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IN RE WORLDCOM

September 21, 2005.

IN RE WORLDCOM, INC. SECURITIES LITIGATION.


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

OPINION & ORDER

This Opinion considers the fairness of settlements reached this year in the securities class action litigation arising from the collapse of telecommunications giant WorldCom, Inc. ("WorldCom"). These settlements include the series of settlements between the Lead Plaintiff and the seventeen Underwriter Defendants;*fn1 and those between the Lead Plaintiff and the twelve Director Defendants,*fn2 WorldCom's former auditor Arthur Andersen LLP ("Andersen"), former WorldCom CEO Bernard J. Ebbers ("Ebbers"), former WorldCom CFO Scott D. Sullivan ("Sullivan"), and former WorldCom officers Buford Yates ("Yates") and David Myers ("Myers") (collectively, the "2005 Settlements"). The 2005 Settlements total $3.558 billion. Together with the settlement between the Lead Plaintiff and the Citigroup Defendants (the "Citigroup Settlement"), which received final approval on November 14, 2004, the Class will recover $6.133 billion, plus interest. Very few Class Members have filed objections to the 2005 Settlements. No one has objected to the amounts of the 2005 Settlements and there is only a single objection to the request for attorneys' fees and expenses submitted by Lead Counsel for the Class.*fn3 Only a brief, conclusory objection was made to the Plans of Allocation, which determine according to claim type how settlement funds will be distributed. Most of the objections address the scope of the claims release to be imposed pursuant to the 2005 Settlements and the proposed Supplemental Plan of Allocation distributed to the Class with a July 1, 2005 Notice.

  With the three modifications to the Supplemental Plan described below, the petition for approval of all of the 2005 Settlements is granted. Lead Counsel's application for attorneys' fees and expenses is also granted.

  Background

  The relevant history of the Securities Litigation through November 12, 2004 is described in an Opinion pertaining to the Citigroup Settlement. See In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2004 WL 2591402, at *1-*9 (S.D.N.Y. Nov. 12, 2004). That description, and the definitions therein, are incorporated by reference into this Opinion. In brief, WorldCom announced a massive restatement of its financial statements for 2000 and 2001 on June 25, 2002 (the "Restatement"), spurring numerous class actions and other lawsuits.*fn4 Virtually all federal litigation was transferred to this Court by the Judicial Panel on Multi-District Litigation. The securities class actions were consolidated on August 15, 2002, and the New York State Common Retirement Fund ("NYSCRF") was selected as the Lead Plaintiff. The Lead Plaintiff filed a Consolidated Class Action Complaint on October 11, 2002. The securities class action, scores of actions filed by individual plaintiffs (the "Individual Actions"), many of them large pension funds, and other related securities actions were consolidated on December 23, 2002 for pretrial purposes and are referred to as the Securities Litigation.

  An Opinion of May 19, 2003 decided various motions to dismiss addressed to the class action complaint. In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 431 (S.D.N.Y. 2003); see also In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC) 2003 WL 21488087 (S.D.N.Y. June 25, 2003) (deciding Andersen's motions to dismiss); In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2003 WL 23174761 (S.D.N.Y. Dec. 3, 2003) (deciding motions to dismiss by members of the Audit Committee of WorldCom's board of directors). An Amended Complaint was filed on August 1, 2003; a Corrected Amended Complaint was filed on December 1, 2003.

  An Opinion of October 24, 2003 certified a class consisting 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. See In re WorldCom, Inc., Sec. Litig., 219 F.R.D. 267, 274-75 (S.D.N.Y. 2003). Putative Class Members received a December 11, 2003 Notice of Class Action (the "December 2003 Notice"). That notice informed Class Members that they could opt out of the class action by February 20, 2004, a date which was later extended to September 1, 2004.*fn5 See WorldCom, 2004 WL 2591402, at *5.

