCom common stock in the secondary market or in exchange for shares of companies acquired by WorldCom pursuant to a registration statement, and all persons or entities who acquired debt securities of WorldCom in the secondary market or pursuant to a registration statement.*fn11 See id. at 274-75.

  On December 31, 2003, the Court of Appeals for the Second Circuit permitted the Citigroup Defendants to bring an interlocutory appeal of the certification of the class to address the applicability of the fraud-on-the-market doctrine to analysts' opinions. Hevesi v. Citigroup Inc., 366 F.3d 70, 79 (2d Cir. 2004). The Court of Appeals rejected the other requests by defendants for interlocutory review of the class certification decision. Discovery

  With the decision on the first tranche of the motions to dismiss, see In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 431, the discovery stay imposed pursuant to the Private Securities Litigation Reform Act of 1995 ("PSLRA") was lifted and Lead Plaintiff began its discovery efforts in earnest.*fn12 Document discovery in the class action was substantially complete by October 10, 2003. Lead Counsel reviewed over ten million pages of documents.

  A scheduling order of November 14, 2003 ("November 14 Order") set deadlines for the remainder of the consolidated class action. The November 14 Order provided that the plaintiffs and defendants in the Securities Litigation were each limited to sixty, eight-hour deposition days, excluding the time given to defendants for discovery of the plaintiffs in the Individual Actions. A deposition day could be split into two, four-hour depositions. Substantive depositions of the defendants were scheduled to begin by January 15, 2004, and fact discovery in the Securities Litigation, excluding again the discovery of plaintiffs in the Individual Actions, was scheduled to conclude on June 18, 2004. An Order of May 12, 2004 ("May 12 Order") extended fact discovery until July 9. The schedule for expert discovery and summary judgment practice in the class action, as modified by the May 12 Order, provided that experts would be identified on July 16, and that expert discovery was to conclude on October 22. Summary judgment motions were fully submitted on October 1. The November 14 Order scheduled the consolidated class action trial to begin on January 10, 2005, with the pretrial order due November 12, 2004.

  In the Fall of 2003, the United States Attorney's Office for the Southern District of New York (the "Government"), which was conducting the criminal investigations and prosecutions of former WorldCom officers and employees, objected to discovery being taken in the Securities Litigation of certain witnesses the Government planned to call at the then-scheduled criminal trial of Sullivan. The parties were permitted to take the depositions of these Government witnesses following the conclusion of the Sullivan trial, then scheduled to begin February 2, 2004. See In re Worldcom, Inc. Sec. Litig., 2003 WL 22953645, at *3.

  As Sullivan pled guilty, Ebbers was indicted on March 2, 2004. The Government promptly sought to "embargo" the depositions and interrogatories of thirteen witnesses it expected to be critical witnesses at Ebbers' trial. Ebbers' trial was scheduled to begin on November 9, 2004, long after the close of the fact discovery period for the class action. An April 27, 2004 Order stayed all WorldCom civil litigation against Ebbers until the final resolution of his criminal trial. An Opinion of April 15 and an Order of May 7, 2004, granted the Government's request to embargo thirteen witnesses. The April 15 Opinion determined that the parties would be permitted to save some of their allotted time for deposition discovery for possible depositions of embargoed witnesses in the interval between the Ebbers trial and the commencement of the class action trial, which was to begin on January 10, 2005. In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2004 WL 802414, at *7 (S.D.N.Y. Apr. 15, 2004). Another in a series of motions by the defendants to extend the discovery period and class action trial date was also denied. Id. at *8. The April 15 Opinion recognized that should the date of Ebbers' criminal trial shift, it would be necessary to revisit the embargoed witness issue. Id. at *7 n. 24. A June 7 Order permitted the defendants and plaintiffs in the Securities Litigation to reserve up to twelve and eight days respectively to depose thirteen embargoed witnesses.*fn13

  During the deposition period, defendants took a total of 37 depositions, of which 20 were WorldCom witnesses, seven were plaintiff witnesses,*fn14 and six were third party witnesses who testified about the recent restatement of WorldCom's financial statements. With few exceptions, the defendants noticed and took these depositions at the very end of the period allotted for fact discovery. Prior to March 2004, defendants had noticed only one deposition, and before May 2004, defendants took only one deposition. For their part, plaintiffs conducted 77 depositions, of which 70 were noticed by Lead Plaintiff. Lead Counsel was lead examiner on the 70 depositions that it noticed. Plaintiffs noticed 71 and conducted 23 depositions before May 2004. Plaintiffs deposed 25 Citigroup Defendants, of which 18 were noticed by Lead Plaintiff.*fn15 Prior to reaching the settlement with the Citigroup Defendants, Lead Plaintiff had deposed fifteen witnesses associated with the Citigroup Defendants. Plaintiffs also took ten depositions of J.P. Morgan and five of WorldCom witnesses.

  On October 19, the judge presiding over the Ebbers' trial granted Ebbers' request for an adjournment of the trial, and moved it to January 17, 2005. In light of the delay in the start of Ebbers' trial, an October 25 Order adjourned the date of the consolidated class action trial in the Securities Litigation to February 28, 2005.

  Opt-Out Period

  On December 16, 2003, this Court certified an interlocutory appeal from a denial of remand motions made in certain of the Individual Actions. In re WorldCom, Inc. Sec. Litig., 2003 WL 22953644. The United States Court of Appeals for the Second Circuit accepted the appeal and issued an Order of February 3, 2004 ("February 3 Order") extending the opt out period for the class action to no earlier than thirty days after its mandate issued. Class members originally had until February 20, 2004 to mail their requests for exclusion from the class.