  The $2.575 billion Citigroup Settlement was announced in May 2005. Id. Class Members received an August 2, 2004 Notice of the proposed Citigroup Settlement (the "Citigroup Settlement Notice"), which also informed them that the opt-out date had been extended to September 1 and gave them instructions on how to submit proofs of claim. A fairness hearing regarding the Citigroup Settlement was held on November 5, 2004, and that settlement was approved in a November 12, 2004 Opinion. WorldCom, 2004 WL 2591402, at *9, *11. The following is an overview of the significant events in the class action litigation since the announcement of the Citigroup Settlement.

  Completion of Discovery

  The Citigroup Defendants settled with the Lead Plaintiff just weeks before the conclusion of fact discovery. A three-week stay was entered to allow the Lead Plaintiff and the Underwriter Defendants an opportunity to determine whether they could also resolve the litigation. The Underwriter Defendants rejected an offer to settle with the Class using the same formula that resolved Securities Act of 1933 ("Securities Act") claims in the Citigroup Settlement (the "Citigroup Formula"). Fact discovery resumed and was concluded on July 9, 2004. During June and July, the Lead Plaintiff took forty-one depositions.

  During the late summer and fall, the parties exchanged expert reports and conducted expert discovery. The Lead Plaintiff produced reports from five experts.

  Summary Judgment Opinion Regarding the Underwriter Defendants

  The Underwriter Defendants faced Securities Act Section 11 and Section 12(a)(2) liability stemming from massive bond offerings in 2000 (the "2000 offering") and 2001 (the "2001 Offering"). They filed motions for partial summary judgment on several grounds, including their reliance defense under Section 11. They argued that they were entitled to rely on WorldCom's audited financial statements and had no duty to investigate their reliability unless they had reasonable grounds to believe that the statements were not accurate. A December 15, 2004 Opinion denied summary judgment on the reliance defense, noting that, while underwriters generally may rely on audited financial statements, a jury could find that one or more "red flags" triggered a duty for the Underwriter Defendants to conduct further investigation of WorldCom's financial status. See In re WorldCom Sec. Litig., 346 F. Supp. 2d 628, 678-81 (S.D.N.Y. 2004). The Opinion also ruled that the Underwriter Defendants were not entitled to summary judgment because of their receipt of Andersen's comfort letters for the unaudited quarterly financial statements incorporated into the Registration Statements for the 2000 and 2001 Offerings. Rather, although the comfort letters were one factor a jury could consider, the Underwriter Defendants still had to establish that they had performed a reasonable investigation regarding any unaudited financials in order to establish their due diligence defense under Section 11. See id. at 681-85.

  The Lead Plaintiff filed its own motion for partial summary judgment against the Underwriter Defendants. It succeeded on the issue of whether the Registration Statement for the 2001 Offering was false and misleading, but was denied summary judgment in regard to the 2000 Offering. Id. at 661. Initial Settlement with the Director Defendants

  Following settlement discussions spanning more than twenty months, the Lead Plaintiff and ten of the twelve Director Defendants executed a Memorandum of Agreement in May 2004. In the following months, the Lead Plaintiff reviewed detailed financial information provided by those ten directors, and the negotiations between the directors and several insurers that had issued excess directors and officers insurance policies to WorldCom (the "Excess Insurers") continued.*fn6 On January 6, 2005, a settlement was reached between the Lead Plaintiff, the ten Director Defendants, and the Excess Insurers. The settlement was for a total of $54 million; notably, the settlement amount included $18 million paid personally by the settling Director Defendants, representing more than twenty percent of those individuals' cumulative net worth, excluding their primary residences, retirement accounts, and certain joint marital property.*fn7 The balance of the settlement amount, $36 million, represented the Excess Insurers' contribution. Portions of the January 6 settlement agreement that were conditioned on the Court's staying the lawsuit brought by Roberts, a non-settling Director Defendant, against the Excess Insurers and deferring a decision on Roberts' application for an order to advance defense costs were rejected by the Court in a conference on January 11.*fn8 The parties to the settlement submitted a revised Stipulation of Settlement that omitted those provisions on January 18 (the "January 18 Stipulation").

  The January 18 Stipulation retained a provision known as a judgment reduction formula (the "Judgment Reduction Formula") that provided, in essence, that any damages awarded against non-settling defendants would be reduced by the greater of the settlement amount or the proportionate liability of the settling Director Defendants, as found at trial, adjusted to reflect any limitation on the financial capability of the settling Director Defendants to pay. The settlement was conditioned on approval of the Judgment Reduction Formula, which paralleled a formula that had received the Court's approval in the WorldCom ERISA Litigation. See In re WorldCom, Inc. ERISA Litig., 339 F. Supp. 2d 561, 571 (S.D.N.Y. 2004). Several non-settling defendants objected to the portion of the Judgment Reduction Formula that took into account settling Director Defendants' ability to pay, arguing that it violated 15 U.S.C. § 78u-4(f) (7) (B) (I), the applicable provision of the Private Securities Litigation Reform Act of 1995 ("PSLRA").

  In an Order of February 2, the Court ruled that the Judgment Reduction Formula in the January 18 Stipulation was impermissible under the PSLRA. An Opinion of February 10 explained this ruling in detail; a Corrected Opinion was issued soon thereafter. In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2005 WL 335201 (S.D.N.Y. Feb. 14, 2005). That Opinion lamented the fact that the applicable PSLRA provision rendered it highly unlikely that plaintiffs bringing Securities Act claims would be willing to settle with outside directors before reaching settlements with "deep pockets" such as underwriters. See id. at *14-*15. This policy concern was well-founded. Soon after the Judgment Reduction Formula ruling was announced, the Lead Plaintiff exercised its right to withdraw from the settlement. The Director Defendants were given until February 25 to file a pretrial order for the rapidly approaching trial, which was then scheduled to begin on February 28, 2005.

  Summary Judgment Opinion Regarding Andersen

  Andersen, which was facing claims under Securities Act Section 11 and Securities Exchange Act of 1934 ("Exchange Act") Section 10(b), filed a motion for partial summary judgment on August 23, 2004. It argued that Lead Plaintiff had failed to present sufficient evidence that the 1999 WorldCom financial statements audited by Andersen contained a material misstatement. In addition, Andersen contended that there was no evidence of scienter sufficient to support a finding under Section 10(b) that Andersen certified the 1999, 2000, and 2001 WorldCom financial statements recklessly or with knowledge that material misstatements or omissions were present.

  A January 18, 2005 Opinion denied summary judgment for Andersen. It ruled that whether various accounting treatments, including WorldCom's use of purchase method accounting for its 1998 acquisition of MCI, Inc. ("MCI") and its assignment of a forty-year lifespan to the MCI goodwill, complied with Generally Accepted Accounting Principles (GAAP) and thus did not constitute misstatements, were issues of fact for a jury to decide, precluding summary judgment on the 1999 financials. See In re WorldCom, Inc. Sec. Litig., 52 F. Supp. 2d 472, 493-94 (S.D.N.Y. 2005). That Opinion also ruled that issues of fact existed regarding whether Andersen's audits of WorldCom financials were so deeply flawed that Andersen acted with reckless disregard and whether certain "red flags" should have prompted Andersen to reevaluate its audit plans. See id. at 497-98.

  Motions in Limine

  On January 7, 2005, motions in limine and the Joint Pretrial Order were filed by the Lead Plaintiff and various non-settling defendants. The Lead Plaintiff filed six motions in limine; the Underwriter Defendants filed eleven, as well as a motion to phase the trial; Andersen filed eight; Director Defendant Galesi filed thirty. On February 8, an Order was issued denying the Underwriter Defendants' motion to phase the trial and providing preliminary rulings on most of the Lead Plaintiff's and Underwriter Defendants' motions. Full Opinions regarding most of the pending motions in limine were issued on February 17. See In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC) 2005 WL 375315 (S.D.N.Y. Feb. 17, 2005) (Lead Plaintiff's motions in limine and Underwriter Defendants' motion to phase the trial); In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC) 2005 WL 375314 (S.D.N.Y. Feb. 17, 2005) (Underwriter Defendants); In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC) 2005 WL 375313 (S.D.N.Y. Feb. 17, 2005) (Andersen). Several pending motions were further addressed at pretrial conferences and in later Opinions. Motions in limine by Galesi were addressed on March 4, In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC) 2005 WL 517333 (S.D.N.Y. Mar. 4, 2005), and those brought by other Director Defendants were decided in a Memorandum Opinion of March 16, 2005.