  On May 11, 2004, the Second Circuit affirmed this Court's remand decision, finding that individual state court lawsuits, brought against WorldCom's officers and directors under the Securities Act, were properly removed to federal court on the ground that they were "related to" the WorldCom bankruptcy estate. See California Public Employees' Retirement System v. WorldCom, Inc., 368 F.3d 86 (2d Cir. 2004). By Order of June 15, 2004, the Court of Appeals vacated the February 3 Order and an Order of this Court dated July 16, 2004 ("July 16 Order"), extended the deadline for a class member to request exclusion from the class to September 1, 2004.

  Because the affirmance of the remand decision and the settlement with the Citigroup Defendants were important new events in the history of the Securities Litigation, those who had already opted out of the class were given an opportunity to rejoin the class. The July 16 Order established September 1 as the deadline for persons to revoke a prior request to be excluded from the class and as the deadline for Individual Action plaintiffs to seek to voluntarily withdraw their cases and to remain as members of the class.*fn16 Settlement Negotiations

  On November 7, 2002, the Court ordered the parties in the Securities Litigation to participate in settlement negotiations under the supervision of the Honorable Michael H. Dolinger, United States Magistrate Judge of the Southern District of New York. The initial discussions with the Citigroup Defendants, as with all other defendants, were not fruitful. On September 22, 2003, the Court ordered the parties to engage in further settlement negotiations under the joint supervision of the Honorable Robert W. Sweet, United States District Judge for the Southern District of New York, and Magistrate Judge Dolinger. These two judicial officers and the parties in the Securities Litigation have invested a significant amount of time over the intervening months in settlement negotiations. In May 2004, on the eve of the argument before the Court of Appeals on the Citigroup Defendants' challenge to class certification*fn17 and with the substantial assistance of the two judicial officers supervising settlement discussions, the Lead Plaintiff and the Citigroup Defendants reached a settlement. Face-to-face negotiations before Judge Sweet by Alan C. Hevesi, Comptroller of the State of New York ("Comptroller Hevesi") and Charles Prince, CEO of Citigroup, in the latter stages of the settlement process greatly facilitated the settlement. The two judicial officers each signed a statement released on May 10, 2004 with the memorandum of understanding between the Lead Plaintiff and the Citigroup Defendants endorsing the settlement. It reads:
Pursuant to appointment by the Honorable Denise L. Cote, United States District Judge, we have presided over the extensive negotiations between the Parties that led to this Agreement. We can state based on our discussions with the Parties and the information made available to us, that this Settlement was negotiated in good faith and the Settlement and the allocation between the Securities Act and Exchange Act claims are in the public interest.
(Emphasis supplied.)

  Settlement Terms

  On July 1, Lead Plaintiff and the Additional Named Plaintiffs entered into a stipulation of settlement (the "Agreement") with the Citigroup Defendants. The Agreement created a maximum settlement fund of $2,650,000,000 in cash, plus interest. Under the terms of the Agreement, the settlement fund would be reduced in the event that more than 1.5% of class members recovering from any one of three allocation classes opt out of the settlement.*fn18 For purposes of these calculations, the WorldCom security holdings of certain investors that had filed Individual Actions as of the date of the Stipulation are excluded.

  The entire settlement amount (after deduction of Court-approved costs, expenses and attorney's fees), plus interest, will be distributed to class members who timely submit valid proofs of claim. Proofs of claim are to be postmarked by March 4, 2005. There will be no reversion to the Citigroup Defendants of any portion of the settlement amount.

  The Agreement is conditioned on the entry of a bar order against any claims by non-settling parties, including any of the foreign affiliates of the Underwriter Defendants through which May 2001 Notes were distributed. The bar order in the proposed judgment states that the non-settling persons

are hereby permanently BARRED, ENJOINED and RESTRAINED from commencing, prosecuting, or asserting any claim for indemnity or contribution against the Citigroup Releasees (or any other claim against the Citigroup Releasees where the injury to the Non-Settling Entity/Individual is the Non-Settling Entity's/Individual's liability to the Lead Plaintiff, Named Plaintiffs and other Class Members), arising out of or related to the claims or allegations asserted by Lead Plaintiff and the Named Plaintiffs in the Complaint. . . . Provided, however, that the Bar Order stated in this paragraph shall not apply to claims that may be asserted by Non-Settling Entities/Individuals in cases of persons who timely opted out of the Class and did not revoke their request for exclusion by September 1, 2004. The Non-Settling Entities/Individuals will be entitled to judgment credit in the amount that is the greater of the amount allocated in the Settlement to claims for which a Non-Settling Entity/Individual may be found liable for common damages or, for each such claim, the proportionate share of the Citigroup Defendants' fault as proven at trial.
(Emphasis supplied.) In addition to dismissing with prejudice all of the class members' claims against the Citigroup Defendants asserted in the Amended Complaint, the Agreement also bars class members from pursuing any other claims against the Citigroup Defendants relating to investments in WorldCom securities. It grants
the release by Lead Plaintiff, the Named Plaintiffs and all Class Members of all claims of every nature and description, known and unknown, arising out of or relating to investments (including, but not limited to, purchases, sales, exercises, and decisions to hold) in securities issued by WorldCom, and/or in options or derivative instruments based in whole or in part on the value of securities issued by WorldCom (including Targeted Growth Enhanced Terms Securities ("TARGETS") with respect to MCI WorldCom, Inc. issued by an SSB affiliate and GOALs issued by UBS AG),*fn19 including without limitation all claims arising out of or relating to any analyst research reports or other statements made or issued by the Citigroup Defendants concerning WorldCom, any disclosures, registration statements ...

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