  Significant motions in limine included that of the Lead Plaintiff to exclude evidence from the plenary trial relating to individualized issues of the class representatives. The Lead Plaintiff's motion was granted in an Opinion of February 22. See In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2005 WL 408137 (S.D.N.Y. Feb. 22, 2005). Motions brought by both the Underwriter Defendants and Andersen to preclude Lead Plaintiff's expert from presenting an aggregate damages calculation to the jury were denied. See WorldCom, 2005 WL 375314, at *7-*8; WorldCom, 2005 WL 375313, at *2-*5; In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2005 WL 491397 (S.D.N.Y. Mar. 3, 2005). Andersen filed a motion to exclude evidence of the Restatement, arguing, inter alia, that the Restatement was irrelevant and based on hearsay. Andersen's motion was denied on the basis that the Restatement was clearly relevant to, and in fact highly probative of, the issues being tried. The Restatement was ruled an admissible business record under Rule 803 (6), Fed.R.Evid. See WorldCom, 2005 WL 373313, at *6-*9.

  Andersen also moved to preclude evidence of corporate wrongdoing, including evidence of its indictment in connection with its role as Enron's auditor and evidence of other litigation in which Andersen had been involved. An Opinion of March 4 ruled that references to most other litigation against Andersen would be barred, but that decision would be deferred on references to Enron, as the Lead Plaintiff had pointed to evidence that the Enron scandal directly affected certain decisions made by WorldCom's management in regard to Andersen. See In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2005 WL 578109, at *1-*2 (S.D.N.Y. Mar. 4, 2005). That Opinion also deferred a ruling on the Underwriter Defendants' motion to bar evidence of the spinning of "hot" IPO shares by Salomon Smith Barney ("SSB"), a co-lead underwriter in the 2000 and 2001 Offerings and one of the Citigroup Defendants. See id. at *2-*4. Extension of Trial Date

  In October 2004, in light of a two-month delay in the date of Ebbers' criminal trial, the class action trial date was moved from January 10, 2005 to February 28, 2005. In a pretrial conference of February 18, 2005, the trial was rescheduled for March 17, 2005. The delay was attributable to the Government's reluctance to allow several "embargoed" witnesses who were testifying in Ebbers' criminal trial to submit to depositions by counsel for parties to the class action until the evidentiary portion of the criminal trial had concluded. See WorldCom, 2004 2591402, at *4.

  Underwriters' Settlements

  In early February 2005, the Lead Plaintiff commenced settlement negotiations with BOA and several junior underwriters who had participated in the 2000 Offering only, and after those proved successful, opened negotiations with the remaining Underwriter Defendants. The seventeen Underwriter Defendants had coordinated their litigation strategy; as trial approached, however, they procured separate settlement counsel and broke rank.*fn9 In the period from March 3 through March 16, 2005, settlements totaling $3,427,306,840 were achieved between the Lead Plaintiff and each of the Underwriter Defendants (the "Underwriters' Settlements").

  On March 3, the Lead Plaintiff informed the Court that it had reached a settlement with BOA and Fleet, two Underwriter Defendants that had combined after their participation in the 2000 and 2001 Offerings, for a total of $460.5 million (the "BOA Settlement"). Of this amount, 13.61% has been allocated to Class Members who purchased bonds in the 2000 Offering ("2000 Purchasers"), and 86.39% to those who purchased bonds in the 2001 Offering ("2001 Purchasers"). The Plan of Allocation for the BOA Settlement and each of the subsequent settlements is based on the number of bonds the Underwriter Defendant was allocated in each Offering, as well as the Securities Act Section 11 damages provision, 15 U.S.C. § 77k(e). The BOA Settlement amount was calculated using the Citigroup Formula. As already noted, all Underwriter Defendants had been offered the opportunity to settle at the Citigroup Formula rate in May 2004, at the time the Citigroup Settlement was announced.

  On March 4, four more settlements were announced (the "March 4 Settlements"): Lehman Bros. settled for $62,713,582, and CSFB, Goldman Sachs, and UBS Warburg each agreed to pay $12,542,716. Those defendants participated only in the 2000 Offering, so all recovery from the March 4 Settlements will go to 2000 Purchasers. The March 4 Settlements likewise followed the Citigroup Formula. With two minor exceptions, all of the settlements with the Underwriter Defendants that followed included a premium over the Citigroup Formula. The Lead Plaintiff reached settlements with four more Underwriter Defendants on March 9 (the "March 9 Settlements"): ABN AMRO agreed to pay $278,365,600; Mitsubishi agreed to pay $75 million; and BNP and Mizuho settled for $37.5 million each. On March 10, Deutsche Bank settled for $325 million; Caboto settled for $37.5 million; and WestLB agreed to pay $75 million (the "March 10 Settlements"). With the exception of Deutsche Bank, all defendants involved in the March 9 and March 10 Settlements participated only in the May 2001 Offering; recovery from those settlements will thus go only to 2001 Purchasers. Of the Deutsche Bank settlement monies, 4.15% is to be distributed to 2000 Purchasers, and 95.85% to 2001 Purchasers.

  A conference was held on March 9 to address preliminary approval of the BOA Settlement and the March 4 Settlements. Preliminary approval was delayed, however, until the Court could address objections by JP Morgan to the Judgment Reduction Formula and Bar Order in the BOA Settlement. JP Morgan was a co-lead underwriter with SSB in both the 2000 and 2001 Offerings. A March 15 Opinion rejected JP Morgan's objections. In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2005 WL 613107 (S.D.N.Y. Mar. 15, 2005). That Opinion performed a theoretical but detailed calculation of the damages faced by JP Morgan should it proceed to trial. See id. at *7. All settlements that had been announced through March 10 received preliminary approval in a March 16 conference. On March 16, JP Morgan settled for $2 billion. This was $630 million more than the Lead Plaintiff had been willing to accept in settlement in May 2004, at the time of the Citigroup Settlement, and thus represents a significant premium over the Citigroup Formula. Of the $2 billion sum, 22.75% will go to 2000 Purchasers, and 77.25% to 2001 Purchasers. The same day, Blaylock and Utendahl agreed to pay $572,840 and $234,000, respectively.*fn10 The amount recovered from Utendahl will go entirely to 2001 Purchasers, while 43.02% of the Blaylock monies will be distributed to 2000 Purchasers and 56.98% to 2001 Purchasers. The final three settlements received preliminary approval in a March 18 conference.

  Because the Underwriter Defendants faced only Securities Act claims stemming from the 2000 and 2001 Offerings, the amounts recovered in the Underwriters' Settlements are allocated solely to those claims.*fn11 Thus, the recovery will go to Class Members who purchased bonds in the 2000 and 2001 Offerings, not to purchasers of WorldCom stock or bonds issued prior to those Offerings. The Underwriters' Settlements, and almost all settlements in the class action litigation, were achieved with significant involvement by the Honorable Robert W. Sweet, U.S. District Judge for the Southern District of New York, and the Honorable Michael H. Dolinger, U.S. Magistrate Judge of the Southern District of New York.

  Severance of the Claims Against Ebbers, Sullivan, Myers, and Yates

  An Order of March 16, 2005 severed the claims against defendants Ebbers, Sullivan, Myers, and Yates pursuant to Rule 21, Fed.R.Civ.P.*fn12 Severance was granted in light of the criminal prosecution of those four defendants; the class action litigation against them had previously been stayed for the same reason. In addition, the Order deemed that any testimony given by the four severed defendants at Ebbers' criminal trial would be admissible in the class action trial. No party to the class action litigation had objected to this accommodation.

  Director Defendants' Settlement

  After the Underwriter Defendants had settled with the Lead Plaintiff, the Director Defendants and Excess Insurers were able to resurrect their settlement agreement (the "Directors' Settlement"). On March 16, the Court was informed that a settlement with the Director Defendants was imminent; a Stipulation of Settlement was executed on March 18, 2005. Former directors Galesi and Roberts, neither of whom had been a party to the original Director Defendants' settlement, joined the settlement — Galesi in the first instance, and Roberts on March 21. Roberts' personal contribution was $4.5 million, which Lead Counsel represents to be significantly more than twenty percent of Roberts' personal net worth, thus representing a premium over what was obtained from the other directors.

  The total amount of the Directors' Settlement is $60.75 million. Of that amount, $24.75 million was paid by the Director Defendants personally, and $36 million was contributed by the Excess Insurers. With a prior payment of $15 million, this contribution is approximately one-half of the available insurance proceeds. Unlike the January 18 Stipulation to which ten of the twelve Director Defendants were parties, the March 21 Stipulation contains a Judgment Reduction Formula that conforms to the PSLRA. The Directors' Settlement was granted preliminary approval on March 21, 2005.

  The Plan of Allocation for the Directors' Settlement provides that 80% of the funds are to be allocated to purchasers of WorldCom stock and other publicly traded debt securities. The remaining 20% will be distributed to purchasers of bonds in the 2000 and 2001 Offerings. Of this amount, 4.774% will go to purchasers in the 2000 Offering, and 15.226% to purchasers in the 2001 Offering. The Directors' Settlement also reserved other funds from the Excess Insurers for the Director Defendants' defense of the claims pending against them in the various Individual Actions. Summary Judgment Opinion Regarding Roberts

  Roberts, chairman of the WorldCom board of directors throughout the Class Period and one of the Director Defendants, had also filed a summary judgment motion. Roberts argued that he had established his due diligence defense under Securities Act Section 11; that he was not a "controlling person" under Exchange Act Section 20(a); and that he had established his affirmative defenses under Section 20(a) and Securities Act Section 15. In an Opinion of March 21, 2005, which was issued hours before Roberts agreed to join the Directors' Settlement, Roberts' summary judgment motion was denied on all counts. See In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2005 WL 638268 (S.D.N.Y. Mar. 21, 2005).

  Andersen Trial and Settlement

  Jury selection in the class action trial against Andersen, the only remaining defendant against which the litigation had not been severed, began on March 23, 2005.*fn13 Individualized voir dire was conducted on March 28, and opening statements began the following morning. The Lead Plaintiff presented eleven fact witnesses, three of whom testified live at trial, and four expert witnesses. Andersen presented a number of fact witnesses, including two Andersen audit and engagement partners, and one expert witness. Only two more experts were set to testify on Andersen's behalf when the jury was dismissed because the Lead Plaintiff and Andersen had reached a settlement.*fn14 The jury was remarkably attentive throughout the proceedings.

  The testimony from three of the Lead Plaintiff's witnesses was particularly memorable. Richard Roscitt, the former president of AT&T Business Services from December 1999 to January 2001, described his amazement at WorldCom's E/R ratio as reported in its quarterly and annual financial statements, and the concerted efforts he and his team made over a period of months to try to understand why WorldCom's reported performance of such a critical indicator was so superior to AT&T's comparable ratio.*fn15 The Lead Plaintiff offered this testimony, a videotaped deposition which had been noticed by underwriter defendants in an Individual Action, to establish that a "red flag" existed which put Andersen on notice that WorldCom might not be accurately recording its line costs, which were its largest operating expense. If the E/R ratio constituted a red flag, it required Andersen to conduct a reasonable audit of the WorldCom records associated with the reporting of its E/R ratio. The Lead Plaintiff also offered the evidence to show that Andersen had acted in willful blindness to WorldCom's financial condition and in abrogation of its duty as an auditor, rendering it liable under Exchange Act Section 10(b).

  Eugene Morse ("Morse"), who worked in WorldCom's Internal Audit department, was the single most important individual in the discovery of the scheme at WorldCom to capitalize line costs in order to improve WorldCom's reported revenue and E/R ratio. WorldCom's Internal Audit department did not perform financial audits until early 2002. In May 2002, Morse noticed a discrepancy of well over $1 billion between the numbers reflected in the capital expenditures report he was reviewing and WorldCom's publicly reported numbers. The executive director of the capital budget attributed the discrepancy to "prepaid capacity." Morse searched for the source of the so-called prepaid capacity using a computer software called Essbase that allows one to navigate the company's general ledger, and quickly found a series of entries of large round-number entries such as $500 million. After further investigation, often performed alone at night in WorldCom's offices, he found that the amounts were transfers originating from line costs. Line costs were the company's largest operating expense and therefore not an item that should be capitalized. The suspicious entries were made after the closing of the quarters they affected and directly preceded the dates on which WorldCom issued press releases announcing its financial results. Morse found $1.7 billion of fraud in the first few days of his investigation, and a total of $3 billion, dating as far back as the first quarter of 2001, within a couple of weeks. Cynthia Cooper, the head of the Internal Audit department, encouraged Morse throughout his investigation and reported the findings to the audit committee of WorldCom's board of directors on June 20, 2002. The fraud at WorldCom was disclosed to the public several days later.

  Finally, Ralph Stark testified as one of the Lead Plaintiff's experts. In December 2004, the Lead Plaintiff obtained access to WorldCom's computerized general ledger for the year 2001.*fn16 In just half an hour, using a protocol to examine using Essbase the largest categories in WorldCom's balance sheet and income statement for any large, post-closing adjustments, Stark and his team found the first "unusual" journal entry, or financial input, in WorldCom's general ledger. Within hours, he found many large, round-number, post-closing entries. Stark testified that a junior financial analyst, accountant, or auditor with basic training in Essbase could have readily discovered the same entries in an audit of the general ledger. The Lead Plaintiff offered this evidence to illustrate how easily Andersen could have discovered the WorldCom fraud if it had audited WorldCom's general ledger for post-closing adjustments. The Lead Plaintiff's examination at trial of Andersen's auditors showed that Andersen's audit planning had identified post-closing adjustments to the general ledger as one of the ways in which WorldCom could commit fraud, but that Andersen did not access the computerized general ledger to perform such an audit during the years in question.

  At the end of two weeks of trial testimony, the Court asked the parties to renew their settlement negotiations. The next week Andersen shared information regarding its financial condition with the Lead Plaintiff for the first time. On April 22, 2005, at the end of the fourth week of trial and a few short days before closing arguments, the Lead Plaintiff and Andersen reached a settlement (the "Andersen Settlement"). In an April 22 Stipulation of Settlement, Andersen agreed to pay $65 million in cash, plus contingent payments equivalent to 20% of any amount paid out by Andersen to present or former partners and certain other individuals in repayment of any subordinated notes issued in respect of paid-in capital or subordinated loans. The Stipulation of Settlement also contained a "most favored nation clause" entitling the Class to receive an additional amount if Andersen pays from its own funds more than $65 million in any other settlement.

  On April 26, preliminary approval of the Andersen Settlement was granted, the money was transferred to Lead Plaintiff's escrow account, and the jury was dismissed. The Plan of Allocation for the Andersen Settlement distributes the settlement funds between Exchange Act and Securities Act claims in the same proportion as the Directors' Settlement Plan of Allocation. Because the first alleged misstatement by Andersen was made on March 30, 2000, however, Exchange Act monies will only be allocated to Class Members who purchased WorldCom securities on or after that date. Judge Sweet and Magistrate Judge Dolinger released an April 22, 2005 Mediators' Statement attesting that, based on the information available to them and their discussions ...


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